Q4 2023 Methode Electronics Inc Earnings Call
Greetings and welcome to the method electronics fourth quarter and full year fiscal 2023 results call.
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I will now turn the conference over to your host Mr. Robert Cherry Vice President of Investor Relations, Sir you may begin.
Thank you operator, good morning, and welcome to method electronics fiscal 2023 fourth quarter and full year earnings conference call.
For this call we have prepared a presentation entitled fiscal 2023 fourth quarter and full year financial results, which can be viewed on the webcast of this call 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.
<unk> 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.
Factors that could cause actual results to differ materially from our expectations are detailed in met those 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 and fourth quarter earnings Conference call.
I'm joined today by Ron Zaleski, 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 a healthy $301 million.
They were up 4% compared to the prior year, but up 9%, excluding a significant headwind from foreign exchange and a drop in material spot buy and premium freight cost recovery.
The increase was mainly due to higher sales in the industrial segment, driven by lighting solutions for commercial vehicles.
Power distribution solutions for electric vehicles.
The sales growth from lighting and power product as another data point in our strategic pivot to reduce our reliance on user interface solutions.
In the quarter, we continued to face ongoing cost increases due to inflation in material and labor, which continued to be a drag on margins.
The ongoing cycle of inflation and subsequent efforts to obtain price increases from customers.
Is a persistent challenge I cannot stress that enough.
We can however reported a significant reduction of spot buys and expedited shipping and supply chain constraints have improved over last year.
On the order front, we had a very strong quarter with over $250 million in annual program Awards. These.
These programs were once again dominated by electric vehicle programs.
The Nordic life acquisition, which is an exciting opportunity to grow our lighting franchise and gained more industrial and non auto market exposure is nearing completion.
While we have secured over 99% of the outstanding shares we're still working through the squeeze out process for the remaining shares.
Once the legal process is complete we will be able to provide more information.
Okay.
Turning back to EV activity.
Sales in the quarter or 23% of our consolidated total.
Were a record on a dollar basis.
In regards to awards, we won over $215 million in annual he'd be awards in the quarter.
Looking forward on EV activity will be strong again in fiscal 2024.
But it will be very dependent on auto OEM take rates as well as the timing of program roll offs.
In the quarter, we had an increase in debt, which was driven entirely by the Nordic Glades acquisition.
During the quarter, we purchased approximately $8 million of shares.
We announced $200 million Board authorization, we've now purchased $119 million in total.
Prior to the Nordic Life's acquisition. This buyback program was a key focus of our capital allocation strategy.
With the increased debt level part of our focus will return to debt reduction.
Lastly, but just as important on anything on the slide we generated $38 million in free cash flow in the quarter.
Which is an indication that a lot of attention to operational performance and a focus on generating cash in our business model.
Moving to slide five.
The awards identify here represent some of the key wins in the quarter and represent $258 million in annual sales at full production.
As a reminder, the launch timing that most of these programs could be anywhere in the range of one to three years from now.
The awards were mainly for power products associated with the E V skateboard architecture.
The awards were also heavily weighted towards the United States or even quoting activity has clearly picked up.
In other areas, where work programs for lighting user interface and sensitive solution for applications in commercial vehicles and E bike.
I would like to take a step back and reflect on our E. P activity over the last three years.
Since the beginning of fiscal year 2021.
We own approximately $600 million in EV Awards.
This award streaming actually the backlog of potential future business.
There is little doubt that evs will be driving our organic growth in the coming years.
Turning to slide six and our fiscal 2023 highlights.
We delivered sales growth for the sixth year in a row.
And finished with a record sale.
One building $180 million for the full year.
Excluding foreign exchange and cost recovery, we had a 7% year over year sales growth.
Material labor and overall manufacturing cost inflation challenges during the year took a toll on earnings.
Clearly we were disappointed in the cost recovery efforts with our customers.
Efforts continue as well as other initiatives to improve manufacturing efficiencies.
However program awards were very strong reaching over $435 million with over 75% and EV applications.
The strength of our bookings gives me confidence that along with the aforementioned initiatives will achieve the margin expansion that supports our guidance for fiscal 2025.
We had record sales went to EV applications and the reached 21% of our total sales for the full year.
Our free cash flow generation was up 50% year over year and supported the purchase of $48 million of shares as well as our ongoing dividend program.
It was a challenging quarter and a year plagued by ongoing cost inflation headwinds.
Oliver our worldwide team still delivered organic sales growth for the year.
Moving to slide seven and looking forward, we're expecting a slight slowdown in sales for fiscal 2024.
And then a significant ramp up of sales in fiscal 2025.
I want to walk you through the basic drivers of this.
As you can see from the slide the net of program roll offs and program launches as a sales headwind in fiscal 2024.
While Nordic lights will add to our sales we expect headwinds in the commercial vehicle data center, an E bike markets.
And that resolve all of this is a slight sales slowed down in fiscal 2024.
In fiscal Q1 2025.
Program roll offs and program launches becomes a tailwind.
We also expect a tailwind strengthening commercial vehicles data centers and E bike markets.
The net result is an 11% organic sales growth rate for fiscal 2020 for fiscal 2025.
With the strong award pipeline for the past three years and the ever Meso Theres major transition its product portfolio further in the lighting and power solutions.
Fiscal 2025 guidance demonstrates that our business model is healthy and is positioned to prosper from the strategic steps that we've taken to grow the business.
Yeah.
Turning to slide eight.
In summary, although at a number of successes in fiscal 2023, we achieved record sales in our industrial segment with growth of 29%.
We delivered record sales in the EV applications, we generated strong free cash flow and lastly, we executed the acquisition of Nordic lights.
Turning to outlook due.
Due to the program roll offs and the expected weakness in key markets, we expect to have lower organic sales in fiscal 2024.
In addition, we will be making significant investments in launching over 20 new programs.
These investments include significant tooling and increased staffing.
This activity along with multiple years of strong awards will enable us not only to replace the sunsetting programs, but to organically grow the business, 11% for fiscal 2020 for fiscal 2025.
At this point I'll turn the call over to Ron Who'll provide more details on our fourth quarter and full year financial results as well as small as well as more details on our outlook.
Thank you Dan and good morning, everyone.
Please turn to slide 10.
Fourth quarter net sales were $301 2 million compared to $287 7 million in fiscal 'twenty, two an increase of four 3%.
This quarter sales has $7 7 million unfavorable currency impact and $2 5 million favorable spot buy and premium freight cost recovery impact.
Also impacting the quarters prior year comparison, what the roll off of a large automotive program in North America.
Excluding the foreign currency and year over year cost recovery impacts sales increased by eight 8%.
The strength in the quarter was driven by lighting solutions and commercial vehicles and power solutions in the evening.
EV product applications, where 23% of sales in the quarter.
Fourth quarter income from operations decreased 41, 8% to $8 5 million from $14 6 million in fiscal 'twenty, two mainly due to acquisition cost material cost inflation and unfavorable foreign currency translation.
Partially offsetting those factors was the higher sales volume.
Adjusting for acquisition costs of $6 8 million and costs related to the reorganization of our poor and subsidiary.
<unk> 5 million or non-GAAP adjusted income from operations increased eight 2% to $15 8 million from $14 6 million in fiscal 'twenty two.
Please turn to slide 11.
Fourth quarter diluted earnings per share decreased 48, 8% to 22 cents per share per diluted share from 43 cents per diluted share in the same period last fiscal year.
The EPS was negatively impacted from the acquisition cost material cost inflation and unfavorable foreign currency translation.
Adjusting for the net acquisition cost of $6 6 million and the net benefit related to the reorganization of our foreign subsidiary area of $7 million or non-GAAP adjusted diluted EPS decreased 51, 2% to 21 cents per diluted share from 43 cents in fiscal <unk>.
<unk> two.
Shifting to EBITDA, a non-GAAP financial measure fourth quarter, EBITDA was $21 9 million versus $38 million in the same period last fiscal year.
28, 9% decrease.
<unk> was negatively impacted by acquisition cost material cost inflation and the unfavorable currency foreign currency translation.
Higher sales volumes helped to partially offset the decrease.
Adjusting for acquisition costs of $6 8 million and cost of $2 6 million related to the reorganization of our foreign subsidiary, our adjusted EBITDA increased one 6% to $31 3 million.
From $30 8 million in fiscal 'twenty two.
Please turn to slide 12.
We increased gross debt by $96 3 million for the full year, mainly due to the Nordic lights acquisition.
We ended the year with $157 million in cash down $15 million for the full year.
During the quarter, we bought back shares for $8 5 million, bringing the year to date total to $48 1 million.
Net debt and non-GAAP financial measure increased by $111 3 million to $149 8 million in the full year from $38 5 million at the end of fiscal 'twenty two.
Again.
The main driver of the increase was the Nordic lights acquisition.
Our debt to trailing 12 month EBITDA ratio is approximately two points to our net debt to trailing 12 month EBITDA ratio was approximately one.
We continue to have solid debt capacity, which offers the company flexibility from a capital allocation perspective, especially for inorganic growth initiatives.
Please turn to slide 13.
Fourth quarter net cash from operating activities was a healthy $49 million as compared to 42 million in fiscal 'twenty two.
The increase of $7 million was primarily due to working capital improvements in the quarter.
Fourth quarter capital expenditure was $11 2 million as compared to $8 4 million in fiscal 'twenty, two an increase of $2 8 million.
The increase was mainly a function of a lower level of spending in the prior year quarter as a spending level. This quarter was in keeping with our guidance.
Fourth quarter free cash flow, a non-GAAP financial measure was $37 8 million as compared to $33 6 million in fiscal 'twenty two and.
An increase of $4 2 million.
This 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.
Fiscal 'twenty three net sales were a record $1 billion $179 6 million compared to 1 billion $163 6 million in fiscal 'twenty, two an increase of one 4%.
This was our sixth year in a row of record sales.
This year's sales had $57 3 million unfavorable foreign currency impact and $20 9 million favorable spot buy and premium face premium freight cost recovery impact.
Excluding the foreign currency and year over year cost recovery impacts sales increased by six 5%.
The strength in the year was driven by our industrial segment EV product applications were 22% of sales in the year negatively impacting the year was the roll off of a large automotive program in North America.
Fiscal 'twenty three income from operations decreased 19, 1% to $90 4 million from $111 7 million in fiscal 'twenty, two mainly due to acquisition costs and material inflation, which were partially offset by higher sales volume.
Adjusting for the acquisition costs of $6 8 million in costs related to the reorganization of our foreign subsidiary of <unk> 5 million or non-GAAP adjusted income from operations decreased 12, 5% to.
To $97 7 million from $111 7 million in fiscal 'twenty two.
Please turn to slide 15.
Fiscal 'twenty three diluted earnings per share decreased 22% to $2 10 from $2 70 per diluted share last fiscal year.
The EPS was negatively impacted from the acquisition cost and material cost inflation, which were partially offset by a net tax benefit related to the reorganization of a foreign subsidiary.
Adjusting for the acquisition costs of $6 6 million in net benefit related to the organization of a foreign subsidiary up 7 billion, our non-GAAP adjusted diluted.
<unk> decreased 22, 6% to $2 nine.
From $2 70 in fiscal 'twenty two.
Shifting to EBITDA on a full year EBITDA was $142 3 million versus $174 6 million last fiscal year and 18, 5% decrease.
EBITDA was negatively impacted by the acquisition cost and material cost inflation, which were partially offset by higher sales volume.
Adjusting for the acquisition costs of $6 8 million in the cost of $2 6 million related to the reorganization of our foreign subsidiaries are adjusted EBITDA decreased 13, 1% to $157 1 million from $174 6 million in fiscal 'twenty two.
Please turn to slide 16.
Fiscal 'twenty three net cash from operating activities was a healthy $132 8 million as compared to $98 8 million in fiscal 'twenty two.
The increase of $34 million was primarily due to working capital improvements.
Capital expenditure was $42 million as compared to $38 million in fiscal 'twenty, two an increase of $4 million.
The increase was mainly a function of our low levels of spending in the prior year as the spending level. This year was within guidance.
We expect significant increase in Capex in fiscal 'twenty, four to increase capacity and capability for the increased launches in both fiscal 'twenty four and fiscal 'twenty five.
Free cash flow was $90 8 million as compared to $60 8 million in fiscal 'twenty, two an increase of $30 million.
This increase again was primarily due to working capital improvements.
Please turn to slide 17.
Regarding forward looking guidance. It is based on management's best estimates and are subject to change due to a variety of factors 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 still be with us in fiscal 'twenty four.
We expect a net sales range for fiscal 'twenty, four is $1.150 billion to $1.200 billion.
The expected diluted earnings per share range is $1 55 to.
To $1 75.
This fiscal year 'twenty four guidance includes the Nordic like acquisition.
Assumes an income tax rate of between 18% and 20% with no discrete tax benefits or expenses.
Assumes capex in the $65 million to $75 million range and assumes depreciation and amortization in the range of 57 to 62 million.
The fiscal year 'twenty for EPS cadence will be somewhat uneven with the first quarter being weak is largely due to the anticipated contingent legal fees related to the Medtronic lawsuit, we anticipate minimal sequential quarterly EPS growth from the fourth quarter of fiscal 'twenty three.
Looking further ahead to fiscal 'twenty five the expected net sales range is between $1 billion $250 million to $1 billion $350 million.
The midpoint of this range represents 11% organic growth from the midpoint of the fiscal 'twenty.
Fiscal year 2000, and for net sales guidance range.
The expected range income from operations as a percentage of net sales in fiscal year 'twenty five is 11% to 12%.
Fiscal year 'twenty five income tax rate is expected to be between 20, and 22%, but no discrete tax benefits or expenses.
Don that concludes my comments.
Ryan Thank you very much.
Operator, we are ready to take questions.
Thank you.
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One moment, please while we poll for questions.
Thank you.
Our first question is coming from John <unk> with Sidoti <unk> Company you May proceed.
Good morning, guys and thanks for taking the questions.
Good morning, just to start with a couple of with a couple of quick clarifications.
First and foremost it looks like Nordic is part of the balance sheet I'm curious if it's if it's part of the P&L too Chris.
Because I didn't hear any mention of any revenue contribution from Nordic in the fourth quarter.
So can you just kind of walk me through that.
Yes, you are.
Absolutely correct. The it's on the opening balance sheet, but we had did not have any.
Profit and loss activity.
In fiscal 'twenty three related to Nordic lights due to its very late closing right prior to the end of the fiscal year.
Got it and then we will see that they will.
In fiscal 'twenty four.
Okay, alright so.
You mentioned legal fees that you were going to continue to incur from nor are there any other.
Cash expenses that we should be worried about or incremental debt that youre going to have to bring onboard and that'll be part of Q1 that was not part of Q4.
We mentioned.
From a legal expense perspective, the Supreme Court.
Ruling if that comes through next week that we could have the contingent legal fee.
To that matter in the first quarter.
I think from a.
We would not expect to take on any further debt in the first quarter and if anything.
Depending on cash flows and harvesting going we might even de lever a little bit.
Okay.
Eric raises interest rates interest rates, obviously are something cost of borrowing has gone up and we have some.
Our fixed interest variable to fixed interest rate swaps that will be expiring. So we do expect an increase in debt higher interest expense significantly higher interest expense in fiscal 'twenty four as compared to fiscal 'twenty three.
So since you brought it up.
What is your expected interest expense embedded in your in your guidance for fiscal 2024.
It's in the.
About $13 million ish range somewhere around there.
Okay, Perfect and then just switch gears real quick on the program roll offs.
Just just to clarify you mentioned the impact in 2020 season of the North American program rollout that we've been talking about for quite some time.
Two questions here, one how much was that impact in the fourth quarter and secondly, when you're talking about the fiscal 2020 for guidance.
Paul It's program well off so so in addition to the one that we've been going through whats the incremental number on top of that from new program roll offs.
Okay.
The second area. So the program roll offs in total.
We would expect around $150 million.
Yes.
Yes I.
Great.
And how much of that is the <unk>.
After over from the one that we've been incurring and in 2023.
So.
It would be approximately from that program another.
$100 million.
Then there's another program.
In the <unk> space that would take.
A lot of the balance of that.
Perfect. That's what I was looking for you know what ive been taking a lot of time guys I'll get back into queue for follow ups. Thank you.
Thanks, John .
Thank you. Our next question is coming from Gary Prest, Pinot with Barrington Research you May proceed.
Hey, Good morning, everyone. My question kind of revolves around what the last questioner was but.
In terms of this north American program roll off is that over in fiscal 'twenty four or is there some residual going into fiscal 'twenty five.
Again, theres, a plural roll ups there.
The.
In round numbers the roll off.
And 25 and I talked about.
24.
Headwind in 2025, our increased business because of the tailwind even with about 100.
$120 million of roll offs in fiscal 'twenty five.
Right I understand that but im trying to get at is that I guess.
Let me just ask you as the North American roll off over in fiscal 'twenty, four or is there still some residual fiscal 'twenty five.
That depends on the customer.
Okay.
There could be some.
Additional business.
And 25% it depends one.
<unk> launched their new programs and I really can't get into too much of that but we have seen programs.
Extend a little longer so there could be some of that and twenty-five Gary I think what I would say too about the other program is.
The one that started rolling off in fiscal 'twenty three that's rolling off in 'twenty for the preponderance of the roll off will be done by the end of fiscal 'twenty four there will be some carryover at $25, but the preponderance of it is in 'twenty, three and 'twenty four yeah.
And I don't look at.
Is that extending into 'twenty five.
As a huge upside.
It's just the timing.
Timing of the customers launch.
Okay, that's kind of what I was getting at thank you for that answer and then in terms of.
The DNA range for fiscal 'twenty four.
How does that breakdown between depreciation and amortization can you give us some rough numbers there.
I guess at a high level.
2020 ish million.
A part in the.
The rest of the day part.
Okay. Thank you.
And then.
I also want to just ask in terms of its great. You've got all these new product launches could you maybe detail first of all what are some of the expenses that are upfront that are associated with with these new product launches and then are we as we model things out or.
The expense front end loaded in Q1, Q2, and then you start generating.
This level of expenses or less upfront expenses and net revenue start to accelerate from the new programs in the back half of fiscal 2004 could you help us out with that lease.
Sure.
It is.
Equipment.
<unk>.
People.
It is the prototyping costs.
That we're starting to incur and we will continue to incur.
Throughout fiscal 2024.
As we get into the.
At the end of 'twenty four of those costs will start to be absorbed into the product launches.
Okay.
Factored into the guidance.
<unk>.
And we will globally, we are starting we've been hiring we've.
We've been procuring equipment.
30%.
Complete from an equipment standpoint.
So that will continue throughout the year and then we will be launching.
At the end of the end of the year Theres not a significant amount, but it will start to absorb the cost.
Alright, and I know you didn't give this as a point of your guidance, but it looks like you had almost a 13% adjusted EBITDA margin in fiscal 'twenty three.
Given the range of what you've given us for fiscal 'twenty, four where do you see that adjusted EBITDA margin range. If you have that calculation handy.
Well in terms of.
The the range it would be.
It would be somewhat comparable to two this fiscal year.
Our fiscal 'twenty four.
From our EBITDA.
Margin percentage as a percentage of sales.
So it would be comparable FY2023.
You're saying.
Yes.
Okay Alright.
Alright, alright, thank you very much.
Thank you.
Thank you once again, if you have any questions or comments. Please press star one on your phone at this time.
Our next question is coming from Matt Sheerin with Stifel.
You May proceed.
Yes, good morning, and thanks for taking my questions I have a couple of quick questions. One your commentary in terms of your outlook for data centers. It looks like that will continue to be a headwind is that due to an inventory build.
At the Hyperscale customers that have yet to work off and are you having any visibility.
In terms of that picking up in the back half of your fiscal 'twenty 'twenty four and then.
Second question.
In your preliminary.
Our earnings release your pre announcement a couple of weeks ago, you talked about a sunsetting of an EV program.
Due to a change in technology by that customer.
Could you be more specific about what that technology changes and how that may impact you on other programs. Thank you.
Okay.
I, probably can't answer that.
Exactly.
I can't give you detail on that because of that.
Because of the customer I can tell you. This it is one customer.
One products, we do not sell that product to other customers.
Don.
I don't want to lose the business.
But I understand it.
But it is not does not impact our strategic thinking in terms of.
Evs it is on the top hat.
There is more volatility on the top half of their iron.
On passenger cars is.
<unk> as well so.
Does it concern me long term no doesn't like the business to say, yes I understand.
Apologies I can't really go into.
Any more detail and then I have to be respectful of the.
Contract, we have with the customers and the customer we continue to do business with.
Just to your other question.
More of an inventory.
Over inventoried due.
Hi.
I expect that to maybe.
Improve it towards the tail end of the year I don't we don't think so we haven't.
Put that into our into our numbers.
<unk>.
Look at commercial vehicles alone on I know you asked about data centers, but.
ACD.
The market down 29%.
And they're not always.
The market people aren't always thought I don't know we're not spot on.
But that's a.
And a direction and a headwind we're going to face in 'twenty one.
And then 'twenty fives I haven't gone back up.
Got it and just so on data center or you're just not getting visibility into that picking up anytime soon.
No and we know when we know when we shipped the customer we kind of know the usage and they told US they are over inventoried. So until they worked that down and we can.
Now we can model here's what they've taken.
The last three quarters and if they have all of that in inventory you can pretty much expect youre not going to have much business for the next three quarters.
We have visibility to that.
That's why we guide to that.
Fair enough. Okay. Thanks, thanks very much.
Thank you.
I want to make I described electrification.
Gary's question a.
<unk> part of DNA is will be about $25 million instead of 29, I think I said 'twenty.
<unk> 25 is the correct answer thanks Ron.
Thank you.
<unk> reached the end of our question and answer session I will turn the call back over to Mr. Duda for any closing remarks.
Thank you we will thank everyone for their questions and for listening and wish everyone, a very safe and enjoyable summer and good day.
Thank you. This concludes today's conference and you may disconnect. Your lines at this time and we thank you for your participation.