Q3 2021 Methode Electronics Inc Earnings Call
Good morning.
And welcome.
Third quarter for plenty of of the results. The participants are in place and a listen only mode and and the florals and for your question and then following the presentation and.
There's not much of your host Rob Cherry Vice President of Investor Relations, Sir the doors.
Thank you operator, good morning, and welcome to met the electronics fiscal 2021 third quarter earnings Conference call.
For this call we have prepared the presentation entitled the fiscal 2020, one third quarter financial results, which can be viewed on the webcast of this call were found at and Metro Dot com and the investors page.
This conference call contains certain forward looking statements, which reflect 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 and provided on the <unk> Securities laws.
[noise] methodologies and takes 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.
The 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 our expectations are detailed and metrics filings with the securities and Exchange Commission, such as our 10-K and 10-Q reports.
At 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 third quarter earnings Conference call.
I'm joined today by Ron Zoom, as our Chief Financial Officer.
Brian and I will have opening comments and then we will take your questions.
Let's begin with the business highlights on slide four.
Sales for the quarter were $295 million.
As noted in the matter released this morning, the company's accounting period for this quarter included 13 weeks as compared to 14 weeks for the third quarter of fiscal 2020.
Our discussion of year over year comparative results should be viewed in this context.
For illustration of our sales on a weekly run rate basis.
And excluding favorable currency translation were up 8% from the prior year.
We share of this to give investors insight and how we view of the underlying strength of our business, which clearly improved year over year.
While the top line was strong and we did have some headwinds to gross margin and the quarter.
Supply chain disruptions led to additional costs, such as premium freight as well as true factory inefficiencies.
Moving forward these challenges will linger and be joined by demand disruptions caused by the ongoing semiconductor and potentially other material shortages and.
Some of which are related to the recent extreme weather events in the U S.
This is driving the level of of near term uncertainty the can been seen and a wide guidance range for the fourth quarter.
However, none of these issues are systemic and we expect most of the resolved by the middle of this calendar year.
Our confidence and the situation improving as evidenced by our decision to give an early indication of our anticipated sales for fiscal 2022 of over 10% organic growth.
In addition, as the commercial vehicle market continues to rebound our sales mix is expected to further improve gross margin.
Turning to our automotive business, we continued to see strength and demand our sales and EBITDA grew and we had a strong force.
Awards for power and lighting and user interface programs and the quarter.
Focusing on EV.
Last quarter, we reported net sales into EV applications, where over 9% of consolidated sales and were expected to be and the high single digits for fiscal 2021.
This quarter <unk> sales were over 12% of consolidated sales and we now expect that number to be over 10% for fiscal 2021.
Furthermore, our healthy pipeline of EBIT programs now gives us visibility to project of this percentage will be and the mid teens and fiscal 2022.
Methods combination of user interface, and led lighting and power distribution solutions is a winning formula and the EV and positions us well for continued growth and this exciting market.
Regarding our balance sheet, and we generated over $80 million and free cash flow and significantly reduced our net debt and the quarter the.
Debt reduction was driven by the full repayment of our $100 million revolver draw from March of last year.
We continue to have ample liquidity and our net leverage ratio is now near zero.
The strength and flexibility of our balance sheet allows us to consider the multiple paths to invest and the business in order to drive growth and ultimately shareholder return.
In addition to the COVID-19 pandemic, we face the growing impact from the semiconductor shortage in the quarter.
While the COVID-19 situation is improving the <unk>.
Ongoing operating issues from it remain.
In regard to the chip shortage situation.
The impact of method and the third quarter was minimal.
However, we do anticipate of financial impact and our fourth quarter and beyond as a result, before mentioned issues as well as other potential supply chain disruptions.
Moving to slide five.
And I thought had its best quarter of this fiscal year for book The awards. These.
These awards continue to capitalize and key market trends like vehicle electrification led.
The led lighting and auto and sensors and E bikes.
The award the identified here represent a cross section of the business wins, and the quarter and represent over $50 million and annual business.
And vehicle electrification, we won awards for bus bar power distribution and user interface programs.
We continue to win programs with the Oems globally, and auto commercial truck and even charging station applications.
And non EV led lighting, we were awarded programs for several of the auto applications.
We also continue to participate and the growth of E bikes, which utilizes our proprietary Magneto elastic technology.
Lastly, we went two sizable awards for user interface programs with international automotive Oems.
For the first three quarters of the fiscal year method is booked orders of over $150 million of potential annual sales.
We continue to build on our debt foundation for organic growth.
Regarding the anticipated roll off of our largest auto program.
While we can't comment on our customers' timing.
We are pleased that our strong new program bookings over the last several quarters.
Put us on a track and aggregate to replace the sales from that program.
We're also pleased to protect ourselves from any single customer is expected to drop below 25% from a high of approximately 50%, 50% four years ago, all while we continue to grow our top line.
We are definitely making progress on reducing both customer and program concentration.
Turning to slide six.
I'd like to elaborate further on our footprint and Evs.
And as I've shared with you before Methodist become uniquely qualified.
Three pronged solution provider for Evs those solutions includes user interface led lighting and power distribution.
The architecture of the is generally divided into two parts the top hat and the skateboard.
The top hat is essentially the body of the vehicle and varies from model to model the.
The skateboard and the chassis or framework of the vehicle.
As many of you know the type of vehicle architecture is a game changer with evs as it can be standardized and leveraged across multiple models and platforms.
On the top hat method offers its traditional vehicle solutions of user interface and led lighting along with some EV specific solutions such as charging ports.
These charging ports of fairly complex and include the features such as actuators and lighting.
In addition to the power connection itself.
On slide seven we show a skateboard.
This is where method leverage its unique combination of auto grade manufacturing operations, our auto pedigree and power distribution expertise to supply of various bus bars connectors and battery disconnect units to the EV Oems.
We are also gaining traction with sensor solutions for by wire systems and battery monitoring.
However, it is and the power distribution, where the largest content growth opportunity lies.
Historically, our participation with power products and internal combustion vehicles was minimal.
And Evs. It is quickly growing and has reached approximately half of our product sales for EV applications.
Consequently method is a clear opportunity to incrementally grow our content per vehicle with the transition to evs.
The additional content and the <unk> could range from 20% to over 100% of our current content on and internal combustion vehicles.
As I said in the past EV is a definite organic growth tailwind the format for all of them.
To conclude given the recent supply chain challenges and the ongoing pandemic situation I am extremely pleased that our strategy and our team were able to deliver at the high end of our previous guidance.
Generate significant free cash flow and when substantial new program awards in the quarter.
At this point and I'll turn the call over to Ron who will provide more detail on our third quarter financial results Brian.
Thank you Don and good morning, everyone.
Please turn to slide nine.
Please note that the third quarter of fiscal year 'twenty. One contains 13 work weeks, whereas the third quarter of fiscal year 2014 work weeks.
And third quarter sales were $295 3 million and fiscal year 'twenty one.
Compared to $285 9 million and fiscal year, 'twenty and increase of $9 4 million of three 3%.
The year over year quarterly comparisons included a favorable foreign currency impact on sales of $9 7 million and the current quarter.
On a weekly run rate basis, and excluding the foreign currency impacts net sales were up a solid seven 6% compared to the same quarter of fiscal year 'twenty. The.
The increase was due in part to higher sales of electric and hybrid vehicle solutions.
Third quarter net income decreased $9 3 million to $31 9 million or <unk> 83 per diluted share from $41 2 million or $1 <unk> per diluted share and the same period last year.
In addition to one week less of production activity and the current fiscal quarter. The decrease was primarily due to premium freight and factory inefficiencies resulted from supply chain disruptions due to COVID-19.
And to a lesser extent increased tariff expense and the product sales mix.
Also contributing to the decline was lower other income of $2 5 million and higher income tax expense of $1 8 million.
Please turn to slide 10.
Third quarter gross margins were lower in fiscal year, 'twenty, one as compared to fiscal year 'twenty, mainly due to the premium freight and factory inefficiencies, resulting from supply chain disruptions due to COVID-19, and the mentioned tariff expense and product sales mix.
Fiscal year 'twenty, one third quarter margins were 24, 6% as compared to 27, 7% and the third quarter of fiscal year 'twenty.
The premium freight and other expenses, resulting from inefficiencies and the supply chain that were experienced in the third quarter are expected to continue and the fourth quarter.
However.
We do not believe these issues are systemic and based on our knowledge at this time will gradually be resolved and the fourth quarter with lesser impact to the first quarter of fiscal year 'twenty two.
Third quarter, selling and administrative expenses as a percentage of sales decreased 50 basis points year over year, two of 11% compared to 11, 5% and the fiscal year 2003rd quarter.
The fiscal year 'twenty, one third quarter percentage was attributable to lower compensation expense lower travel expense and restructuring costs.
Really offset by higher stock based compensation expense.
The decrease and compensation expense was primarily related to the benefit of restructuring actions taken and the first quarter of fiscal year 'twenty one.
While we anticipate an increase and the SG&A percentage on the go forward basis due to a full year of LTE of amortization on the restricted stock units and more normal travel expense.
We expect the future SG&A expense percentage to be more in line with our historical norms, which has still yield and efficient flow through from gross margins operating income.
Regarding our restructuring activities of third quarter expense was 700000 and the year to date third quarter expense was $8 3 million.
The company currently expects and additional restructuring expense of 200000 and.
The remainder of the fiscal year, resulting from the previous quarter's actions the.
Vast majority of the restructuring took place and the first half of the fiscal year.
Please turn to slide 11.
In addition to the gross margin and SG&A items mentioned above two other non operational items significantly impacted net income and the third quarter of fiscal year 'twenty, one as compared to the comparable quarter last fiscal year.
First.
Other income net was lower by $2 5 million, mainly due to lower government assistance between the comparable quarters.
Second income tax expense and the third quarter of fiscal year 'twenty, one was $4 6 million or 12, 6% as compared to a tax expense of $2 8 million.
Or and effective tax rate of six 4% and the third quarter of fiscal year 'twenty.
The $12 six effective tax rate for the quarter was less and the estimated tax rate due to the benefits of some tax planning and that's it and the third quarter, which was retroactively applied to the first quarter of the current fiscal year.
We expect to benefit from the third quarter tax planning and the current fourth quarter, which will result, and an estimated fourth quarter effective tax rate of 15% down from the previously guided rate of 17%.
Shifting to EBITDA and non-GAAP financial measure.
Fiscal year 'twenty, one third quarter, EBITDA was $51 3 million versus $58 7 million and the same period last year.
EBITDA was negatively impacted by the higher cost I previously noted.
Please turn to slide 12.
We reduced gross debt by $103 million and the third quarter, resulting from the full repayment of the 100 million per cautionary draw we initiated in March 2020.
Since our acquisition of Great Con and September 2018, we have reduced gross debt by $113 million.
Net debt of <unk>.
Non-GAAP financial measure decreased by $108 9 million and the third quarter of the fiscal year 'twenty, one as compared to the fiscal year 'twenty year and from $134 8 million to $25 9 million, we ended the quarter with $218 $17 million and cash.
Our debt to trailing 12 month EBITDA ratio, which is used for our bank covenants is approximately one three.
Our net debt to trailing 12 months EBITDA ratio was 0.1.
Please turn to slide 13.
Free cash flow and non-GAAP financial measure.
Effective and fiscal year 'twenty fund is defined as cash provided from operating activities minus capex.
For the fiscal year 'twenty, one third quarter free cash flow was $82 8 million as compared to $6 7 million and the third quarter of fiscal 'twenty.
The strong free cash flow performance was driven by and approximately $40 million favorable change in working capital and the quarter.
While this level of working capital execution is not likely to be sustainable, especially as we navigate through supply chain challenges, we anticipate continuing our history of consistently generating predictable cash flows, which will allow us ample funding of future organic growth and organic growth and return of cash.
Capital to the shareholders.
And the third quarter of fiscal year 'twenty, one we invested approximately $4 9 million and capex as compared to $8 1 million and the third quarter of fiscal year 'twenty.
The lower third quarter Capex was simply due to timing as opposed to any conscious effort to curtail capex. We approved capex during the quarter that was not reflected and the cash flow statement as the actual outlay for these approved expenditures will occur in future reporting periods.
We have a strong balance sheet and will continue and utilizing it by continued investment and our businesses to grow them organically and the future.
In addition, we continue to actively pursue opportunities for inorganic growth.
Please turn to slide 14.
And as Don mentioned in his remarks, we are providing revenue and earnings per share guidance for the fourth quarter, which is subject to disruption at any time due to a variety of factors, including direct and indirect impacts from the ongoing cover COVID-19 pandemic situation the.
The semiconductor supply shortage and potential challenges from supply disruption, resulting from the severe weather experienced in the U S and mid February.
The revenue range for the fourth quarter is between $270 million and 300 million diluted earnings per share range is between 60 and 82.
And the wide range is due to the uncertainty from the supply chain disruption for semiconductors, and other material and both method and its customers.
Factors that could result in us moving towards the higher end of the sale of the rate include higher sales due to lesser.
The supply disruption to us and all of our customers, which would result in higher demand for all of our products lesser of disruption would also minimize the cost of sales impact from premium freight factory inefficiencies and to a lesser extent tariffs and other logistic factors such as port congestion.
Don that concludes my comments.
And thank you very much Kathryn we are ready to take questions.
Ladies and gentlemen, the floor is now open for question and if you have any questions or comments. Please press star one on your phone now we ask that will close in your question you. Please pickup your handset if the Sam speaker phone and to provide alcohol and the sound quality. Please hold the moment when we poll for questions.
And your first question is coming from Luke junk.
Your line is live and.
Good morning.
And I'm wondering if the first question because of just talk about your current view of the chip shortage and what your customers are telling you at this point and here in early March and curious within that if you think youre waiting to the trucks and Suvs and the idea of business should help to cushion of the company and to some extent the margin.
Gotcha.
The answer the.
The last part first yes.
I don't want to speak for the customers, but we do and all of the across the board customers of reallocating to the models that are are selling for them. So.
We do benefit from that.
No.
But it's very difficult to project.
How that will work out we said, we said and our third quarter of that it was minimal, but we are seeing the effect of it and and our fourth quarter and our guidance clearly reflects the that's the win win.
And we're being told and it will mitigate.
And it runs the gamut.
The latest we heard as maybe in the middle of the year.
But we've also heard.
The longer.
As well so it's very difficult.
And from where we set the.
Yes.
Predict that and again Thats why we gave a wide the guidance range.
Okay understood second question I had is by my Count you show about a dozen or so EV product applications on slide six and seven there are a couple of maybe two or three that you'd highlight as an emerging opportunity for the company.
And we've already know and so your strength and in terms of bus bar is now lead the lighting is key products for example.
Sure one of the ones, we like I mentioned in my prepared remarks of the charging ports.
<unk>.
They are fairly complicated.
Theres actuators and the so theres coils and the numbers those connectors.
Lastly, the surfaces.
And so we're.
We don't have any awards at the moment that I can announce but that is an area of that.
And.
And we.
We are we are pursuing the other area and we say.
Sensors and cameras.
The.
And we do.
Our cyber and Peter for one of the major EV.
The company that as of the camera and it but we're also looking at.
Put of cameras on the class eight.
Trucks as well.
Not so much from electric standpoint, I guess, but as you go into some of the other vehicles putting the.
Smaller delivery vehicles, putting the external cameras and is another area that we are we are working on.
From a skateboard standpoint.
The battery disconnect units.
We have some business with that now those are fairly complicated and then theres the power distribution units as.
As well those are the areas those are high dollar.
<unk>.
The content.
For the vehicles and again.
Uniquely qualify the.
And.
Producers I think those will be the for the key areas.
Okay, great. Thank you for that and then last question of how does if you could just remind us of your overall commercial vehicle exposure and industrial and more importantly, and what your outlook for that business is right now based on the increase and order rates that we've seen and as those rates start to recover.
Wow.
And we follow.
<unk>.
And we look at.
And somewhat flat and.
And I shouldn't say that.
Because it is increasing and our third and fourth quarter, but we see it.
Mid next year.
Continuing to go up into the end of 'twenty three.
I'm not sure if I would call it the peak, but the.
And I think Thats, where the ECT hazard.
We tend to outpace AC T.
<unk>.
And we'll just have to see how.
How strong the recovery recovery of and I would also point out of that some of that is just catching up with demand.
Yeah, and we think too.
And that this trend going forward too will provide.
Provide opportunity for margin expansion into the next year. The whole segment is and we get into more vehicle electrification and the the uptick in commercial vehicles and that's our highest margin segment so to have more activity there.
Should lift all boats so to speak so that's a that's a good thing.
Watch very closely.
<unk>.
Great. Thank you for that I'll go ahead and leave it there.
Thank you.
Once again, ladies and gentlemen, if you have any questions or comments. Please remember you can press star one at anytime you're.
And your next question is coming from Ryan Cingal.
Your line is live.
Good morning, guys. Thanks for taking the question good morning, Ryan.
Just wanted to dive and you mentioned margin expansion next fiscal year, which is helpful. Directional commentary just curious theres a lot of headwinds challenges obviously this year.
But as we looking back maybe to fiscal 'twenty EBITDA margins were.
Close to 20% I guess is that a reasonable baseline you mentioned more content and higher margins I guess directionally is that a good baseline for next year, where you think you can do better than that or the <unk> think it'll be worse.
And that requires us to get into guidance for the next the.
The next year.
Let me too of.
We can say there.
We've talked about margin expansion and two.
Because of the glass AIDS and so if I were the.
Look at the industrial margins.
And let's say we would.
The benefit from that from that increase also we have a.
And probably a better margin mix and some of the new products.
Keep in mind those won't launch.
Q1 of fiscal 'twenty, two but the beta use and the <unk> do carry much much higher margin so I.
I would expect from and industrial standpoint, we would see.
And so your margin and EBITDA expansion from that.
<unk>.
Auto that's the tougher one.
It really depends.
Chip shortages and.
What the flow of on the flow through but the.
What the actual demand is.
From the consumer right now we're benefiting.
From both consumer demand, which has been very good.
And three new trucks, and Suvs, but theres also and inventory replenishment of if you look at what.
The Oems have.
And inventory there and the.
And the lowest I think I've seen and my time and and auto So we're getting.
Of double.
Kind of a double benefit from that.
And that will take quite some time, the probably with the shortages for the.
The inventory to get back up to 90 days or 100 day, bill that could could that benefit us throughout our fiscal 'twenty two yes.
Don't want to sit here and say.
And that for sure we really need to see what happens with the shortages and anytime you've got sort of does not just in semiconductors, but and we and we have faced shortages.
Really since the beginning of the pandemic.
For the most of it we've been able to alleviate them but.
There are very real right now and we're seeing them affect everybody.
<unk>.
Around the Olympics.
Thank you.
And I agree with what John saying and clearly all of the headwinds.
From the shortages and and that are the top line and as you can see through the results. The also.
A double whammy effect and that the affect our operations as well too so.
A lot of what we're looking at next year will depend on that being satisfied and getting.
To a more normal run rate and then I think we'd probably be and are better positioned.
To fine tune that answer and the other thing I would say Ryan is.
And obviously, we're very excited about our position in Evs.
<unk>.
But we need to see how of the programs materialize to the stay on track are they.
The units are ex U.
Ex.
Plus or is that ex negative.
And the and then and no one has enough.
History on that to say for sure. So we're a little guarded.
What those volumes will be and you get out of.
Get on a truck program for Florida, GM, you pretty much know.
And what the volume is going to be it's much more difficult and.
And EBIT.
We're going to get some volume because of around the on the program but.
And we'll have to wait and see how that materializes.
And then.
Just on the chip shortage and maybe I missed it earlier did you quantify or could you quantify how much that impacted your Q4 guide and then do you expect that to be resolved this quarter or do you think that will linger into the next.
And next fiscal year.
I think it is going to linger into two of our Q1 of next year, we have been.
So all of that perhaps by the by mid calendar year that it may alleviate itself, but we've also had the caution that it.
May go on.
Did not quantify it.
There's a lot of moving.
Pieces and the quarter, that's why we gave up.
A large range.
I can tell you that.
Let's go for six weeks ago that are.
Our forecast for the fourth quarter was and it was in excess of 300 million and which would have been a record quarter. So we're clearly being.
Impacted.
And the fourth quarter, not so much the third quarter by chips, but we haven't.
We haven't quantified exactly.
Last one for me and I've asked this previously, but a little more directly maybe your net cash position almost of net cash at this point debt repayment, but from a capital allocation standpoint.
<unk> valuation relative to earnings it's lagged peers for years I guess, you guys are focused on acquisitions, which have come out of fairly sizable premium two and the ice valuation.
Have you reconsidered and meaningful share buyback program versus more focus on acquisitions.
And I'm very appropriate question that is something that we.
Are considering.
We're now going to.
And we're up to over 200 million and the net cash.
And.
And not likely to pay down much more and more of that it's very inexpensive debt some debt and Europe. We may we may repay so now let me back up.
We thought it was very very important after doing the great kind of acquisition that we prove to the street that method and as a discipline to achieve the synergies and more importantly.
And paydown of debt and we've accomplished that.
And that was that for the last well since of the breakout of acquisition that was priority one now where we're sitting today.
We're ahead of where we thought we would be largely because of our teams did a very good job of taking cost out of the factories and and.
Dealing with tariffs and so on.
So now we will turn our attention to the where do we put that cash.
To use do we do a stock buyback.
That is.
Certainly on our list I won't and we'll give you a priority on it by the there is certainly something that we are we are considering having said that we will we.
We always look at acquisitions.
Greg <unk> was I think of first there was some concern about it.
But it clearly.
And.
It has put us in good stead, and the commercial vehicle market and the EV market.
And some of the the EV wins, we had.
And what will be commercial trucks and.
Particularly when you get into the Bdus and Btu so.
I'm not I'm not going to say that we're not going to do an acquisition. So I'm not going to give you the and the the order, but I can tell you the stock buyback is something that we would certainly consider.
Great helpful color, Thanks, and good luck guys.
Thank you.
And there are no further questions from the lines at this time I would now like to turn the call back to Don for closing remarks.
Katherine and thank you very much and we will thank everyone for listening to us today and.
Have a good <unk>.
Rest of the day.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.