Q4 2021 Methode Electronics Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the method of electronics fourth quarter of fiscal 'twenty 'twenty 1 results.
At this time, all participants have been placed on a listen only mode and the floor will be opened for your questions and comments following the presentation.
And as of now my pleasure to turn the floor of it to your host Rob Cherry Vice President of Investor Relations, Sir the floor is yours.
Thank you operator, good morning, and welcome to the method electronics fiscal 2021 fourth quarter earnings conference call for.
For this call we have prepared a presentation entitled fiscal 2021 fourth quarter financial results, which can be viewed on the webcast of this call were found it met the dot com on 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.
We're looking statements are subject to the safe Harbor protection provided under the securities laws.
[noise] methadone and takes no duty to update any forward looking statement to conform the statement to actual results or changes in 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 in methods 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. Thank you for joining us for our fiscal 2021 fourth quarter earnings Conference call.
I'm joined today by Ron <unk>, our Chief Financial Officer.
Ron and I will of opening comments and then we will take your questions.
Let's begin with the business highlights on slide 4 are.
Our sales for the quarter was $301 million, excluding favorable currency translation, our organic growth was up 37% from the prior year.
It should be noted however that our prior year quarter was significantly impacted by the pandemic.
In this year's fourth quarter, our team faced multiple challenges.
First with the chip shortages, and then with the plastic resin shortages, resulting from the freeze in Texas.
These issues along with the ongoing port congestion created meaningful headwinds in response.
The met the team did what it does best recognize the challenge early.
Work with the customers and suppliers to develop solutions and then executes.
As a result, we were able to meet the high end of our sales guidance for the quarter.
However, the supply chain disruptions required remedial actions, such as expedited shipping and premium component pricing that significantly impacted our margins.
Moving forward. These challenges are lingering into the first quarter and some may continue until the end of this calendar year.
However, we have confidence in the situation improving as evidenced by our guidance for the full fiscal year.
The growth that we realized from the fourth quarter was due to increased demand across most of our businesses, but was especially focused in auto and commercial vehicle.
We also saw growth in our beer business as a result of of major hospital system order.
Overall, we had strong awards for EV led.
Lighting and E bikes.
Focusing on EV.
The last quarter, when we reported the sales into EBIT applications from over 12% of consolidated sales.
This quarter <unk> sales were over 13% of consolidated sales and we continue to expect the number to be in the mid teens for fiscal 2022.
And that those combination of user interface led lighting and power distribution solutions is a winning formula in the EV.
But we are especially seeing growth in our power offering.
This is where method leverages of over 40 years of auto grade manufacturing operations and power distribution expertise to supply bus bars connectors and battery disconnect units to the EV Oems.
Regarding our balance sheet, we generated $31 million of free cash flow and further reduced our net debt in the quarter.
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 a of multiple paths to invest in the business in order to drive growth and ultimately shareholder return.
As an example of this quarter, we initiated the stock buyback program and purchased 7.
The $10.5 million and method of chairs.
After the quarter end, we also announce of 27% increase to our dividend.
Metals business model continues to generate excellent free cash and we are allocating capital per our balanced approach.
Yeah.
Moving to slide 5.
At the finished the fiscal year with another strong quarter of business Awards.
The words continued to capitalize on key market trends like vehicle electrification led lighting in auto and cloud computing.
The awards identified here represent a cross section of the business wins in the quarter and represent over $40 million in annual business at full production.
And vehicle electrification, we won awards for power distribution user interface and led lighting programs.
We continue to win programs with the Oems globally in both auto and commercial vehicle applications.
And non EV led lighting, we reward of programs for automotive and motorcycle applications.
In cloud computing, we continue to see demand for our power distribution products and data center applications.
Additionally, we continue to participate in the growth of E bikes, which utilizes our proprietary Magneto elastic technology.
Also won 2 awards for traditional user interface solutions as well as secured of power distribution Award for wind farm application.
Turning to slide 6 as noted in our release. This morning, the company's accounting periods for fiscal 2021 included 52 weeks as compared to 53 weeks for fiscal 2020.
Despite having 1 less week, we were able to deliver year over year organic growth and finished with record sales of $1.88 million for the year.
Also a record for the year was our free cash flow of $155 million.
The team's disciplined focus on working capital improvements throughout the year made this result possible.
The strong fourth quarter drove our EV sales for the full year to over 12% of total consolidated sales.
All of our key solutions user interface led lighting and power distribution contributed to our growth.
Lastly for the full year metals business awards were over $200 million in.
An estimated annual sales at full production with the majority being in our targeted markets of EV commercial vehicles E bike and cloud computing.
Yes.
As I mentioned last quarter, our business awards over the last couple of years of put us on track in aggregate to replace the sales from the roll off of our largest auto program.
As such our customer and program concentrations continued to improve and our foundation for organic growth is building.
On a side note moving to slide 7 you will see that we recently celebrated our 70 <unk> anniversary.
The methodologies Tronox was founded $19.46 by William J Mcginley in Chicago.
The company started with the production of tube sockets use the radios and early television sets it.
It was named from an anagram, although good manufacturing method and the electrode and cathode, although vacuum tube tube, forming the words muscled.
Day method has grown in the world class manufacturer and continues to develop new technology and innovative solutions for our customers worldwide. The.
Entire method team is proud to carry on the legacy of Mr. Mcginley.
To conclude given the reason the supply chain challenges I am extremely pleased that our team was able to deliver at the high end of our guidance.
Generate solid free cash flow and the wind substantial program the ones in the quarter.
As I articulated earlier the supply chain issues are still present and are impacting our first quarter.
However, we believe they will diminish over the course of our fiscal year, which would put us in a position to deliver strong organic growth for fiscal 2022.
At this point I will turn the call over to Ron who will provide more detail on our fourth quarter and full year financial results.
Thank you Don and good morning, everyone.
Please turn to slide 9.
Fourth quarter sales were $301 million in fiscal year, 'twenty, 1 compared to $210.6 million in fiscal year 'twenty, an increase of $90.4 million or 42, 9% the.
The year over year quarterly comparisons included a favorable foreign currency impact on sales of $11.5 million in the quarter.
The increase was mainly due to lower sales in the prior year quarter from the impact of the COVID-19 pandemic.
And to higher sales of electric and hybrid vehicle products.
Fourth quarter net income increased the $1 to $31.1 million or <unk> 81 per diluted share from 34, $30.1 million or <unk> 79 per diluted share in the same period last year.
Net income benefited from lower income tax expense and favorable foreign currency translation offset by higher costs from supply chain shortages higher sales and administrative expenses and lower other income.
Please turn to slide 10.
Fourth quarter gross margins were lower in the fiscal year 'twenty, 1 as compared to fiscal year, 'twenty, mainly due to higher material cost higher logistics costs, including freight and supply chain shortages.
Fiscal year 'twenty, 1 fourth quarter margins were 21, 25, 1% as compared to 28, 1% in the fourth quarter of fiscal year 'twenty.
But the supply disruption of accounted for over 200 basis points of the margin decrease.
The higher logistics costs, including freight and supply chain shortages that were experienced in the fourth quarter are expected to continue into fiscal 'twenty 2.
In addition, we anticipate a degree of cost inflation continuing into fiscal year 'twenty 2.
Fourth quarter, selling and administrative expenses as a percentage of sales increased to 12, 3% as compared to 8.6% in the fiscal year 'twenty fourth quarter.
The fiscal year 'twenty, 1 fourth quarter percentage increase was attributable to higher stock based and performance based compensation expenses, mainly as a result of compensation accrual reversals in the prior year quarter related to the negative impact of the COVID-19 pandemic on the fiscal 2.
'twenty financial performance measures.
The fourth quarter fiscal 'twenty, 1 SG&A percentage is more in line with the historical norm, which is still yield an efficient flow through from gross margin to operating income.
Please turn to slide 11.
In addition to the gross margin and SG&A items mentioned above 2 other non operational items significantly impacted net income in the fourth quarter of fiscal year 'twenty, 1 as compared to the comparable quarter last fiscal year.
First of.
Other income net was lower by $2.1 million, mainly due to lower international government assistance between the comparable quarters.
Income tax expense in the fourth quarter of fiscal year, 'twenty, 1 was $5.5 million or 15% as compared to a tax expense of $10 million or 24, 9% in the fourth quarter of fiscal year 'twenty.
The effective tax rate was higher in the fourth quarter of fiscal year 'twenty due to an increase in tax reserves in the quarter.
Shifting to EBITDA, a non-GAAP financial measure fiscal 'twenty, 1 fourth quarter EBITDA was $50.8 million versus $54.5 million in the same period last year.
EBITDA was net net is typically impacted by lower operating income and lower on the revenue.
<unk>.
Please turn to slide 12.
Net sales increased by $64.1 million to 1.8.
<unk> 8 billion of which $26.7 million was attributable to foreign exchange.
The 1.
The 1 billion in sales was a record per mento.
Net income was virtually flat as supply chain disruptions higher performance based compensation and increased restructuring contributed to lower pre tax income, which was partially offset by the lower income tax rate.
Please turn to slide 13.
In fiscal year 'twenty, 1 we reduced gross debt by $112 million, resulting from the full repayment of the 100 million per cautionary draw we initiated in March 2020.
Since our acquisition of great kind of in September of 2018, we have reduced gross debt by $118 million.
Net debt of non-GAAP financial measure decreased by $127.9 million to $6.9 million in the fiscal year 'twenty 1.
From a $134.8 million at the end of fiscal year 'twenty.
We ended the fourth quarter with $233.2 million in cash.
Our debt to trailing 12 month EBITDA ratio, which is used for our bank covenants is approximately 125.
Our net debt to trailing 12 months EBITDA ratio was 0.0 for virtually nil.
Please turn to slide 14.
Free cash flow of non-GAAP financial measure, which effective in fiscal year 'twenty..1 is defined as net cash provided from operating activities less capex.
For fiscal year, 'twenty, 1 fourth quarter free cash flow was $31.2 million as compared to $47.8 million in the fourth quarter of fiscal 'twenty.
The decrease was mainly due to higher working capital in the quarter to support year over year increase sales.
For the full fiscal year 'twenty, 1 we produced record net cash provided by operating activities of nearly $180 million and record free cash flow of $155 million.
While we don't expect to equal the fiscal year 'twenty, 1 free cash flow results in fiscal 'twenty, 2 largely due to increased working capital to support fiscal year 'twenty to sales growth and increased Capex, we do expect to generate sizable free cash flow.
We anticipate continuing the proven history of consistently generating reliable cash flows which allows for ample funding of future organic growth inorganic growth.
And return of capital to the shareholders.
In the fourth quarter of fiscal year 'twenty, 1 we invested approximately $4.8.
$8 million in Capex as compared to $10.2 million in the fourth quarter of fiscal year 'twenty.
The lower fourth quarter Capex was simply due to timing as opposed to a conscious effort to curtail capex, we approved capex during the quarter and the full fiscal year that is not yet reflected in the cash flow statement as the actual cash outlay for these approve expenditures will occur in future reporting period.
Yes.
We have a strong balance sheet and we will continue utilizing it by continuing investment in our businesses to grow them organically in the future.
In addition, we continue to pursue opportunities for inorganic growth.
Regarding capital allocation, we recently announced 2 initiatives first on March 31, we announced the $100 million share repurchase program, which we executed $7.5 million of repurchases during the fourth quarter of fiscal year 'twenty 1.
In addition, last week, we announced a 27% increase in our quarterly dividend from <unk> 11 per share to <unk> 14 per share.
We are confident in our cash generating ability to simultaneously invest in organic growth inorganic.
Inorganic growth and provide an ample return of capital to the shareholders.
Please turn to slide 15.
As Don mentioned in his remarks, we are providing revenue and earnings per share guidance in the first quarter of fiscal 'twenty 2 due.
Due to the uncertain direct and indirect impacts from the ongoing semiconductor supply shortage and the continued challenges from other supply disruptions, including port congestion.
The.
The revenue range for the first quarter of fiscal year 'twenty, 2 is between $285 million and $300 million.
Diluted earnings per share range is between <unk> 68 per share to <unk> 80 per share.
The revenue range for the full fiscal year 'twenty 2 is between $1.75 billion and $1.2 to 3.5 billion.
Diluted earnings per share range is between $3.35 per share to $3.75 per share.
The midpoint of the range represents an 11% increase over fiscal 'twenty, 1 despite having a significantly higher tax rate in fiscal year 'twenty 2.
The wider range is due to the uncertainty from the supply chain disruption for semiconductors and other materials on both <unk> and its customers.
Factors that could result in us moving towards the higher end of the sales range include higher sales due to the lessors.
Disruption of supply to us <unk> of our customers, which would result in higher demand for our products.
Lesser 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.
Ron Thank you very much Kathryn we are ready to take questions.
Ladies and gentlemen, the floor is now open for questions.
If you have any questions or comments. Please press star 1 on your phone now.
We ask that will posing your question. Please pickup your handset at Lasalle Speaker phone provide of Sam quality. Please hold them on the poll for questions.
Your first question is coming from Luke junk.
Sir your line of 5 great. Thank you good morning, everyone.
Good morning, Luke.
So I wanted to start with a question on electrification electrification of land sales came in at over 12 percentage of sales. This year. That's the versus what you had indicated if we look in the first half of the fiscal year of an expectation that that would be in the high single digits, so relative basis about a third higher than youre expecting.
Wondering as we unpack that are we seeing benefits from the market and that upside or should we read the higher electrification mix as methode specific.
And if so if you could help us understand what's driving that fundamentally.
Sure.
It's really both of the market is helping us, particularly in Europe, and our new launches of which came from our business wins, a year and a half to 2 years ago. So it's really both.
Percentage wise I don't know the we could.
We could give that now but we.
We have that lets you want to comment around yes.
I agree with that on the.
Of the 12%.
<unk>.
The split now between automotive and industrial it's more weighted towards industrial which means we're getting more activity from the power side of the.
The vehicle electrification, which seems to be strengthening so.
And the power side.
Probably is more weighted towards market growth because it's in the batteries and the more batteries.
The more tire of the Oems all of our batteries in the low more bus bars will sell so I would say that the weighted more towards the market effect.
Okay. Thank you for that next.
Cost of related question in terms of the higher material and logistics costs that you're seeing right now and what I'm wondering is if we look in the near term what you're most of the.
Visibility isn't the that you mentioned that youre expecting of continued impact as we move into the first fiscal quarter, but as we look over the next few quarters, let's say is there any visibility into those cost headwind starting to abate as we move through the fiscal year as you've built into the guidance effectively.
That is.
The tough 1 to answer the 1 of the reasons. We gave quarterly guidance is just the uncertainty uncertainty in the quarter on shortages and the effect in.
Just as a reminder, even if we could supply of our customer does not have a complete bill of materials to build the vehicles, they're not going to release us.
It is very hard to.
The forecast and again Thats 1 of the reasons we gave.
Quarterly guidance.
The most of the reports we've seen the same ones we do.
Until the end of calendar year 'twenty..1 there is of concern that maybe that goes on a little bit longer.
<unk>.
But then we can say that the resin shortages have for the most part of the beta themselves and that completely but.
Sure.
That's moving in the right direction the.
The.
Chip.
Really we are managing to day to day basis, I wish I could give you more information on that but.
You probably have as much as we did not do we get.
A better allocation of.
Of chips because of our customers wanting to ship.
The premium vehicles trucks, and Suvs, yes that does help us being in.
From the center of Council and the in those areas, but it is still relatively unpredictable.
The outlook.
The onset is spot on and certainly the first quarter.
We we.
We had 200 bps in the fourth quarter.
We would expect.
Maybe not to that level, but something with some visibility into this quarter will be.
A little tough from that perspective, but beyond the beyond the first quarter of this year it still remains to be seen.
Okay. Thank you for that and I appreciate the.
The company and looking into the.
Into the future of there. So I appreciate the color you're able to provide and then lastly, I just wanted to touch on capital allocation. So in your prepared remarks covered the 2 spoke to this in terms of the recent announcement with the dividend as well as share repurchase just wanted to get your commentary on your interest level in the <unk>.
M&A right now and from.
Of course.
From a capital allocation standpoint, and strategically whether or not your focus areas have shifted at all especially as youre seeing the slipped in electrification.
I don't know that our focus has shifted its been in industrial.
Mainly and non.
Turning it to a lesser degree medical but mainly it's the industrial along the lines of of EV.
That would be.
A nice combination of in the industrial business.
On the TV content.
Again, I won't rollout of automotive.
Of that before but we will be optimistic there, but our focus is on industrial.
We have a very high focus internally and externally.
The acquisitions, we've reviewed a number of books that have come in.
Through the quarter nothing of that.
We felt was actionable, but we continue to look at them of course, we also.
Of our own ability to look.
Look at something.
Companies that might not be per sale.
That's a big emphasis of 4.
So it is very key to our.
The growth plans, our strategic plan to our long term.
Growth plans.
We continue and we have 1 of the reasons and of the team did a very good job of paying down debt.
We want to have the liquidity to look.
And acquisitions as we move forward.
Look I.
We haven't done an acquisition since September of 2018 that should not be construed that we haven't looked or were not engaged or we're not active in the process.
Method is very smart we're disciplined.
We bet things in a very strategic and disciplined manner. So the inactivity has nothing to do with our interest or.
Our level of.
Wanting to grow Inorganically.
That all makes sense I'll leave it there thanks for all of the comments this morning.
Luke.
Once again, ladies and gentlemen, if you have any questions or comments. Please press star 1 on your phone now.
We have no further questions from the lines at this time I'd like to turn the floor back to Dan for closing remarks.
Okay. Thank you very much and we'll thank everyone for listening today and wish everyone, a very safe and enjoyable summer.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect at this time and have a wonderful day. Thank you for your participation.