Q2 2022 Methode Electronics Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the method electronics second quarter fiscal 2022 results.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Robert Cherry Vice President of Investor Relations of method electronics. So the floor is yours.
Thank you operator, good morning, and welcome to method electronics fiscal 2022 second quarter earnings Conference call.
This call we have prepared a presentation entitled fiscal 2022 second 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.
Methode undertakes no duty to update any forward looking statements 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 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 second quarter earnings Conference call I'm joined today by Ron <unk>, Our Chief Financial Officer.
Both Brian and I will have opening comments and then we will take your questions.
Let's begin with the highlights on slide four.
Our sales for the quarter were $296 million.
We had a significant headwind in our automotive segment due to the ongoing supply chain disruptions, particularly the semiconductor shortage.
That shortage led to auto OEM production slowdowns in some cases production shutdowns. This.
This in turn led directly to lower sales in our automotive segment, especially in North America.
Helping to offset that auto headwind were near record sales in our industrial segment.
There was strength in sales across all our industrial product categories, but in particular, we saw growth in electric vehicle bus bars commercial vehicle lighting and radio remote controls and.
Secondly, these products are benefiting from the macro growth trends of electrification ecommerce and automation.
Industrial sales in our portfolio relative our automotive sales continue to grow.
As I mentioned, our team continued to face supply chain challenges. These.
These include the ongoing semiconductor chip shortage pandemic related supply chain disruptions and port congestion.
All of which are increasing costs and consequently negatively impacting margins.
Our team has worked diligently to mitigate these challenges, which in many cases require remedial actions such as expedited shipping and premium component pricing.
In addition, we are working relentlessly with our customers to share in the absorption of these costs.
The timing of these cost recoveries is not certain.
At this point our expectation is that these conditions will last until the end of our fiscal year.
This extended period of demand recovery and margin pressure as a driver of our revised guidance for the full fiscal year.
The situation is fluid and our mitigation efforts are ongoing but we are confident that we will continue to execute and meet our customers' requirements.
Ron will provide more detail on our guidance later in the call.
On the new order front, we were encouraged by the diversity of awards across key applications.
In addition to our traditional automotive market, we secured awards in cloud computing commercial vehicle and EV applications.
Focusing on EV last quarter, we reported that sales into EV applications was 16% of our consolidated sales.
This quarter <unk> sales were again, 16% of consolidated sales. However on a dollar basis, they were higher and in fact were a record for methode.
Our expectation for that percentage for the full year continues to be in the mid teens.
Our activity is being fueled by growth in our power distribution offerings, where we leverage over 40 years of expertise to supply power products to various EV Oems.
In the quarter, we further reduced debt.
Generated positive operating cash flow and continued to return capital to shareholders.
Our free cash flow was positive even though we invested in inventory to support our deliveries to customers and to help mitigate supply chain disruptions.
While our debt was down we did have an increase in net debt as we utilized a portion of our available cash to exit 2% to $35 million share buyback in the quarter.
We have now executed half of the $100 million stock buyback authorization since it was announced last March.
Before I provide detail on our business awards.
To provide some information on an existing program.
I can now share with you a little more detail on our largest truck center console program.
We expect a small portion of the sales from this program to start to roll off late this fiscal year, which was included in our original full year guidance.
Then in fiscal 2023, we expect the bulk of the remaining truck program sales to roll off in the range of $90 million to $100 million.
The fiscal 2020 impact is negligible.
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 this truck program.
Moving to slide five.
<unk> had another solid quarter of business Awards.
Awards, continuing to capitalize on key market trends like cloud computing and vehicle electrification.
The awards identified here represent some of the key business wins in the quarter and represent $25 million in annual sales at full production.
In non EV automotive were awarded programs for lighting and user interface applications in cloud computing, we saw demand for our power distribution products and data center applications and.
In commercial vehicles with signs of an upcycle continue we were awarded programs for exterior lighting solutions.
In EV, we won awards for switch lighting and power distribution programs.
Overall, our business awards are delivering on our strategic priority to drive customer product and geographic diversity.
To conclude despite the ongoing demand fluctuations in supply chain challenges, we are still in a position to deliver solid organic growth sales for fiscal 2022, while generating positive free cash flow.
At this point I'll turn the call over to Ron who will provide more detail on our second quarter financial results.
Yes.
Thank you Don and good morning, everyone.
Please turn to slide seven.
Second quarter net sales were $295 5 million in fiscal year, 'twenty, two compared to $300 8 million in fiscal year 'twenty, one a decrease of $5 3 million or one 8%.
The year over year quarterly comparisons included a favorable foreign currency impact on sales of $2 8 million in the current quarter.
Sequentially sales increased by $7 7 million or two 7% from the first quarter of fiscal year 'twenty two.
The decrease in second quarter sales was mainly due to lower automotive sales, especially in North America as compared to the same period in fiscal 'twenty, one which benefited from the rebound from the depths of the impact of COVID-19 pandemic experienced in our first quarter of fiscal year 'twenty one.
The sales decrease was partially offset by higher sales of electric hybrid vehicle products, which amounted to 16% of sales in the second quarter of fiscal 'twenty, two which was in line with our previous communication that electric and hybrid vehicles sales would comprise a mid teens percentage of our fiscal.
Year 'twenty two consolidated sales.
In addition, <unk>.
Stronger commercial vehicles sales contributed to the robust industrial segment sales growth.
Second quarter net income decreased $11 1 million to $27 5 million or <unk> 72 per diluted share.
From $38 6 million or $1.01 per diluted share in the same period last year.
Net income was negatively impacted from decreased sales the impact of higher materials and logistics costs and other operating cost and the efficiencies due to the global supply chain shortages and logistics challenges.
Higher stock based compensation costs and lower other income.
Partially offset by lower restructuring costs and favorable foreign currency translation.
Please turn to slide eight.
Second quarter gross margins were lower in fiscal year, 'twenty, two as compared to fiscal year, 'twenty, one mainly due to higher material and logistics costs, including freight and supply chain shortages and unfavorable product mix.
Fiscal year 'twenty, two second quarter margins were 23, 4% as compared to 26, 9% in the second quarter of fiscal year 'twenty one.
The negative impact of supply chain disruption and higher logistics costs, including freight in the second quarter fiscal year 'twenty. Two gross margin was approximately 250 basis points.
Unfavorable product mix also impacted gross margins.
These higher costs that were experienced in the second quarter are expected to continue and further into fiscal year 'twenty. Two. In addition, we had anticipated degree of cost inflation and the remainder of the current fiscal year.
Fiscal year, 'twenty, two second quarter, selling and administrative expenses as a percentage of sales increased to 10, 6% compared to 10, 2% in the fiscal year 'twenty, one second quarter.
The minor fiscal year 'twenty, two second quarter percentage increase was a true <unk> to higher stock based compensation, partially offset by lower professional fees and restructuring costs.
The second quarter of fiscal year, 'twenty to selling and administrative expenses percentage is in line with our historical norm, which should yield an efficient flow through from gross margin to operating income.
Please turn to slide nine.
In addition to the gross margin and selling and administrative items mentioned above one non operational items significantly impacted net income in the second quarter of fiscal year 'twenty, two as compared to the comparable quarter last fiscal year.
Other income net was down by $1 7 million, mainly due to lower international government assistance between the comparable quarters and increased foreign exchange losses from re measurement.
The effective tax rate in the second quarter of fiscal year, 'twenty, two or 16, 7% as compared to 16, 5% in the second quarter of fiscal year 'twenty one.
But fiscal year 'twenty, two full year estimate, which does not include any discrete items.
It is estimated to be between 17, and 18% tightening the high end of the range down from 19% to 18%.
Shifting to EBITDA, a non-GAAP financial measure fiscal year 'twenty, two second quarter, EBITDA was $47 4 million versus $60 2 million in the same period last fiscal year.
EBITDA was negatively negatively impacted by lower operating income and lower other income.
Please turn to slide 10.
In the second quarter of fiscal year 'twenty, two we reduced gross debt by $12 3 million and we ended the second quarter with $177 2 million in cash.
During the first six months of fiscal year 'twenty, two net debt, our non-GAAP financial measure increased by $39 million, mainly due to the share repurchases of $42 4 million and unfavorable working capital changes, especially related to inventory, which increased by nearly $26 million due to the supply.
Chain related challenges.
Regarding capital allocation on March 31st we announced the $100 million share repurchase program, which we executed nearly $35 million of purchases during the second quarter of fiscal year 'twenty two.
Since the authorization approval, we purchased nearly $50 million worth of shares at an average price of $44 four.
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.
For the fiscal year 'twenty, two second quarter free cash flow was $21 6 million compared to $36 7 million in the second quarter of fiscal year 'twenty one.
The decrease was mainly due to negative working capital changes, especially from the inventory items, we've discussed prior we.
We experienced sequentially improved free cash flow in the second quarter of fiscal 'twenty, two as compared to the first quarter of fiscal 'twenty two.
We anticipate our proven history of generating reliable cash flows which allows for ample funding of future organic growth inorganic growth and continued return of capital to the shareholders.
In the second quarter of fiscal year 'twenty, two we invested approximately $5 4 million in capex as compared to three 6 million in the second quarter of fiscal year 'twenty one.
The higher Capex is in line with our expectation that capex in fiscal year 'twenty, two would be higher than the investment in the prior fiscal year.
We now estimate fiscal year 'twenty, two capex to be in the $45 million to $50 million range, which is lower than the prior estimates for the current fiscal year of $50 million to $55 million, we provided earlier.
The decrease is simply the result of the timing of the cash outflows of approved projects as opposed to a concerted effort to slow or reduce the gains of capital investment.
Investing for future organic growth and vertical integration remains a key priority from a capital allocation strategy perspective, we.
We do have a strong balance sheet and we will continue to utilize it by continuing investment in our businesses to grow them organically. In addition, we continue to pursue opportunities for inorganic growth and a measured return of capital to the shareholders.
Please turn to slide 12.
Regarding guidance. It is managed it is based on management's best estimates external events and the related potential impact on our financial results remain an ongoing challenge.
As Don mentioned in his remarks, we lowered our previously issued revenue and earnings per share guidance largely due to the persistent headwinds from the ongoing negative impact of the chip shortage and logistics challenges.
As you recall on our September conference call, we noted that the persistent headwinds.
Could call our performance to be below the midpoint of the ranges of our original guidance as a situation was fluid and would likely remain challenging.
These headwinds continue to adversely impact our second quarter results and will likely be with us for the remaining six months of our fiscal year.
The revenue range for full fiscal year 'twenty two is between 114 and $1 $1 6 billion down from a range of 1.1 dollars 75 to one to three 5 billion.
Diluted earnings per share range is now between $3 per share and $3 20.
<unk> per share down from $3 35 to $3 75 per share.
The range is due from 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 a supply disruptions to us or our customers, which could result in lesser demand for our products or our ability to meet customer demand.
Continued supply chain disruption would also negatively impact gross margins due to additional costs incurred from premium freight.
Factory inefficiencies in a lesser extent other logistic logistic factors such as port congestion.
Higher costs for materials freight and labor are a constant dynamic battle.
We remain uncertain as to when things will stabilize Don that concludes my comments Ron. Thank you very much Matt we are ready to take questions.
Certainly ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We do ask them are posing your question. Please pickup your handset if you're listening on speaker phone to provide optimal sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Please hold while we poll for questions.
Your first question is coming from Luke junk from Baird. Your line is live.
Thanks for taking my question good morning.
Good morning.
First question I wanted to ask is on guidance I know youre, not giving third quarter guidance I was just wondering at a very high level. If there's any factors that you could discuss that we should be thinking about from a modeling perspective <unk> versus <unk> in your fiscal year, especially be interested in your perspective on.
Underlying auto and commercial vehicle trends and also just wanted to make sure. There's nothing that's sort of one off in nature that we should be aware of in Iran. You mentioned FX remeasurement in the current quarter. For example, just want to make sure. There is nothing that we should be looking for in the back half of the year that could be impactful like that.
I think.
The main thing that will affect the cadence of the second half as we're going into the holiday production shutdowns that always has an impact.
Both in the U S and.
And in Europe, so up above us.
Q3 tends to be a.
Lessor.
Revenue quarter, historically, so I think that would be the biggest factor.
And.
The balance is really unknown.
Supply chain disruptions I will comment that.
To some degree maybe we've reached in the U S.
A bottom of that.
And that's.
I guess a qualified maybe.
And then in Europe.
Seen more disruptions.
Previous quarter than we've had in the past so one may be getting slightly better than the other one might be getting a little bit worse.
I mean, historically, our third quarter due to the dimension that holiday shutdowns and simply lost shipping days tends to be our weaker quarter in our fourth quarter tends to be stronger and we would expect that.
But to follow a policy that type of cadence.
Okay, great. Thank you for that second question would be in terms of the state of your supply chain, obviously, a number of comments in the prepared remarks, and then I'm, hoping we can maybe discuss sequentially. What you saw in the second quarter versus the first quarter of the year sort of where you exited the previous fiscal year.
Especially wondering where you're seeing incremental challenges right now from a supply chain and materials standpoint, and Dana as we zoom out and look at what this might look like going forward.
Much permanent do you see in costs that are in the P&L right now versus things that might be less permanent in nature or are subject to potential customer recoveries.
Yeah, Let me answer that one first I mean, we as I said in my remarks, we are diligently.
Working with customers too.
Mitigate.
Entire supply chain issues from a cost standpoint that take some time, we think thats going to be with us.
For the duration of the fiscal year.
The success on that is contemplated in the high and low end of.
Our guidance.
Yes.
Covid is still part of the supply chain issues.
Certain areas of the subside in other areas, it's still contributing to labor shortages and causing our inventory.
To be higher than needs to be worked down the inventory is.
The disruption subsides exactly when that is.
<unk>.
Is it is very difficult to say.
From a cadence standpoint from Q2.
Q1 to Q2.
It was 250 basis points.
Hum.
The things get.
Worse. They did they did not get better I think that's the best I can I can say.
Bob.
We're getting maybe a little more confident in our ability to.
Dealing with the shortages.
Maybe from a labor standpoint port congestion, yes.
But again I see that continuing.
Through the end of the fiscal year and every day is really.
A new challenge.
Normally in auto or the production schedules are.
Pretty.
Pretty well cast at the end of the quarter.
And for this.
This whole year, it's been.
Changing on us.
Daily basis, yes.
I would just say that as time goes on I mean this is.
From a basis point perspective, we did a little better than we did in the first quarter.
But as time goes on we will be.
Better position too.
Eventually get better or get more accommodating in terms of cost sharing and things of that nature. So one quarter doesn't make a trend, but certainly we can be in a position to.
Maybe do better with that down the road and that's that's contemplated in our guidance.
Okay. Thank you for that next thing I want to ask about I. Appreciate the disclosure in terms of the existing large truck center console program and was just hoping to understand them.
Revenue numbers that you provided really helpful. Just hoping to understand the the margin puts and takes related to that.
I know there is certainly going to be grow.
Gross margin impact in terms of mix as that business rolls off and.
Certainly theres, a manufacturing overhead impact as well where did those two lines in your stacked and.
I don't want to get into fiscal 'twenty three guidance per se, but just any high level considerations as you think about the margin progression would be helpful.
Sure.
That's been a very good program for us.
<unk>.
But it then.
We've said this in the past it is not the highest margin program and it is being replaced.
By higher margin EV.
Programs, So we would expect.
Getting into the exact.
Timing of when we would expect that our margins as that rolls off in other programs roll on that our margins.
Would improve in terms of.
Overhead.
Sure.
And the associated.
Associated costs of that.
Pretty good at looking at programs.
On a rolling off how do we adjust the factory overhead accordingly, what are we bringing in.
We look at Florida space, we look at indirect because we look at.
Labor and that will.
Those are all being put in place now is that we.
Starting to see the roll off of the program inventory is another area that we look at.
You don't really want to have a whole lot of inventory left as the program goes end of life, but there is also.
Our service that we have to provide for them.
Three to five years at a minimum so we'll have to take that into account, but I would say that were.
We're on top of that we've had we've had other programs roll off and other ones roll on and you adjust your factory accordingly.
Yeah.
Okay, and then if I could just ask a last question a little bigger picture.
I noticed on the business awards that one of the words, but it was interesting this quarter is bus bars for charging and just hoping you could expand on what that opportunity set might look like for <unk> going forward.
Sure that is for.
Commercial vehicle charging.
Not the charge stations that you might see in.
Our parking garage.
And Thats Thats.
More to say on that.
Thus far it deals with.
The commercial vehicles in other words.
At a.
Fedex and I'm, not saying at Fedex.
But.
Yes.
Depo.
Those charges will be turning the vehicles.
Overnight and we're providing the bus bars for that.
Got it okay.
That's all I had for this morning. So thank you again for taking the questions.
Look thank you very much.
Yeah.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone at this time.
Next question is coming from Matt Sheerin from Stifel. Your line is live.
Yes, thanks, and good morning, everyone.
Just had a quick follow up question regarding your comments on the cost headwinds in your ability or inability to pass them along to your auto customers. Some of your peers selling into auto appear to have.
More success. So I'm wondering are you sort of locked into contracts that make it difficult how are those conversations with customers going.
Uh huh.
I would say as well as can be expected in terms of we're asking for.
Price increases in.
Logistics relief that that does take time.
And.
We've been there before.
<unk>.
And we're confident that we will recover our margins.
Maybe some of our competitors are ahead of the game.
We have.
We track it.
On a weekly basis, we will have conversations are taking place.
The.
The answer is not.
Sure.
We won't get.
Increases this is really a matter of timing.
The other thing to point out in some tiers have material riders.
And so the price increases.
Our automatic we don't we don't have those.
In our typical automotive.
We do have that in some of our non.
<unk> power distribution contracts, where we have material.
So some of that could be automatically and in our case. It is not we are programs tend to be four to five years they are contractual.
<unk>.
And.
So I think this whole time, so that takes some of the discussions.
I would also point out that.
That actually auto has been.
I don't know if accommodating as the word a little bit easier to have those discussions been actually with our commercial vehicle.
I think.
This was the first quarter I can say, we've made some progress there.
A little tougher going them.
I'm not saying that auto is easy we've had some very.
Tough discussions whenever you're asking for a price increase.
Right.
Is it just going to I mentioned on the CV space.
Okay. Thanks, very much for that and just regarding the strength you're seeing on the EV side.
It seems like you've got some good content gains are you also winning new programs and new logos in terms of customers.
Yes, yes, and I think it's important to point out.
Some of it is some of the.
Startups on the ASO.
The traditional Oems as well so we've been very pleased with.
The bookings we've had there.
That supports our growth going forward.
Okay, great. Thanks very much.
Thank you.
Thank you as a final reminder, press star one at this time for any questions. Please hold while we poll for questions.
Okay.
Thank you there are no further questions in the queue I'll now hand, the conference back to Thomas <unk> CEO for closing remarks. Please go ahead.
Thank you very much all thank everyone for listening today.
<unk> and we wish everyone, a very safe and pleasant holiday season the day.
Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.