Q3 2023 Methode Electronics Inc Earnings Call
Good day, everyone and welcome to the method electronics third quarter fiscal 2023 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 not my pleasure to turn the floor over to your host Robert Cherry Vice President of Investor Relations I've met the electronics.
The floor is yours.
Thank you operator, good morning, and welcome to Methode Electronics fiscal 2023 third quarter earnings Conference call.
For this call we have prepared a presentation entitled fiscal 2023 third quarter financial results, which can be viewed on the web site of this cough or found at metro 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.
Undertakes no duty to update any forward looking statement to conform the statement to actual results where 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 2023 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 highlights on slide four our sales for the quarter were $280 million.
They were down 4% compared to the prior year, but up 4%, excluding a significant headwind from foreign exchange and a sharp drop in material spot buys and premium freight cost recovery.
The increase was mainly due to higher sales in the industrial segment, driven by power distribution solutions for electric vehicles and data centers.
Our power product sales continue to be the catalyst behind our strategic pivot to more industrial business and a reduced reliance on user interface solutions.
This also results in a better sales balanced between our automotive and industrial reporting segments.
In the quarter, we continued to face ongoing cost increases due to inflation and material and labor, which continues to be a drag on margins.
Can however, as I previously stated report a significant reduction in spot buys and expedited shipping and we continue to gain traction with price increases, which will lag as a matter of process.
On the order front, we had a modest quarter with approximately $30 million in annual program Awards.
These programs were once again dominated by electric vehicle Awards.
After the end of the quarter, we announced a public tender offer for the shares of Nordic Alliance.
Very exciting opportunity for us to grow our led lighting solutions franchise and gained more industrial and non auto transportation market exposure.
I will provide more detail on this shortly.
Turning back to EV activity sales in the quarter reached a record 24% of our consolidated total.
And we increased our full year presented to 21%.
In regard to E V Awards, we've now won over $120 million in annual program awards year to date.
I have a very strong pipeline in front of us.
In the quarter, we continued to reduce debt, which again at its lowest level since a great kind of acquisition in 2018.
Okay.
During the quarter, we purchased approximately $8 million of stock.
Of the announced $200 million Board authorization, we have purchased $111 million in total.
This buyback program has been a key part of our capital allocation strategy.
Lastly, but just as important as anything on the slide we generated $43 million in free cash flow in the quarter.
No I would not view this as a run rate as can fluctuate based on the dynamics of our working capital, but it is certainly an indication our retention to operational performance and the importance of generating cash in our business model.
Moving to slide five the awards identified here represent some of the key wins in the quarter and represent $21 million in annual sales at full production.
As a reminder, the launch timing most of these programs could be anywhere in the range of one to three years from now.
In the quarter all of our major awards were for EV programs.
The words were mainly for power products associated with the EV skateboard architecture.
But they also include programs for lighting and user interface solutions for the top of that.
The awards were also heavily weighted towards Asia, we're even quoting activity has clearly picked up.
I'd like to take a step back and reflect on our EV activity over the last three years.
As you can see from this chart since the beginning of fiscal year 2021, we have won approximately $400 million in EV Awards.
There is little doubt that evs will be driving our organic growth.
Moving to slide six.
I would like to take like you to turn to the exciting opportunity that we have with our tender offer for Nordic legs.
They are a global supplier of mission critical lighting solutions, including work in driving light or heavy duty equipment with a reoccurring and diversified OEM business and a considerable aftermarket.
Our management team has been very impressed with Nordic lights, and its management team.
Its market position and its customer base.
Let me provide a few details.
Method announced the public offer last week on February 28.
The board of directors of Nordic Lights has agreed to recommend that the shareholders of an article I accept the offer.
And approximately 57% of Nordic led shareholders have already undertaken to accept the offer.
Nordic lives aligned well with metal stated on inorganic growth framework given its focus on engineered solutions for Oems, its industrial and non auto transportation market exposure and its customer and geographic diversity.
The article items are highly complementary to metals led lighting solution and there was very minimal overlap in our product offerings.
I thought it adds greater scale in arc lights, and reduces our reliance on the construction and mining markets.
Lastly, leveraging the methyl brand Nordic lives will be able to cross sell those products to the broader method the customer base.
The completion of the offer is subject to certain conditions and achieving acceptance of more than 90% of the shares in Nordic legs.
The offer period as expected commenced on or about March 15th and to expire on or about April 14th and the offer is currently expected to be completed during the second quarter of this calendar year.
In summary, we are very excited about this opportunity to grow our existing led lighting solutions business, while gaining more industrial and not all the transportation market exposure.
We look forward to working closely with the talented nautical eight's team to grow and strengthen their business even further.
Moving to slide seven and returning to the court.
<unk> delivered solid sales driven by our industrial segment and our efforts in power solutions.
Furthermore, most of it had another record quarter for <unk> sales.
Our operations generated strong free cash flow and we have embarked on an exciting acquisition opportunities with Nordic lights.
Lastly, we again reaffirmed our three year organic sales compound annual growth rate of 6% demonstrating that we are on track to organically grow the business.
However, due to the expected weakness in data centers and commercial vehicles and the timing of an auto program roll off our path to this target will not be linear.
Metals at multiple years of strong awards in fact these awards.
While enabling them to not only replace the sunsetting center console business, but to grow the business at the <unk>.
We have targeted.
To support these new and diverse set of customer programs. Many of which are for EV applications, we were making investments and launching over 20, new programs in fiscal 2024.
These investments include significant tooling and increased staffing.
While this activity is expected to support our organic growth targets for fiscal 2025.
<unk> will result in flat organic growth in fiscal 2024.
As a reminder, none of this includes the acquisition of Mark Lyons.
When we report full year fiscal 2023 zones, and Joan will provide further details on our guidance for fiscal 2024.
At this point I'll turn the call over to Ron who will provide more detail on our third quarter financial results and outlook for the full year.
Thank you Don and good morning, everyone.
Please turn to slide nine.
Third quarter net sales were $280 1 million compared to $291 6 million in fiscal 'twenty, two a decrease of $11 5 million or three 9%.
This quarter sales had $13 million unfavorable currency impact and a $1 4 million favorable spot buy and premium freight cost recovery impact.
Also impacting the quarter's prior year comparison was the roll off of large automotive program in North America.
Excluding the foreign currency and a year over year cost recovery impacts sales increased by three 8%.
The strength in the quarter was driven by power distribution solutions for EV and datacenter applications.
EV product applications reached a record 24% of sales in the quarter. We now expect <unk> to represent 21% of our full year fiscal 'twenty three consolidated sales.
Third quarter impact from operations decreased eight 4% to $27 3 million from $29 8 million in fiscal 'twenty, two mainly due to unfavorable currency translation and material cost inflation.
Partially offsetting those factors was lower selling and administrative expense it.
It is worth noting that absent the unfavorable foreign currency impact of $2 3 million. Our operating income would have been flat year over year, despite the $11 million in lower sales.
Third quarter diluted earnings per share decreased 38% to <unk> 54 per diluted share from 78 per diluted share in the same period last fiscal year.
In addition to the lower sales that EPS was negatively impacted from the higher other expense higher effective tax rate and unfavorable foreign currency translation.
These other expense was clearly the major driver.
Mainly due to an increase in foreign exchange re measurement and the reduction of government assistance related to COVID-19.
Other expense increased $7 9 million going from an income of $4 4 million last year to an expense of $3 $5 million this year.
While the reduced government assistance was expected by nature, the foreign exchange Remeasurement impact was not forecasted.
Please.
Turn to slide 10.
Third quarter gross margins were 23, 2% a decrease of 50 basis points as compared to 23, 7% in fiscal year 'twenty two.
Material cost inflation and higher manufacturing costs in the quarter were the main contributing factors.
Really offsetting them was lower restructuring costs.
Third quarter, selling and administrative expenses as a percentage of sales was 11, 7% as compared to 11, 8% in the fiscal year 'twenty two a 10 basis point decrease.
This decrease was mainly a factor of lower annual incentive expense and lower restructuring expense.
Note that some restructuring costs are captured in cost of goods sold and some in selling and administrative.
Higher salary expense, partially off so those lower expenses.
Third quarter operating income margin was nine 7% as compared to 10, 2% in fiscal 'twenty, two a 50 basis points decrease.
Material cost inflation and unfavorable foreign currency translation more than offset the lower selling and administrative expense.
Please turn to slide 11.
Shifting to EBITDA, a non-GAAP financial measure are third quarter, EBITDA was $36 1 million versus $47 9 million in the same period last fiscal year, a 24, 6% decrease.
EBITDA was negatively impacted by the higher other expense the lower sales volume the higher manufacturing costs and the unfavorable foreign currency translation.
Third quarter EBITDA margin was 12, 9% versus 16, 4% in the same period last fiscal year, a 350 basis points decrease as.
As previously described the year over year change in other expense was the major driver of the decrease.
Please turn to slide 12.
Year to date, we have reduced gross debt by $9 2 million to the lowest level since our acquisition of <unk> in September 2018.
We ended the third quarter with $164 7 million in cash.
During the quarter, we bought back shares for $8 million, bringing the year to date total to $39 6 million.
Net debt and non-GAAP financial measure decreased by $1 9 million to $36 6 million from $38 5 million at the end of fiscal 'twenty two.
Our debt to trailing 12 month EBITDA ratio was approximately 1.3, our net debt to trailing 12 month EBITDA ratio was approximately zero point too.
We continue to have solid debt capacity, which offers the company flexibility from a capital allocation perspective, especially for inorganic growth initiatives.
As announced last week method expects to fund the purchase of Nordic lights with a combination of cash on hand and debt financing under our existing credit facility. The transaction. The transaction is not subject to a financing condition.
Please turn to slide 13.
Third quarter cash from operating activities was a healthy $55 7 million as compared to $20 1 million in the fiscal year 'twenty two.
The increase of $35 6 million was primarily due to working capital improvements in the quarter.
Third quarter capital expenditure was $12 8 million as compared to $8 3 million in fiscal 'twenty, two an increase of $4 5 million.
The increase was mainly a function of the lower level of spending in the prior year quarter as the spending level. This quarter was in keeping with our annual guidance.
Third quarter free cash flow another non-GAAP financial measure was $42 9 million compared to $11 8 million in fiscal year 'twenty, two an increase of $31 1 million.
This notable increase again was primarily due to working capital improvements. We continue to have a strong balance sheet and we will continue to utilize it by investing in our businesses to grow organically and by pursuing opportunities for inorganic growth.
Please turn to slide 14.
Regarding fiscal 'twenty three guidance. It is based on management's best estimates and then subject to change due to a variety of factors as noted on this slide.
While we have experienced some success in price increases to offset the ongoing material cost inflation. We expect this headwind will be with us for the remainder of fiscal year 'twenty three.
The expected revenue range for fiscal 'twenty, three has been updated to $1 billion $155 million to $1 billion $180 million. The midpoint was lowered $17 5 million from the previous range.
The expected diluted earnings per share range has been updated to $2 50 to $2 60, with the midpoint lower by 25 per diluted share.
The main drivers for both the updates or the demand weakness in Asia to lower auto and data center activities and third quarter impact from the foreign exchange re measurement.
Our other guidance assumptions have been updated as follows the guidance does not include any acquisition costs from Nordic lights, our estimated annual effective tax rate is now 16% to 17% lowered from 17% to 18%. It does not include any potential.
Discrete items.
We anticipate capex of between 40% and $45 million, which remains unchanged.
Estimated depreciation and amortization <unk> expense is 50% to 55 million also unchanged.
As a reminder, we previously announced a three year organic sales compounded annual growth rate target of 6% with fiscal year 'twenty two as the base year.
Due to the timing of a large auto program roll off and the expected Marcus market weakness in data centers and commercial vehicles, the organic growth will mainly occur in fiscal year 2025.
As Don mentioned before method has had a strong pipeline of awards they will enable us not only replace the center console programs, but grow the business at the 6% rate we have targeted.
We will be making investments in launching over 20, new programs in fiscal year 2024, while this activity is expected to support our organic growth target for fiscal year 'twenty five.
Timing of the launches will result in flat organic growth in fiscal year 2024.
As a reminder, none of these projections include the acquisition of Nordic Lights, We will provide further details on our guidance for fiscal 2024, and when we report our full year fiscal 2023 results in June .
Don that concludes my comments.
Ron Thank you very much.
We're ready to take questions.
Certainly at this time, we'll be conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time we.
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Once again, if you have any questions or comments. Please press star one on your phone.
These hold while we poll for questions.
Your first question is coming from John French rib from Sidoti and company. Your line is live.
Good morning, guys and thanks for taking the questions.
Good morning, I'd like to start with that last comment about your expectations of organic growth being flat in 2024.
You would deteriorate, we changed about your expectations in the automotive or truck market as far as growth or cyclicality compared to three months ago.
We've seen.
Slower growth.
Our data center.
The market.
Mainly in empower.
Sure.
Slower sales in Asia.
That is changing.
Clearly the Asian Auto and data center, which tends to the data center business tends to be lumpy.
We've had a really good quarters, we don't expect that to continue into next year at that rate and <unk>.
Some of our third third party market research on commercial vehicles.
<unk> has also.
Changed.
In the last since we since we spoke last so the combination of all of those things.
Would lead us to.
A more flat organic growth year over year.
Got it got it and our projections for truck change quite a bit for commercial vehicles.
These are.
From a market forecast.
About 14%, although we're looking at and 24 are recovering in 'twenty five.
But the significant drop in.
Our growth.
Planning for 'twenty four.
I guess I'll just stick with that theme quickly it seems like a lot of people who are experiencing better than expected.
Calendar 'twenty three truck business than they anticipated say January one and that might make the comps are more challenging in the year ahead, you're seeing the same kind of scenario playing out.
Yes, yes.
And was not a factor.
Much this year, but it is.
We'll be moving next year, so, yes, I agree with that.
Okay.
And just in regards to your EV wins it seems like it's.
Becoming increasingly important for us to maybe.
Be aware of the geographic mix involved in your backlog, especially in the EV market do you have any sense of what that looks like.
Broken out between North America, China and Europe .
It's really all three.
But I think given time Lombardo and user interface was heavily weighted towards.
North America allowance.
That's quite nice.
And then some of the programs we won are across all the continents.
Sure.
Four.
Some of the larger.
Automakers are both North America and.
Europe , which is very nice.
As John .
We're investing for this organic growth in all three.
Major locations.
The major three continents to support the.
The Oems in different locations so.
And a lot of ways.
A really good good thing for us.
To have that as one of the factors of why we're booking business yet.
Okay, and one last question I'll get back into queue.
Looking at your Q. This morning, it looks like recoveries were down about $9 million year over year why was that the case and what should we how should we think about your ability to.
When we reach maybe pricing equilibrium with the current cost environment.
Right.
Tough one to answer.
Yes.
The numbers show that it's improved.
As we said in our prepared remarks was the material price increases and labor certainly is continues to go up so.
Im very hesitant to say that thats behind us because we're looking at going into our next fiscal year.
And John maybe to differentiate a bit on the Spotify has to do more with the supply chain and all of that and getting premium.
<unk>.
On behalf of the customer procuring that products, we're seeing that start to come on but remember that's at zero margin right. So as to differentiate that the price increase and yes, we're going to <unk> because of inflation yet.
Alright.
Got it guys. Thanks, I'll, let somebody else have the floor.
Thank you.
Thank you. Your next question is coming from David Kelley from Jefferies. Your line is live.
Hi team. This is Gavin Kennedy on for David Kelly. Thanks for taking my questions can you quantify the impact of legacy roll off had this quarter and how should we think about the impact in fiscal year 'twenty for any details on timing and the potential magnitude would be great.
Okay.
Yes go ahead, yes, I think for the for the full year this fiscal year.
The legacy roll off has been in the 70 $75 million range.
And.
So pretty much.
Same.
Spread that over the three quarter, so $125 $30 million range, maybe for the quarter.
Sorry that was this year and then expectations for next year.
Hum.
This color we have is our customer has not announced their vehicle change yet.
And our planning, but I.
I really I can't go into that because of our.
<unk> with our customers.
Alright fair enough and then switching gears you reiterated your organic sales CAGR.
Even though you expect next quarter or next year to be flat. So this implies a pretty meaningful step up in fiscal year 'twenty five I assume this is driven by robust launch rates, but was just hoping you could provide more details on what gives you confidence in that acceleration in fiscal year 'twenty five.
And if you have any visibility into these launches the potential timing either first half second half that would also be helpful. Thank you.
Okay.
Well Theres always.
Some downsides to being the automotive business one on one.
Big upside because you get term contracts.
Whats detail the timing of the launch and the.
The volumes the volume.
It can vary.
We've seen that before.
But that allows us to really put pen to paper and project.
So what our increases are in.
This is ancient history, but if you go back.
So when we launched Kate too.
When we were launching center council. So what we've done we've had that happen before and again, we can go through.
And look at the programs and we wanted these are.
Some of them are very large established.
Automakers is not.
It's not all there are some start ups, but the major ones are well established but we feel confident of that and per the third party.
Research on commercial vehicles wireless it expects to dip maybe in our next fiscal year. The following fiscal year the forecast.
Rebounds, and goes up on that as well so that will certainly help us.
With our 6%, 6% growth and we've seen that before too in commercial vehicles.
Thanks for taking my questions.
Thank you.
Thank you once again, everyone. If you have any questions or comments. Please press star then one on your phone.
Your next question is coming from Gary <unk> from Barrington Research Your line is live.
Thank you and good morning, everyone.
Could you give me what the tax rate is going to be for this.
The change in the tax rate I didn't quite get that down.
Yes, it went down to.
16% to 17%, yes, so not modestly down just basically 1%.
And Thats and Thats, where it will be for this year right.
Without any additional discrete tax benefit or expense run rate estimated tax rate based on jurisdictional income yes.
Okay.
Don't know how are you at Liberty to give us any idea of what the northern lights revenue is like and how it has grown over the years.
I have to stick to what we've announced is a public tender offer.
So no I can't.
Okay.
That might be.
That may be out there I just can't.
Okay, Thats why I don't look at them.
And then what are they are they may be.
Basically dealing with Oems on the European continent.
Or is it more of a worldwide business.
Worldwide.
I like the Gi.
Geography.
Oh.
Mainly Oems, but there's a very nice aftermarket.
Business and aftermarket generally has higher margins.
Okay, well, there's very little overlap with your current customer base.
I don't want to say zero, but very little level.
One of the first things we do.
<unk> acquisition once we started due diligence to look at.
Product offering was on them.
We're very happy with that.
Okay. Thank you.
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.
Thank you everyone for listening and have a pleasant day goodbye.
Thank you everyone that concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.