Q2 2021 Methode Electronics Inc Earnings Call
That's true and I tried to second quarter and 2021 zone.
At this time all participants are in listen only mode for the question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad and.
No for an <unk>, Rob Cherry Vice President Investor Relations you may begin.
Thank you operator, good morning, and welcome to mentor Electronics fiscal 2021 second quarter earnings conference call for.
For this call we have for parity presentation entitled fiscal 2021 second quarter financial results, which can be viewed on the webcast of this call were filed and metro dot com on the investors page.
This conference call contains certain forward looking statements.
Which reflects management's expectations regarding future events and operating performance and.
Speak only as of the date hereof.
These forward looking statements are subject to the safe Harbor protection provided on other securities laws.
<unk> undertakes no duty to update any forward looking statement to conform the statement to actual results or changes and met those expectations on a quarterly basis or otherwise.
Forward looking statements in this conference call involve a number of risks and uncertainties.
The factors that could cause actual results to differ materially from expectations are detailed and methods filings with the securities and Exchange Commission, such as our 10-K and 10-Q reports.
This time I'd like to turn the call over to Mr., Don Duda, President and Chief Executive Officer.
Thank you, Rob and good morning, everyone and thank you for joining us for our fiscal 2021 second quarter earnings Conference call.
I'm joined today by Ron So, let's start Chief Financial Officer.
And and I have opening comments and then we will take your questions.
Let's begin on slide for with a brief summary of our financial results for our fiscal second quarter, which ended on October 31st net.
Second quarter sales increased 17% to nearly 301 million.
Our net income increased 62% and our diluted earnings per share increased 16%.
Ron will provide more detail on financial results and later.
Turning to the business highlights on slide five the three.
301 million and that sales sales was EUR 45 million and income from operations for both records for medical and.
The resulting operating income margin was 15%.
These records results Oh these record results for a validation of our strategy and the product up and relentless efforts and commitment of our global team.
In the quarter, we saw a significant rebound and automotive demand as compared to the first quarter, which had been impacted by the pandemic and created uncertainty and OEM production schedules.
The automotive segment sales for the quarter were also a record at 216 million.
And with another strong quarter for our E V businesses as well.
Sales for NTM applications for over 9% reported consolidated sales.
We also saw continued strength for every bookings during the quarter with the annual expected sales for those awards totaling over 28 million.
As many of you know much of methods historical growth came from our user interface products.
Well, they're moving to vehicle Ltd, lighting, and we're on our longstanding reputation and capabilities and power distribution in conjunction with the user interface Methode is uniquely qualified as a three pronged solution provider for electric vehicles.
We are globally, well positioned and anticipate continued growth in this market.
Regarding our balance sheet, we continue to generate strong free cash flow and reduced our net debt and the core.
We have ample liquidity and our net leverage ratio continues to be a flow.
The strength and flexibility for our balance sheet allows us to consider multiple paths to and best in the business in order to drive growth and shareholder return.
And gold and 19 I continue to take pride in our employees and credible commitment to meso and supporting our efforts to provide a safe work environment.
All of our facilities are currently open.
And we are making prudent use of work from home where possible.
We do anticipate seeing some level on uncertainty from Carbonite gained throughout the remaining fiscal year.
However, as I stressed since the beginning of this and then we will continue to invest and our businesses for long term growth.
Moving to slide six during the second quarter. That's on the number of awards capitalizing on the strategic trends and vehicle electrification Ltd lighting and data centers.
The awards identified here and represent a cross section of the business was on the quarter and represent over 40 million and and your business.
And vehicle electrification, we won awards for ambient and functional lighting on.
For head counsel and busbar programs totaling over 28 million annually.
As I highlighted last quarter, we continue to and programs for the Oems in the U.S. Europe and Asia.
Avi is a global growth driver for medical.
And now on EBITDA led lighting, we were awarded programs for several auto applications.
We also continue to produce and the growth of the data centers driven by cloud computing.
Programs for Busbars and Pluggable modules.
Lastly, we experienced the balance and Aerospace Defense Program Award.
Of note and the first half the fiscal year, nothing booked awards, approximately 900 million and annual sales.
Looking forward and we are providing sales and may be EPS guidance for only the fiscal 2021 third quarter due to the market risk and uncertainty trolley and going and damage.
Turning to slide seven.
We recently presented at an Investor Conference and I would like to share our key messaging from it.
Our strategic focus is on diversification growth and financial improvement.
Given the progress that we've made diversifying our product portfolio and the power lighting and sensors. We are now actively capitalizing on key market trends like E. These commercial vehicles and cloud computing.
With our technology solutions portfolio, we are able to address customer needs, while increasing content per vehicle predator.
Penetrating non auto markets and cross selling and to existing customers.
And so allow us to drive organic growth.
Something we were clearly demonstrating fiscal 2020 and to afford it by the way W. strike at General Motors and called the 19th.
At the same time, we expect to continue to augment our technology and product portfolios through acquisitions and build on our strategy.
We believe these actions will further improve on product mix and combined with the operational efficiencies will help to drive margin expansion.
Lastly, through our lean manufacturing capabilities were targeting further improvement and working capital.
Moving to slide eight.
As I mentioned earlier much of methods historical growth came from our user interface products.
With our move and the vehicle interior and exterior led lighting.
And with our longstanding experience and capabilities and power distribution now.
And those become uniquely qualified as a three pronged solution provider for electric vehicles.
In addition to our user interface offerings, such as overhead councils integrated center councils and switches for a second prong were leveraging the powerful combination of.
Our auto grade manufacturing operations, our auto pedigree, and our power distribution expertise to supply various busbars connectors and battery disconnect units to the Oems.
Our third for on in our approach to the market is lighting, we are able.
The supply of Pacific insight and be in lighting technology, and our Grayken LCD technology to provide both interior and exterior lighting solutions.
Our energy efficient LTV is an ideal fit for Mds and the need to minimize power consumption.
Turning to slide nine.
With the growing shift from internal combustion engines to electric vehicles, and I thought as a clear opportunity to grow our content per vehicle it.
For additional content and anybody could range from 20% to over 100% above our current content on internal combustion vehicle.
We expect the applications to be a high single digit percentage of our current fiscal year total sales.
And we have an order pipeline that should easily drive that to low double digit percentage and our next fiscal year.
He is a good tailwind for methanol.
Yeah.
Next I'd like to comment on our new five year long term incentive plan as described in our September 8-K filing which includes time based and performance based awards.
The performance based awards may be earned based on fiscal 2025, EBITDA with threshold target and maximum performance goals.
On slide 10, you can find the EBITDA target performance.
And some of you know the methyl team concluded two such plans.
And and dig in fiscal year, 2015, and the other and fiscal year 2020.
The more recent plan, resulting in over 7% annual EBITDA growth and our new plan targets, just under 8% and your growth.
Well, we always have to contend with programs going end of life and we may exit businesses for strategic reasons were confident that we have a path via organic growth operational improvements and acquisitions to achieve the target for 300 million in EBITDA in fiscal year 2025.
To conclude.
Given the recent macroeconomic and pandemic situations.
I am extremely pleased that our strategy and team were able to deliver record results.
Generates significant free cash flow and win additional Emmy awards in the quarter.
At this point I'll turn the call over to around who will provide more detail on our second quarter and hence results.
Thank you Don and good morning, everyone.
Please turn to slide 12.
Second quarter sales increased 17% or 43.6 million to 300.8 million and fiscal 21 from 257.2 million and physical 20.
Sales and the second quarter were positively impacted by the increased demand and all of our reporting segments as we recover from the lower first quarter production levels due to the COVID-19 pandemic.
And year over year quarterly comparisons benefited from the 32 million dollar impact of the U. ADW strike on general Motors and the second quarter of fiscal 20.
In addition, the favorable impact of foreign currency on sales was 6.5 million and the current quarters the.
The company generated year over year organic growth.
Second quarter net income increased $14.8 million to 38.6 million on $1.01 per diluted share from 23.8 million or 63 cents per diluted share and the same period last year.
In addition to the flow through from higher sales and leveraging our best unite expenses second quarter. Net income also benefited from other income from foreign governmental cold and 19 assistance of 3.3 million, partially offset by 4.2 million of restructuring costs. Please.
Please turn to slide 13.
Second quarter gross margins were slightly higher for the fiscal 21 as compared to fiscal 20, mainly due to higher sales volumes fiscal 21 second quarter margins were 26.9% as compared to 26.7% and the second quarter of fiscal on it.
From a sales growth perspective segment growth mix was unfavorable as a 4% and our increase in sales and the highest margin industrial segment.
Partially muted by the 19.8% and 37.8% increases and the automotive and interface segments respectively.
These segments have a lower gross margin profile as compared to the industrial segment.
The fiscal 21 second quarter gross margins included 2.7 million of restructuring expense and the second quarter of fiscal 20 gross margins included 200000 restructuring costs.
Second quarter, selling and administrative expenses as a percentage of sales decreased 270 basis points year over year for 10.2% compared to 12.9 percentage and the fiscal 22nd quarter.
For fiscal 21 second quarter figure was attributable to leverage gained from increased sales lower stock based compensation expense.
Lower wages and associated benefits due to the cold and related salary reduction and short and work weeks and much lower travel expense on.
Currently offset by re extricating expense of 1.5 million.
There was 300000 of restructuring expense and the second quarter of fiscal 20.
Regarding our restructuring activities. The company continues to monitor market factors and trends and we will continue to evaluate possible additional actions to reduce overall costs and improved future operational profitability, especially in the current coal and 19 environment, which has seen an alarming increase and cases glow.
Finally.
The company currently expects and additional restructuring expense of 700000, and the FIS and fiscal 21, resulting from the second quarter actions and.
Company May take additional actions and the future based on conditions as required.
Please turn to slide 14.
Net income was $38.6 million and the second quarter of fiscal 21, as opposed to 23.8 million and the second quarter of fiscal 20.
The main drivers between the fiscal periods were higher sales receipt of 3.3 million a foreign government assistance due to Covance lower.
Lower selling and administrative expenses, partially offset by higher and restructuring costs.
Shifting to EBITDA, a non-GAAP financial measure fiscal 21 second quarter, EBITDA was 60.2 million versus 43.6 million and the same period last year.
EBITDA was positively impacted by increased sales foreign governmental cold and assistance and the benefit from restructuring actions taken and prior fiscal years.
A few other financial items to review.
And the second quarter of fiscal 2001, we invested approximately 3.6 million and capex as compared to 13.6 million and the second quarter of fiscal 20.
For the fiscal 21 year to date second quarter investment represents an approximate leach 30 million run rate for the current fiscal year.
The lower second quarter Capex for simply due to timing as opposed to a conscious effort to curtail capex, we have a strong balance sheet and intend to utilize it during this call and impacted fiscal year to make continued investments in our businesses to grow them organically in the future.
In addition, we continue to pursue opportunities for inorganic growth.
Our intent is to emerge from the Coleman and dynamic stronger then we went into this crisis by judiciously using our strong balance sheet to our long term advantage.
Income tax expense and the second quarter of fiscal 21 was 7.6 million as compared to a tax expense of 5.2 million and the second quarter of fiscal 20.
The fiscal 21 second quarter tax rate was 16.5%.
Compared to 17.9% and the same period last fiscal year.
It's relatively minor differences and effective tax rate was due to jurisdictional earnings and not discrete income tax activity.
Please turn to slide 15.
We deleverage gross debt by 2.2 million and the second quarter.
Since our acquisition of Great kind of on September 28 team when adjusting for the 100 million dollar precautionary credit facility draw and March of 2020, we have reduced gross debt by $110 million.
Net debt decreased by 29.5 million and the second quarter fiscal 21 as compared to the fiscal 20 year end for.
On 130 for 8.8 million to 105.3 million.
We ended the second quarter with 242.3 million and cash which includes the $100 million precautionary draw on the credit facility in March and.
In November we repaid 50 million of the March for cautionary draw and we will continue to evaluate the landscape and the third quarter and may pay down the precautionary draw even further.
Our debt to trailing 12 months EBITDA ratio, which is used for our bank covenants is approximately 1.7.
This figure includes the impact of the precautionary $100 million drawn we initiated on March.
Without the draw on the ratio would have been approximately 1.2.
Our net debt to trailing 12 months EBITDA ratio was a strong 0.5.
Please turn to slide 16.
Free cash flow and non-GAAP financial measure, which effective in fiscal 21 is defined as cash provided from operating activities My index Capex.
Prior to fiscal 21, it was defined as net income plus depreciation and amortization less capex.
On the fiscal 21 second quarter free cash flow was 36.7 million as compared to 35.1 million and the second quarter of fiscal 20.
As Don mentioned in his remarks, we are providing revenue and earnings per share guidance for the third quarter, which is subject to disruption at any time due to a variety of factors, including the ongoing COVID-19 pandemic situation.
Please note that the third quarter of fiscal 21 contains 13 work weeks, whereas the third quarter of fiscal 20, and 14 work weeks and.
Revenue range for the third quarter is between 265 and 285 million.
Diluted earnings per share ranges between 69 cents and 85 cents per share.
Don that concludes my comments.
Ron Thank you very much operator, we are ready to take questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is and the question you May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your hands and before question just on a key.
One moment and we.
The call for questions.
And our first question is for moved on.
Baird. Please proceed with your question.
And good morning, everyone.
Good morning, Luke Don has done is hoping we could start with overall award activity around easy and Justin.
Just in recent weeks here, we've seen a number of traditional auto Oems either go kind of qualify all in on either use or at least knowsley increase or accelerate those the Boston and curious.
Curious, what you're seeing in terms and conversations around new business Awards right now really things are evolving very quickly.
Curious to get your perspective on what's going on right now.
We're seeing the sales were.
Well easily where say the most are excuse for that we've seen probably ever for for each of these.
And if you look at the bookings.
[music].
You know.
Better than better than that for bookings were.
It may relate and so we're seeing we're seeing the same thing and.
You're right we are seeing.
For additional customers that are there.
Either ramping up are going all in on on Tvs, and and as I said in my prepared remarks, we've got the three very strong products that we can sell to these customers.
And then following up on that you noted on the figures and the press release particular strength and Asia as it relates to ease just wondering if you could expand on that perhaps.
Yes, that's an example of our cross selling and.
And the different regions, we we added to our our sales force there.
And then we did that a while ago and we're starting to see that the.
The effect of that although I should point out that.
A portion of our.
Sales increase in Asia. It was the transfer of some TV product, but had been be had been being produced in north.
North America and that was transferred to.
On to Asia, and the customers request and that was planned on.
But.
Net we still improved and in Asia considerably.
Okay, and then Ron and maybe a question for you and you mentioned on the on the guidance slide that we do have this modern and issue related to the extra week.
And last years third quarter and that doesn't repeat this year can you maybe put a finer point on what guidance assumes for that as it relates to I guess, mainly topline and any expense and location, we should be watching for.
Yes so.
With that I mean, it's and.
Let me start by answering it it's a little bit challenging third quarter anyway, because of holiday shutdowns and things of that nature Theres typically less work days in there anyway, but so far and what we're modeling would be the.
No in terms of.
And terms on the of the sales about maybe somewhere between 7% to 10% of the last last years quarter sales would would not be what.
We will not be repeated.
Because otherwise and run rates are somewhat somewhat similar.
Okay.
On any yet soon we should certain and good expenses.
Yeah, we'll get a little bit less you know because there.
Well, the net expense lines, and all that would be and would be consistent quarter over quarter sequentially and that so and just typically modeling day below us don't build muscle for one week less revenue and the and the account.
Accounting for some type of holiday shutdowns on and and.
On that nature as well.
Okay, Thats, great well I'll leave it there and pass it on thank you.
Our next question is from Ryan and sit down with Craig Hallum. Please proceed with your question.
Great. Thanks for taking our questions.
Good morning, Don.
On.
Just.
You mentioned it a little bit for wanted to dig a little bit into guidance you mentioned some holiday shutdowns, but.
And our ramp in production.
And kind of look and industry forecast I guess mid point your guidance is for 9% revenue decline sequentially is there anything else to call up besides just.
Holidays was there anything pulled forward and this quarter and it.
And particularly.
Noteworthy for for the next quarter.
No no and other was pulled forward and and ended the quarter of.
And we'll have to see what.
Well the automakers.
Do on their releases and look on a shutdown. They have we know those shut down for a period of time, but.
It does vary from year to year, So we'll have to wait and see a bit more.
On that but.
Other than the readers week from last year.
And and will an unknown on what the Pandemics and when we do and obviously is on.
Automaker shuts down on and Thats gone back to us.
And state the obvious on them.
I don't think there's anything else no. There was nothing significant that we got credit for and Twoq that we aren't going to get credit for and Q3 because of that so.
Pretty much standard running against it.
I guess more pointedly Hs is forecast and global auto production quarter over quarter on calendar Q3 Q4.
You guys are down 9% doesn't sound like anything else I guess can you help me are you guys, taking a more conservative approach relative to kind of industry forecasters.
Well and we we look at.
On the industry reports, but then we overlay that with the releases we have.
What program for or we're on.
And that's that's what gives us our.
Our guidance range and we don't necessarily.
Because of our concentration and trucks and assay, we don't necessarily on track to soccer.
And that's where we go and of excruciating detail and we put together the guidance, we're literally going on.
[noise] part number by part number of all and we put it together and you can look.
Look at MEP owed and say, okay. The Sars up experts and so therefore, we we will be.
And.
And any given quarter, and we can be up or down compared to those for the Sars is really the on that.
Yes.
And I don't want to say they were we were conservative on the quarter for us.
And.
I think we used our normal methodology to determine the though.
On the product mix and and the.
The guidance.
Good just moving over to aerospace.
This is the first award, but I can remember in some time can you comment I guess on traction you're getting there and that opportunity.
Theres more behind that or if this is kind of a one off for work.
Yes, and always very hard to predict or whatever it was a sizable award.
For noteworthy and.
So I don't.
I don't know for that makes a trend and.
On.
But we have seen and increase in and our fuse.
What are those materialize and this fiscal year or not but that's always hard to predict for Barry.
Dynamic.
Oh.
Business for.
Net standpoint, so I don't know that I would.
I'd read too much into that other than I can tell you that our number of our peers are responding to our.
Great. That's it for me guys. Thanks, Good luck.
Thank you.
[music].
And again as a reminder, if you have a question you May press star one on your telephone keypad.
Our next question for Matt Sheerin strength.
Please proceed with your question.
Yes, good morning, and thanks for taking the questions for me.
Just following up on on the last question regarding your outlook and as for.
Typically demand for automotive I know over the last couple of quarters.
In the June quarter, you saw our growth July quarter, a lot of.
Volatility quarter to quarter in terms of customer orders and then of course, a big surge.
And last quarter are you starting to get a little bit more visibility in terms of you know weekly releases and order.
Patterns or is it still somewhat volatile and and hard to look past and the next quarter.
For the.
For the quarter.
And I hesitate to say this but.
Things have stabilized.
Now keep in mind that that could change here.
And.
But there is enough volatility really around the world.
Maybe more and North America and Europe that.
It makes it difficult for us to go past the for the third quarter.
That's still.
Others are changing dramatically.
For release to really so it will be difficult to forecast that.
But for the quarter.
I believe the when we track.
And the take rate from the release rate that has normalized for us, which gives us confidence and the in the quarter again barring some some.
Oh, OEM shutting down because of the gold and yes.
Yes, and I know you are you getting a sense following this big.
Increase and in orders.
And and sales and that the auto supply chain is largely kind of normalized after being inventory.
Inventory depleted and and building back and that going forward, it's really sort of up and demand thats going to drive your your sales force.
If you look at the supply of are they.
The inventory on truck and as to the those are still down so.
I think it'll be difficult to say what percentage is oh, the sell through versus inventory replacement, but.
But we do know that there still is a.
Inventory is still down on some of our key customers.
On the other hand.
GAAP.
As reported sales of and very.
Very good as well, but there is a there is still a mixed bag on that and I wouldn't anticipate that's going to go into.
Next year for sure.
And I would also point.
No we're not we're supplying everything our customers need.
So were not.
On the missing any shipments, but we do know that oh on the builds are being somewhat.
Moderated by on the other shortages.
Okay, and not track mounted on but no I got it I got to supply their supply chain constrained for got it okay. Okay. Thanks very much.
Well thank you.
And we have reached the end and the question and answer session and I'll now turn the call over to Don Doodle for closing remarks.
Thank you and we'll thank everyone for listening and for their questions and wish everybody a.
Very enjoyable and safe.
Safe holiday season, and good day.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
[noise].