Q1 2024 Methode Electronics Inc Earnings Call

Speaker 1: I am extremely confident that the company will continue to flourish given the exceptional team in place and a solid strategy that is positioned for growth.

Speaker 1: I truly believe that methyl's brightest days are still ahead.

Speaker 1: Meanwhile, I will continue to actively lead the company until the successor has been named, and then we'll work with the new CEO through an extended transition period, which is expected to conclude sometime in fiscal 2025.

Speaker 1: At this point I'll turn the call over to Ron who will provide more detail on our first quarter financial results as well as more details on our outlook. Ron.

Speaker 2: Thank you, Don, and good morning, everyone.

Speaker 3: Please turn to slide 8.

Speaker 3: First quarter net sales were 289.7 million compared to 282.4 million in fiscal 23, an increase of 2.6%.

Speaker 4: Greetings and welcome to the Methodelektronics first quarter fiscal 2024 results call.

Speaker 3: This quarter's sales included $21.2 million from the Nordic Lights acquisition and one half a million from favorable currency translation.

Speaker 4: At this time, all participants are on a listen-only mode and a question and answer session will follow the formal presentation.

Speaker 3: Partially offsetting those positive impacts was 10.4 million lower in spot-fi and premium freight cost recovery.

Speaker 4: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

Speaker 3: excluding Nordic Lights, foreign currency, and their year-over-year cost recovery impacts.

Speaker 4: Please note, this conference is being recorded.

Speaker 3: Sales decrease by 1.5%.

Speaker 3: In addition to Nordic Lights, this quarter's ongoing strength in lighting solutions for commercial vehicles, but it also saw the continuation of a large program roll-off in North America.

Speaker 3: First quarter, income from operations decreased 82.6% to 3.8 million from 21.8 million in fiscal 23, mainly due to operational inefficiencies, higher S&A expenses, and unfavorable product sales next.

Speaker 3: Adjusting for net acquisition costs of $0.8 million related to Nordic Lights and restructuring costs related to the exit from De Beera of $0.7 million, our non-GAAP adjusted income from operations decreased 75.7% to $5.3 million.

Speaker 3: from 21.8 million in fiscal 23.

Speaker 3: Please turn to slide 9. First quarter diluted earnings per share decreased 96.6% to 2 cents per share from 58 cents per diluted share in the same period last fiscal year.

Speaker 3: The EPS was negatively impacted from the operational inefficiencies, unfavorable product sales mix, higher professional fees, the absence of government assistance, and higher net interest expense.

Speaker 3: Adjusting for net acquisition costs of $0.6 million and restructuring costs of $0.5 million, our non-GAAP adjusted diluted EPS decreased 89.7% to $0.06 from $0.58 per share in fiscal 23.

Speaker 3: Shifting to EBITDA, a non-GAF plan measure, first quarter EBITDA was $17.8 million versus $38.2 million in the same period last fiscal year.

Speaker 3: a 53.4% decrease.

Speaker 3: IBITDA was negatively impacted by the higher operational costs, unfavorable sales mix, higher SG&A expenses, and the absence of government assistance. The contribution from Nordic Light helped to partially offset the decrease. Adjusting for acquisition costs of 0.8 million and restructuring costs of 0.7 million, our adjusted IBITDA decreased 49.5% to 19.3 million from 38.2 million in fiscal 2020. Please turn to slide 10. We increased gross debt by 32.2 million in the quarter mainly due to working capital investments and higher TAP-acts, both to support sales and new program launches. We ended the quarter with 147.9 million in cash, down 9.1 million from the end of last fiscal year. Net debt, a net debt financial measure, increased by 41.3 million to 191.1 million for the quarter, from 149.8 million at the end of fiscal 2023. Again, the main driver of the increase was working capital and TAP-acts. Our debt to trailing 12-month IBITDA ratio was approximately 2.7. Our net debt to trailing 12-month IBITDA ratio was approximately 1.5. Please turn to slide 11.

Speaker 1: The decrease was mainly due to lower sales in our auto segment, which was partially offset by higher sales in the industrial segment, driven by lighting solutions for commercial vehicles.

Speaker 1: With the addition of working lights from Nordic and the ongoing contribution from our existing interior and exterior lighting solutions for commercial vehicles,

Speaker 1: and automotive, Method is clearly building a lighting solutions franchise that complements our growing business and power distribution solutions.

Speaker 1: In the quarter, we experienced very un-methyled like operational challenges.

Speaker 1: operational inefficiencies in our North American auto operations.

Speaker 1: caused mainly by salary personnel to turn over, poor operational decisions, and vendor issues, which led to subsequent production planning deficiencies.

Speaker 1: This in turn added domino effect leading to inventory shortages.

Speaker 1: unreinversed spot purchases and premium freight and some delayed shipments.

Speaker 1: While the full picture is nuanced, I can share with you the essence of what occurred.

Speaker 1: Our Monterey operation has historically manufactured with a low mix and a high volume of product.

Speaker 1: Recently, the operation has transitioned into a mode of higher mix and lower volume.

Speaker 3: First quarter net cash from operating activities was an outflow of 5.6 million as compared to 12.7 million in fiscal 23. The decrease of 18.3 million was primarily due to lower net income in the quarter. First quarter capital expenditure was 13.8 million as compared to 9.6 million in fiscal 23, an increase of 4.2 million. The increase was mainly a function of investments to support new product launches and was keeping with our guidance.

Speaker 3: First quarter free cash flow, a non-GAF financial measure, was a negative 19.4 million as compared to a positive 3.1 million in fiscal 23, a decrease of 22.5 million.

Speaker 3: This decrease again was primarily due to reduced net income and increased CapEx.

Speaker 1: We also had accelerated expenses related to the numerous program launches.

Speaker 3: Please turn to slide 12.

Speaker 1: I can confidently tell you these operational challenges have been identified and corrective action plans are already in place, including the hiring of a former seasoned planners in the US.

Speaker 3: Regarding forward-looking guidance, it is based on management's best estimates and subject to change through a variety of factors as noted on this slide.

Speaker 3: The operational inefficiencies experienced in the first quarter will carry over to the second quarter.

Speaker 1: However, the residual effects are expected to impact our second quarter to approximately the same degree and along with a significant weakening of the e-bike market.

Speaker 3: The impact to EPS in the first quarter was approximately 15 cents, and we expect a similar impact to EPS in the second quarter.

Speaker 1: are the primary drivers to our lowering earnings guidance for the full year.

Speaker 3: In addition, we expect to experience a decrease in sales volume relative to our original expectation and increase legal and professional fees.

Speaker 1: As I said, this was very un-method and I have been and will continue to be personally involved with the efforts to correct the situation.

Speaker 3: Given this short headwind, we are providing guidance for the second quarter.

Speaker 1: On that, you have my personal commitment as the CEO and as a shareholder. We will fix this.

Speaker 3: The expected net sales range for fiscal 24 second quarter is 285 million to 295 million.

Speaker 1: Moving to orders. We had a solid quarter with over $70 million in annual program awards. These programs are once again led by electric vehicle programs.

Speaker 3: The expected diluted earnings per share range is 8 cents to 13 cents.

Speaker 3: Adjusting for four cents of costs related to the De Beer exit, the expected adjusted diluted earnings per share is 12 cents 17 cents.

Speaker 5: Turning to medical.

Speaker 1: after pursuing multiple strategic avenues for De Beers, including everything from a formal sales process to the continued operation of the business.

Speaker 3: Turning to the full year, the expected net sales range for fiscal 24 is 1 billion, 140 million.

Speaker 1: it became abundantly clear that a discontinuation was the best financial path forward.

Speaker 3: to $1,180,000,000.

Speaker 3: Four-year sales guidance was decreased by 15 million at the midpoint, mainly due to the softening of sensor sales in the second half of the fiscal year.

Speaker 1: I want to thank the De Beers and Method employees associated with the business for all their efforts.

Speaker 1: as well as the customers who provided the opportunity to market the De Beer product.

Speaker 3: The expected delivered earnings per share range is 80 cents to a dollar.

Speaker 1: Turning back to EV activity.

Speaker 1: Sales in the quarter were 22% of our consolidated total.

Speaker 3: down from previous range of $1.55 to $1.75.

Speaker 1: In new awards, we won over $30 million in annual EV programs.

Speaker 3: The drop is predominantly related to the inefficiencies in North American Auto being experienced in the first and second quarters and a significant slowdown in our sensor business. The magnitude of the inbound and outbound freight.

Speaker 1: For fiscal 2024, activity will be strong, but will still be very dependent on OEM take rates as well as the timing of program roll-offs.

Speaker 1: In the quarter, we had an increase in debt, which is driven by an investment in working capital to support our sales and program launches.

Speaker 1: really didn't become apparent until July . And once you start to air fray products, the costs go up dramatically. And that's really when I look at the myths.

Speaker 1: While our debt, due to payments for a year on items, we have negative cash flow in the quarter.

Speaker 1: However, we fully expect to return to positive free cash flow in the second quarter and have meaningful positive free cash flow for the full year.

Speaker 1: That's the main driver of it. Confidence. We know this will go into the second quarter. We've dropped the inventory levels. We need to replenish some of that, so we're going to still have some premium freight more inbound than outbound this time. What's my confidence level? Hi, I wouldn't have said what I said in my prepared remarks if I didn't feel confident we could fix that. It's very un-method.

Speaker 1: Moving to slide five. The awards identified here represent some of the key wins in the quarter and represent $70 million in annual sales at full production.

Speaker 1: As a reminder, the launch timing of most of these programs could be anywhere in the range of one to three years from now.

Speaker 1: disturbing to me, but we're a preseason management team, the plant, let's call it a transition. They're going from high volume, low mix center councils.

Speaker 1: to me, but we're a pretty seasoned management team, the plant, let's call it a transition. We're going from high volume, low mix, center councils, which they did very well producing.

Speaker 1: to a high mix, lower volume. And they had some issues with that, that coupled with employee turnover, some voluntary, some involuntary.