Q1 2022 Methode Electronics Inc Earnings Call

Yeah.

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Good day, ladies and gentlemen, and welcome to the method electronics first quarter fiscal 2022 results conference call.

Lines have been placed on a listen only mode and the floor will be opened for questions and comments. Following the presentation. If you should require assistance throughout the conference. Please press star zero on your telephone keypad to reach a live operator at this time, it's my pleasure to turn the floor over to your host Robert Cherry Vice President of Investor Relations.

Sir the floor is yours.

Thank you operator, good morning, and welcome to metals Electronics fiscal 2022 first quarter earnings Conference call.

For this call we have prepared a presentation entitled in fiscal 2022 first quarter financial results, which can be viewed on the webcast of this call or found at <unk> 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.

These forward looking statements are subject to the safe Harbor protection provided under the securities laws.

So it undertakes 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 <unk> 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 2022 first quarter earnings conference call.

I'm joined today by Ron <unk>, our Chief Financial Officer, both Ron and I have opening comments and then we will take your questions.

Let's begin with the business highlights on slide four.

Our sales for the quarter were $288 million.

Excluding favorable currency translation organic growth was up 45% from the prior year. However.

However, it should be noted that our prior year first quarter was significantly impacted by the pandemic.

In this year's first quarter, our team faced customer demand fluctuations in supply chain challenges.

These included the ongoing semiconductor chip shortage endemic related supply chain disruptions and port congestion all of which created both sales and margin pressure.

Once again, our team worked diligently to mitigate many of these challenges and we were able to deliver results within our guidance ranges for the quarter.

However, these demand fluctuations and supply chain disruptions continue to require remedial actions, such as expedited shipping and premium component pricing.

As of today, our expectation is that these conditions will last at least until the end of the calendar year.

We have reaffirmed our guidance for the full year versus the headwinds could cause our performance to be below the midpoint of the ranges as the situation is very fluid and will remain very challenging.

The sales growth that we realized in the first quarter was due to increased demand across most of our businesses.

Especially focus on the auto and commercial vehicle markets.

We also realized growth in our <unk> business.

However that business is still being hampered by the pandemic, thus limiting our production our product evaluation opportunities in hospital operating rooms and ICU.

On an order basis, we had solid awards for EV cloud computing and E bike applications.

Focusing on EV.

Last quarter, we reported net sales into EV applications were 13% of consolidated sales.

This quarter <unk> sales were 16% of consolidated sales and we continue to expect that number to be in the mid teens for fiscal 2022.

Methods combination of user interface led lighting and power distribution solutions is a winning formula.

Yeah.

We are especially seeing growth in our power offerings, where we leverage over 40 years of expertise to supply bus bars connectors and battery disconnect units to EV Oems.

In the quarter, we further reduced debt generated positive operating cash flow and continue to return capital to our shareholders.

We have ample liquidity, which also allows us to execute our stock buyback program.

Under which we purchased seven $6 million of shares in the quarter and to pay a dividend, which rose from 11 to <unk> 14 per share in the quarter.

We continue to allocate capital per our balanced approach.

Moving to slide five.

We had another solid quarter of business Awards. These.

These awards continue to capitalize on key market trends like you'll go on vacation and cloud computing.

Awards identified here represent some of the key businesses business wins in the quarter and represent over $30 million in annual business at full production.

And vehicle electrification, we won awards for power distribution and led lighting programs. We continue to win programs with Oems globally in both auto and commercial vehicle applications.

And non EV automotive.

We were awarded programs for power lighting and traditional switch applications.

In cloud computing, we saw demand for our power distribution and transceiver products and data center applications.

Lastly, we continue to participate in the growth of E bikes, which utilizes our proprietary Magneto elastic sensor technology.

Building on the prior year, our business awards are delivering on our strategic priority to drive both customer and geographic diversity.

Turning to slide six as I have mentioned in recent quarters, our business awards over the last couple of years have 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 diversity continues to improve.

Our EV as well as our commercial vehicle and cloud computing businesses have helped drive our customer diversity diversification.

While GM and Ford have been and are expected to continue to be good customers that have fueled metals historical growth in recent years, we have strategically and systematically broaden our customer base.

Our business outside of GM and Ford grew to two thirds of our fiscal 2021 total sales.

To conclude despite the ongoing demand fluctuations and supply chain challenges, we are still in a position to deliver strong organic growth for fiscal 2022.

At this point I'll turn the call over to Ron who will provide more detail on our first quarter financial results.

Thank you Don and good morning, everyone.

Please turn to slide eight.

First quarter sales were $295.0 million in fiscal year, 'twenty, two compared to $199.0 million in fiscal year 'twenty, one an increase of $105.0 million or 58%.

The year over year quarterly comparisons include a favorable foreign currency impact on sales of $13.0 million in the current 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 electric vehicles, which amounted to 16% of sales in the first quarter of fiscal year 'twenty, two which was in line with our previous communication that electric vehicles and hybrid electric vehicles sales, which comprise mid teens of our fiscal year 'twenty two consolidated sales.

In addition, stronger commercial vehicle sales contributed to the robust sales growth.

First quarter net income increased $12.0 million to $30.0 million or <unk> 76 per share diluted.

From $27.0 million or <unk> 54 per diluted share in the same period last year.

Net income benefited from increased sales and favorable currency translation, partially offset by higher income tax expense higher costs from supply chain disruption higher selling and administrative expenses and lower other income.

Please turn to slide nine.

First quarter gross margins were higher in fiscal year, 'twenty, two as compared to fiscal year 'twenty, one mainly due to increased sales, partially offset by higher material cost higher logistic costs, including freight and supply chain shortages.

Fiscal year 'twenty, two first quarter margins were 24, 9% as compared to 23, 6% in the first quarter of fiscal year 'twenty one.

The negative impact of the supply disruption and higher logistics costs, including freight on the first quarter of fiscal year 'twenty. Two gross margin was nearly 300 basis points.

These higher costs that were experienced in the first quarter are expected to continue further in fiscal year 'twenty two.

In addition, we anticipate a degree of cost inflation and the remainder of the current fiscal year.

First quarter, selling and administrative expenses as a percentage of sales decreased to 11, 4% compared to 13, 9% in the fiscal 'twenty one first quarter.

The fiscal year 'twenty, two first quarter percentage decrease was attributable to increased sales related to the negative impact of COVID-19 pandemic on fiscal 'twenty, one sales, partially offset by higher stock based and performance based compensation expenses.

The first quarter of fiscal year, 'twenty to selling and administrative expenses percentage was in line with our historic norm, which should yield an efficient flow through from gross margin to operating income.

Please turn to slide 10.

In addition to the gross margin and selling and administrative items mentioned above two other non operational items significantly impacted net income in the first quarter of fiscal year 'twenty two.

Compared to the comparable quarter last fiscal year.

First.

Income tax expense in the first quarter of fiscal year 'twenty, two was $12.0 million or 16, 4% as compared to a net tax benefit of $6.0 million in the first quarter of fiscal year 'twenty one.

The effective tax rate was lower in the first quarter of fiscal year 'twenty, one due to discrete tax benefits up seven $8 million in the quarter or <unk> 20 per diluted share.

Without the discrete tax benefits the effective rate would have been 17, 2%.

The year over year tax expense increase was $18.0 million.

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Other income net was lower by $7.0 million, mainly due to lower international government assistance between the comparable quarters.

Shifting to EBITDA, a non-GAAP financial measure fiscal year 'twenty, two first quarter EBITDA was $53.0 million.

Versus $32.0 million in the same period last fiscal year.

EBITDA was positively impacted by <unk> higher operating income.

Really offset by lower other income.

Please turn to slide 11.

Free cash flow are non-GAAP financial measure as defined as net cash provided from operating activities minus capex.

For fiscal year 'twenty, two first quarter free cash flow was a negative $8.0 million as compared to a positive $12.0 million in the first quarter of fiscal year 'twenty one.

The decrease was mainly due to negative working capital changes, especially inventory, resulting from difficult logistics and higher capital expenditures.

While we experienced negative free cash flow in the first quarter of fiscal year 'twenty, two we expect improvement the remainder of the fiscal year.

We anticipate continuing our proven history of consistently generating reliable cash flows which allow for ample funding our future organic growth.

Organic growth.

And return of capital to shareholders.

In the first quarter of fiscal year 'twenty, two we invested approximately $24.0 million in capex as compared to $17.0 million in the first quarter of fiscal year 'twenty one.

The higher first quarter Capex is in line with our expectation that capex in fiscal year 'twenty, two would be higher than the investment in the prior year estimated to be in the range of $53 million to $57 million.

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 actively pursue opportunities for inorganic growth and have a measured return of capital to the shareholders.

In the first quarter of fiscal year 'twenty, two we reduced gross debt by $11.0 million.

Since our acquisition of great kind of in September 2018, we reduced gross debt by nearly $123 million.

Regarding capital allocation, we recently announced two initiatives.

On March 31, we announced a $100 million share repurchase program, which we executed $13.0 million of repurchases during the first quarter of fiscal year 'twenty two.

Since the authorization approval, we've purchased $16.0 million worth of shares at an average price of $91.0

In addition, we increased our quarterly dividend from <unk> 11.

To <unk> 14 per quarterly share an increase of 27%.

We ended the first quarter with $216.0 million in cash.

Please turn to slide 12.

As Don mentioned in his remarks, we have reaffirmed our previously issued guidance and earnings per share annual guidance.

Guidance is based on management's best estimates external events and the related potential impact on our financial results.

We remain an ongoing challenge.

While we have reaffirmed our guidance for the full year persistent headwinds could cause our performance to be below the midpoint of the ranges as the situation is fluid and we will likely remain very challenging.

The revenue range for the full fiscal year 'twenty two is between $76.0 to one to three 5 billion Duluth.

Diluted earnings per share range is between $38.0

To $78.0 per share.

The range is due to the uncertainty from the supply chain disruption for semiconductors and other materials on both <unk> and its customers.

From a sales perspective, lower sales could result from despite disruption to us and our customers, which could result in lesser demand for our products or our ability to meet customer demand.

Continued supply chain disruption will also negatively impact gross margins due to additional costs incurred from premium freight factory inefficiencies and to a lesser extent tariffs and other logistic factors, including port congestion.

Higher costs for materials freight and labor are constant and dynamic battle and we are uncertain as to when things will stabilize.

That concludes my comments.

Ron Thank you very much cat I believe we're ready to take questions.

Certainly thank you the floor is now open for questions. If you do have a question you May press star one on your telephone keypad at this time.

<unk> has been answered you could remove yourself from the queue by pressing one again, ladies and gentlemen that star one and our <unk>.

First question comes from.

Yeah.

Yeah.

I'm sorry, our first question comes from Matt Sheerin from Stifel Go ahead, Matt.

Yes. Thank you good morning, everyone. Just a couple of questions for me first regarding your guidance for the fiscal year, it sounds like you're reaffirming that but a little bit more cautious.

Some of the headwinds that you see on the supply side. So are you are you seeing less visibility into demand because their boats.

Issues are things getting worse than they were just wanted to sort of understand why you kind of a little bit more cautious relative to last quarter.

I think.

What I can point to as Gm's announcement.

This morning.

Additional plant shutdowns.

We were anticipating.

Some of that.

And that's really what causes.

Causes us to say, we're going to see enough fluctuation here in uncertainty then.

If that were to continue we would be.

Off the midpoint of our guidance ranges.

We still remain confident in the range and just.

As you mentioned the uncertainty.

It causes us to be perhaps they are more cautious than we were at the beginning of the.

The fiscal year, I think thats fair to say.

Understood I mean in terms of how.

How you see sort of the fiscal year playing out.

I think typically Europe, a little bit in the October quarter sequentially, but it would it be more flattish just because of those near term headwinds.

Obviously GM is not the only one we're hearing about shutdown IHS has been cutting its numbers every month it seems.

So I mean are you expecting things to sort of stall here before they pick up again.

I think the word is lumpy.

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We're going to see some some good months.

As some of the supply chain issues.

Abate some of the.

Alternate materials that everyone is working in income in the play.

But I don't.

I think we can look at the business.

Historically and say on in October.

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Sure.

February is going to be.

We're going to be better based on history.

If you look at the dealer lots, they're empty. So the moment they can build cars, we're going to get business.

So that happened in December which is usually a slower month than we will see an uptick in the December timeframe, it's the unpredictability that.

There is going to make.

So Brazil will future revenues.

I hate to use the word lumpy.

Yeah, Okay, and just lastly regarding the gross margin headwinds that youre not the only one.

<unk> you.

We're having any success talking to your customers about passing some of those costs along.

We're having some success, but I would say it's limited.

Ultimately.

We're pretty persistent.

Hum.

We will have some success in that but as is.

In the past it could take us six to eight months to come to an agreement with the customer on that took that on tariffs.

I think the key thing is we incur them and theres going to be a degree of latency.

Between any type of recovery, then it'll be a little bit mismatch, but.

As Don mentioned, we are persistent in working with our partners as best we can and it's and it's the cycle as we bid new business, we're taking all that into the into account as I'm sure. Our competitors are too so.

That will eventually get passed on.

There is a lag.

Okay, alright, thanks, so much.

Thank you.

Okay.

Again, ladies and gentlemen, Thats star one to ask a question and our next question comes from Luke Junk from Barack go ahead.

Good morning, everyone.

Thanks for taking my question I'll start with a question probably for Ron recently, you've given us guidance for the next quarter I would appreciate why you.

It didn't do that today, obviously, the GM announcement went out this morning, but I was hoping you could maybe walk through any key factors sequentially that might help to bridge from the fiscal first quarter to what you think.

Thinking might be likely internally for the second quarter, just at a high level.

Notwithstanding any any any.

<unk>.

Items that would result from today's announcement. This morning, Yes, I think we've got a good strong.

Backlog in terms of visibility to our commercial vehicle business vehicle electrification continues.

<unk> continues to go well so we do have some other.

Areas that have firmed up relative to where we are in the first quarter. So we clearly would expect the second quarter. They have some momentum relative to the first quarter.

Okay and then.

We chose not to but generally metal doesn't give quarterly guidance.

We felt that there was enough uncertainty going into our new fiscal year end.

The first quarter that we.

Wanted to level set things.

Oh.

We did and then of course on the call here, we gave comment.

What pressures we're seeing.

In the second quarter and the balance of the year.

Okay. I appreciate that next question I had.

You called out.

300 basis point headwind to gross margin around these various supply chain and practical issues. This quarter, that's up versus I think it's a 200 basis points last quarter, just wanted to dig into that a little bit further in terms of where you saw.

Changes in terms of increased pressure there and maybe if you could also expand on that.

Going forward based on what you know right now.

But clearly there is a logistics standpoint that that really hurt.

The port congestion we manufacture.

Good amount of our <unk> products in China that have to be shipped and they're in containers and so our airfreight continues to meet the customer demands continues.

To escalate relative to where we were in the first quarter. We're also seeing a lot of spot by increases in terms of pricing and able to compare components and to secure them.

Some significant.

Material cost inflation as well so those are the major things that.

Are going and you can see look the other thing I'll add to that besides the 300 basis points as you saw our inventory increase a lot during the three months as well. So it really has it got exacerbated in the first quarter and.

We hope to see some improvement in that but port congestion is a real problem.

Getting our goods out of our facilities in China, and getting them to the rest of the world.

And then.

Susan.

We've increased our surveillance on counterfeit.

We've had we've always had a system in place for that.

And.

We're more comfortable when the components come directly from the manufacturer, but as Rob was mentioning spot buy sometimes with new distribution and we've increased our surveillance because that represents.

Uh huh.

The heightened concern when youre not going directly to the factory all the time and so there is a cost associated with that.

Okay.

Thanks.

And then my last question, a bigger picture, one and what I'm wondering if there is any updates in the last three to six months, let's say on some of the emerging opportunities that youre pursuing I'm thinking areas that you've mentioned in the past like charging ports other areas around power in general total sensors cameras.

Sorts of things.

I don't know if we have anything to update other than what we've mentioned in the awards.

We continue to pursue the charge ports.

Big focus for us.

As of today, we don't have any.

And the awards that I can I can announce but that is an area that we are clearly focused on.

And look we're still seeing very.

Robust RFP opportunities more.

Our boswell on power products regarding vehicle electrification those opportunities.

To quote and to win business are still very robust, though they might not show up as a booking for another six nine or 12 months, but I think we remain.

Cautious.

<unk>.

We are excited about.

The newer Oems.

Lighting on those.

That ramp up.

We will definitely benefit from that I believe we're a little cautious in our forecasting.

But that is an area that.

We do expect to see.

Upside from it at some point Mcdonald's don't let alone predict exactly when but certainly.

And our planning.

Okay.

Thanks for the color. This morning, I'll go ahead and leave it there.

Thanks Luke.

And it appears we have no further questions at this time I would now like to turn it back over to management.

Go ahead, Don Duda, the floor back to you.

Alright. Thank you very much so we'll thank everybody for listening today and wish everyone a very pleasant.

Labor day holiday today.

Thank you. This does conclude today's conference. We thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

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