Q3 2022 Methode Electronics Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to method electronics Q3 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 Jerry <unk>, Vice President Investor Relations of method electronics, Sir the floor is yours.
Thank you operator, good morning, and welcome to the medical Electronics fiscal 2022 third quarter earnings Conference call.
For this call we have prepared a presentation entitled fiscal 2022 third quarter financial results, which can be viewed on the webcast of this call were found at Metro Dot com on the investors page.
This conference call contains certain forward looking statements, which reflects management's expectations regarding future events and operating performance and speak only as of the date hereof.
These forward looking statements are subject to the safe Harbor protection provided under the securities laws.
Methode 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 that.
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.
Thank you for joining us for our fiscal 2022 third quarter earnings Conference call.
I'm joined today by Ron <unk>, our Chief Financial Officer, both Ron 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 $292 million.
Helping our sales by $9 million were successful premium freight cost recovery efforts.
However, our automotive segment encountered demand headwinds in Europe due to the ongoing supply chain disruptions, particularly the semiconductor shortage, leading to various European auto OEM production slowdowns.
In our industrial segment, we saw strength across all our product categories, but particularly in power and lighting products.
In particular, the segment saw growth in electric vehicle bus bars commercial vehicle lighting and radio remote controls.
These products continue to benefit from the macro growth trends in electrification e-commerce and automation.
As such our industrial sales again outgrew our automotive sales trend, we expect to continue.
As I mentioned, our team continued to face the ongoing supply chain challenges in the quarter. They.
They have worked diligently to mitigate these challenges, which required remedial action such as expedited shipping and premium component pricing.
We have worked relentlessly with our customers to share in the absorption of these increased costs, particularly with the premium freight.
In addition, we've taken the proactive step to consolidate and operation into another existing facility in response to these logistical challenges.
We are confident that <unk> will help reduce some supply chain risk improve customer service and ultimately drive margin expansion.
Ron will provide more details on this restructuring later in the call.
On the order front, we had a very strong quarter with over $100 million New program Awards.
Of these new awards, approximately 70% word for EV applications.
And of the ebay awards, a large majority were for power distribution products.
I will provide more color on our new awards in a moment.
Focusing on EV.
Last quarter, we reported net sales into EV applications were 16% of consolidated sales.
This quarter <unk> sales grew to 19% of consolidated sales a record for muscle.
Given our year to date performance with EV sales, we're now expecting that percentage will be in the high teens for the full fiscal year up from our previous mid teens guidance.
Our activity our activity continues to be fueled by growth in power distribution, where we leverage over 40 years of expertise to supply and power products to various EV Oems.
In the quarter, we further reduced debt and continued to return capital to our shareholders.
While our debt was down to the lowest level since the great kind of acquisition. We did have an increase in net debt as we utilized a portion of our available cash to execute a 21 million share buyback in the quarter.
We've now executed over $70 million of the $100 million stock buyback authorization since it was announced last March.
Moving to slide five.
Metals had a very strong quarter of business awards.
Rewards identified here represent some of the key business wins in the quarter and represent over $100 million in annual sales at full production.
As a reminder, the full launch timing of some of these programs could be anywhere in the range of one to three years from now.
As you can see the list is dominated by EV programs, representing three quarters of the dollar value.
And within those EV awards power products, where the main focus with several bus bar programs and a battery disconnect units program.
One of those bus bar programs was a significant first when formatted with a large established German automotive OEM.
These ebay awards, which are part of the skateboard of electric vehicle.
I expected to have a longer program life than traditional ICD programs as the OEM will leverage their investment over multiple EV platforms and model our top hat refreshes.
And non EV automotive.
We were awarded programs for several user interface applications, including HVAC switch bars overhead counsels and parking brake switches.
We also won awards for our Motorsports, headlamp and a micro GPU from a telecommunications company.
Overall, it was a very successful quarter for new programs that will drive organic growth in future years.
To conclude.
It was a well executed quarter by a worldwide worldwide team and despite some ongoing demand headwinds and supply chain challenges.
We're still expecting to deliver strong organic growth for fiscal 2022.
Looking beyond this fiscal year, Our award pipeline continues to be strong as evidenced by this past quarter and puts metals on a path to deliver long term results.
At this point I will turn the call over to Ron Who'll provide more detail on our third quarter financials.
I don't know.
Thank you Don and good morning, everyone.
Please turn to slide seven.
Third quarter net sales were $291 6 million in fiscal year 'twenty, two as compared to $295 3 million in fiscal year 'twenty, one a decrease of $3 7 million or one 3%.
The year over year comparison includes $8 6 million of premium freight cost recovery, partially offset by an unfavorable currency exchange impact on sales of $2 million.
Excluding the premium freight cost recovery and the foreign currency impact sales decreased by $10 million or three 5%.
The decrease in third quarter sales was mainly due to the lower automotive sales in Europe . This sales decrease was partially offset by higher sales of electric and hybrid vehicle products, which amounted to 19% of sales in the quarter, which is higher than our previous communication that electric and hybrid electric vehicles.
<unk> would comprise a mid teens percentage of our fiscal year 'twenty two consolidated sales.
We now expect electric and hybrid electric vehicles sales to represent the high teens of our full year fiscal 'twenty to consolidated sales and.
In addition, stronger commercial vehicle and power products sales contributed to the industrial segment growth.
Income from operations decreased by $5 6 million, mainly due to marginally lower gross margins and marginally higher selling and administrative expenses.
Third quarter net income decreased $2 5 million to $29 4 million or <unk> 78.
Per diluted share from $31 9 million or <unk> 83 per diluted share in the same period last year.
Please turn to slide eight.
Third quarter gross margins were lower in fiscal 'twenty, two as compared to fiscal year 'twenty, one due to lower sales volume unfavorable product mix higher restructuring costs, partially offset by premium freight cost recovery.
So year 22 third quarter margins were 23, 7% as compared to 24, 6% in the third quarter of fiscal year 'twenty one.
In addition, we do anticipate the degree of cost inflation and the remainder of this current fiscal year and into our fiscal year 'twenty three.
Fiscal year, 'twenty, two third quarter, selling and administrative expenses as a percentage of sales increased to 11, 8% as compared to 11% in the fiscal year 'twenty, one third quarter.
The minor fiscal year 'twenty, two third quarter percentage increase was mainly attributable to restructuring costs.
This quarter selling and administrative expenses percentage was in line with our historical norm, which should yield an efficient flow through from gross margin to operating income.
Please turn to slide nine.
Net income was negatively impacted from the decreased sales higher restructuring costs unfavorable product mix and higher selling and administrative expenses, partially offset by premium freight cost recovery higher other income and lower tax expense.
In addition to the gross margin and selling and administrative items previously mentioned one other non operational items significantly impacted net income in the third quarter of fiscal year 'twenty. Two as mentioned other net income was up by $2 million, mainly due to success in securing higher amounts of international government assistance.
Between the comparable quarters.
And lower foreign exchange losses from re measurements.
The effective tax rate in the third quarter of fiscal year 'twenty two was 12, 2%.
As compared to 12, 6% in the third quarter of fiscal year 'twenty one.
The fiscal year 'twenty, two full year estimate of between 16 and 17% includes the impact of the $2 2 million of discrete items recorded in the third quarter and is lower than our previous range of 17% to 18%.
Shifting to EBITDA, a non-GAAP financial measure Fiske.
Fiscal year 'twenty, two third quarter, EBITDA was $47 $9 million versus $51 3 million in the same period last year.
EBITDA was negatively impacted by lower operating income mainly due to increased restructuring costs and unfavorable product mix, partially offset by premium freight cost recoveries and higher other income.
Please turn to slide 10.
In the third quarter of fiscal year 'twenty, two we reduced gross debt by $7 5 million and ended the quarter with $153 1 million in cash.
During the first nine months of fiscal year, 'twenty to net debt and non-GAAP financial measure increased by $55 6 million, mainly due to the share purchases of $63 9 million and unfavorable working capital changes, especially related to inventory, which increased by nearly $45 million due to.
The supply chain related challenges.
Regarding capital allocation on March 31, 2021, we announced a $100 million share repurchase program.
Which we have executed $21 3 million of purchases during the third quarter of fiscal year 'twenty two.
Since the authorization approval, we have purchased $71 2 million worth of shares at an average price of $44 72.
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 the fiscal year 'twenty, two third quarter free cash flow was $11 8 million as compared to $82 2 million in the third quarter of fiscal year 'twenty one.
The decrease was mainly due to negative working capital changes, especially from inventory, resulting from difficult logistics and accounts receivable, which had a <unk> <unk>.
Significantly favorable impact in the third quarter of fiscal year, 'twenty, one as compared to the third quarter of fiscal year 'twenty two.
In addition, Capex was $8 3 million in the current quarter as compared to $4 9 million in the third quarter of fiscal year 'twenty one.
We do anticipate continuing our proven history of consistently generating reliable cash flows which allow for ample funding our future organic growth.
Again a growth.
And a return of capital to the shareholders.
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 estimate fiscal year 'twenty, two capex now to be in the $35 million to $45 million range, which is lower than our prior guidance of $45 million to $50 million.
The decrease is simply the result of timing of cash outflows of approved projects as opposed to any concerted effort to slow or reduce the cadence of our capital investment.
Investing for future organic growth and vertical integration remains a key priority from a capital allocation strategy perspective.
We have a strong balance sheet and will utilize it by continuing investments in our businesses to grow them organically. In addition, we assertively continue to pursue opportunities for inorganic growth and measured return of capital to shareholders.
Please turn to slide 12.
Regarding guidance. It is based on management's best estimate external events, such as the headwinds from the ongoing negative impact from the chip shortage logistic challenges and other related items.
An impact potentially our future results and they these headwinds remain an ongoing challenge.
While we have experienced increased success and recouping some incurred costs. We expect these headwinds will likely be with us for the remaining three months of the current fiscal year.
We increased our previously issued annual revenue guidance, mainly due to the revenue from cost recoveries, which are non product sales.
The revenue range for full fiscal year 'twenty two is now between one six and $1 $1 7 billion.
From a range of $1, one four to $1 6 billion largely due to the previously mentioned premium freight.
Cost recoveries, which amounted to $8 6 million in the third quarter.
The diluted earnings per share range has been tightened to $3 <unk> to $3 15.
From the prior range of $3 to $3 20.
The midpoint of our EPS guidance remains unchanged.
Higher costs for material freight and labor are constant and dynamic battle and we remain certain as to when things will fully stabilize Don that concludes my comments.
Ron Thank you very much Matt we're 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 that while posing a question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality once.
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 Chris Howe from Barrington Research Your line is live.
Good morning, everyone.
Good morning, the questions.
Starting first off two questions here.
With the new business wins, you mentioned approximately 70% of the applications going to the EV market.
Can you talk about these new business wins, and a little bit greater detail as far as.
How you anticipate.
The potential or maturation of these new business wins as we move further out.
Into the future over the next several years I would imagine.
That we're just at the.
Kind of initial stages of this and the potential for additional E application wins should only increase from here.
Yes.
I would agree with that and as I said the.
The EV awards.
They will get the full launch.
Sure.
12.
16 months from now the major ones are that Lee.
24 months out.
So maybe even 30 months till you get to full launch.
Because it launches doesn't mean youre running at.
Full full rate so.
Right.
The usual long cycle of our of our ice awards.
Really nothing.
Nothing unusual there.
And you're right the potential as you launch these programs.
Youll see that carried over on the other.
The platform so.
Maybe a $20 million.
Annual when might turn into the 30 to 35.
As you go through the launch so we do anticipate some of that.
<unk>.
More color.
A lot of those around the skateboard.
Which is exciting for us it's hard to predict the length of.
The programs.
Contracts are four years five years even longer.
Overall in Unchartered territory.
How long ago. The awards will go or will it be like transmission program, where.
G R lead.
Our lead frame program is.
10 years, plus I think we can anticipate that so we'd like the skateboard.
Awards, because theres not as much refresh it.
Going down there.
And I would also say the majority of the awards, particularly the.
The larger ones are with.
Established Oems, which also.
I also like to see.
There is more confidence in the.
The volumes rather than nothing.
Against the startups, we deal with but it's a little easier to predict.
Revenues with them established automaker.
Perfect very helpful.
And.
Next.
About the semi conductor situations.
We're still undergoing the situation I think you hinted at it it's going to go into fiscal year 'twenty three.
We think about that challenge and perhaps also the challenges you're seeing in Europe .
On a directional basis, how do you think that plays out in the first half of fiscal 'twenty three in the second half of fiscal 'twenty three.
When we kind of.
Look at that versus how this past year is playing out.
Yes.
You can take the approach that it takes about two years to add capacity.
And that might be a little light on the.
On the two years.
We're about a year into it maybe a little longer depending on.
What was happening before the shortage in terms of capacity.
Addition by the by the suppliers.
So maybe a conservative way of looking at it as that.
The duration of this calendar year, I think thats going to be an issue.
It may.
Some people have predicted that it will start to get better.
In the second half, but we're kind of looking at it that this is a.
Until capacity has been added sufficiently this is gonna be.
I'm going to be with us and that's really how we that's how we look at guidance and that's certainly how we will look at.
Our fiscal 'twenty three as well.
Yes.
I would I would say that its still is a lot of uncertainty not only to us in securing components. So we can ship to our customers, but the Oems that we serve we're still dependent on how well they have navigated the search. So we expect that to continue one thing we have done a better job than we spiked it out and success is.
Recovering.
Cost and getting into more of a cost sharing arrangement than.
And then we did in the first and second quarter of the year. So we're certainly navigating.
The negative impact of the debt as best we can but still obviously a lot of uncertainty on how it's going to impact our customers ultimately and the demand for our product.
Oh, Okay, Yeah, a lot of industrial companies are going with the second half thesis, but in my opinion that just means it's not going to be like the first half.
We'll see how the second half.
Plays out.
As a follow up on some of your comments there.
Q4, typically your strongest quarter.
Q3 is.
Typically weaker.
Hum.
Any puts and takes there that you can see at this point with how that plays out in fiscal year 'twenty three or.
Too early to tell and the typical seasonality of the business should run its course.
Oh.
I agree with that generally our fourth quarters are strongest.
Well Paul It was mentioned here on the <unk>.
<unk> initiatives.
Can impact that.
And as far as you know as we look forward I.
I think we're like everybody else is there's so much uncertainty it's hard to.
And we can look at on paper they are organically, where we looked at were looking good.
But do you really have to see what what starts to happen in the second half of the year.
Auto can be very tough, but one thing that generally it's fairly predictable.
But in the past two years.
Running against that.
That theory, so it's very hard to say what.
June or July .
I'd like to answer that but it's just.
Like anyone else, we don't know.
Okay.
Alright, Thanks for taking my question I'll hop back in the queue to give others a chance. Thanks.
Yeah.
Thank you. Your next question is coming from John <unk> from Sidoti <unk> Company. Your line is live.
Good morning, everyone and thanks for taking the questions.
This morning, I'd like to start I'd like to start with the industrial business had a good quarter on a year over year basis and was up sequentially.
Despite the seasonality of having two days off in the third quarter what is January .
February tell you about the recovery in the class eight truck market and how it's kind of booking for the balance of calendar two.
<unk> 2022.
Okay.
The way we look at.
The commercial vehicles.
A definite.
Tailwind for us as we go into.
Hum in the second half of the year.
That's been the sales have been good.
Last mile vehicles.
I think <unk> is the.
The numbers up.
So we're very positive on that and that certainly helped.
Third quarter no question.
Above that now to what degree.
As I said to Craig.
To what degree that's negatively affected by shortages and so on we'll have to see but in general we see that as a bright spot and kind of looking forward.
No no that we follow the ICT and everything's looking.
Pretty good and unless something happens we would expect.
The fourth quarter to two.
To improve and one of the things that we've talked about restructuring.
We did the logistics move.
Out of Seattle.
The port congestion, there and consolidated in our Mexican Uh Huh.
I'll just ask a center so that will take a while to sort through but we did that.
Two we wanted to certainly reduce inventory and some.
Some of the volatile volatility and be able to service our customers better than that we took that step in the quarter.
And I would imagine we go through the system.
It will be the first quarter of next year.
First quarter of fiscal year before we see the results of that.
Got it got it and just a little clarity on the free recovery costs.
It seems like in the press release, it's a zero impact to profitability, but then when I was perusing the Q. It seemed like it did have an impact on the gross margin profile.
Can you just help me understand how this mechanism is working so I can get a better grasp of the whole concept here.
Sure.
We're in a position now as compared to before where before we do.
Andy premium freight, we either contract up to cost share or.
And we're getting the improvement from previously.
Incurred costs and that was what that $2 8 million was was it was a recovery.
For costs in the third quarter that occurred in the first and second quarter. When we were significantly negatively impacted by that so we're going to continue to get straight up before we do things a greeter cost sharing so we don't have that negative impact and we're going to continue to.
Try to recover any previously.
Premium freight or any other cost for that matter, we're going to continue to do so and the cadence of that success could happen in this quarter. It could happen in the first quarter of next year, but those are the mechanisms that we did but we just felt it was pretty important to spike that out.
As quote non product sales and.
And that we are starting to see some significant success in.
The first two quarters.
One was 240 basis points.
$7 million to $8 million in each of the first two quarters and then this quarter. It was negligible right. So where we've made an impact and that's how we should be kind of thinking about that on a go forward basis.
Got it that was that was helpful and I guess one last question on the other income line.
Are there two items there or is there one is there a 2.2 and a $1 1 million dollar ones the grant and once the Covid recovery number.
What were those numbers in.
How should I think about actually that line going forward.
So the other income line consist of any government assistance at whether it's COVID-19 related or whether it's related to some other.
Opportunity that we have to secure funds and the other one is the foreign exchange from Remeasurement and all of our financial assets and accounts payable accounts all those financial assets. So those are the two main parts, but we keep all government assistance in that other income line.
Are you still receiving government assistance since the fourth quarter is that part of your guidance.
So in the fourth quarter.
We continue to.
Tried to secure all the that's always an ongoing thing for the for the company and any success in that.
Has been contemplated in our guidance.
Got it alright, thanks for taking my questions go ahead Bob.
And Nicole visual that will taper off.
Yeah, Okay, all right I'll get back into queue guys. Thanks for taking the questions.
Thank you.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone at this time. Your next question is coming from Nick Steven from Baird. Your line is live.
Hey, everyone. Thanks for taking my questions.
Hi, Nick.
The first one is in so far that your updated 2022 guidance is also de facto <unk> guidance and considering already a month into the quarter could you just walk us through the puts and takes assumed at the high and low ends of the guidance range, respectively, and what do you see as the main swing factors for your fiscal <unk>.
So if it rightfully. So you it is the fact of <unk> guidance and.
Some of the puts and takes are the recovery the cadence and the amount of recovery in European auto as compared to the <unk>.
$16 million decrease we had in the third quarter, that's from a product standpoint.
That would be that and having a bit of.
Recovery in some of our sensor products and things of that nature. So the cadence and the amount of that would we narrowed the range to the $10 million right. So.
Those are the main puts and takes that we contemplated from a product standpoint and getting too.
That tightened up range and we can say that sensors were somewhat affected in the third quarter not by shortages on our part.
Our major customers of ours and it doesn't make Meg.
<unk>.
We're anticipating that.
We will see some recovery in the.
In the fourth quarter and probably in the first quarter. It wasn't a lack of demand that was supply suppliers.
Perfect. That's super helpful and that leads into my last question on sensors.
Bigger picture, but could you guys provide.
Any update on kind of key central escalated opportunities from <unk> and how is that business performed this year versus your expectations.
From our expectations.
At our.
Or slightly above it was and then.
Third quarter was down a bit due to the aforementioned shortages, so well see where we end the year, but I bet.
Bright spot for us the main uses in.
E bikes.
<unk> continued to be very popular in Europe , and they are definitely a part of the bond gaining momentum in the.
In the United States as well so going forward, we see that.
A bright spot.
For us as an E bike and we continue to look for other.
Applications are the medical application, perhaps in electrical.
Electric wheelchairs that our lithium powered though there wont be as.
Probably the largest market has alluded to with E bikes, but we continue to look for.
The implications for the for the sensors.
Perfect. Thanks.
Thank you.
Thank you that concludes our Q&A session I will now hand, the conference back to Donald Duda, President and CEO of method electronics for closing remarks. Please go ahead.
Matt. Thank you very much and we'll thank everyone.
For listening and have enjoyed.
Enjoyable upcoming weekend. Thank you.
Yeah.