Q2 2024 Methode Electronics Inc Earnings Call
Greetings and welcome to the method would electronics second quarter fiscal 2024 results call.
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Mr. Robert Cherry Vice President of Investor Relations, Sir you may begin.
Thank you operator good morning.
And welcome to Mercer Electronics fiscal 2024 second quarter earnings Conference call for this call. We have prepared a presentation entitled fiscal 2024 second quarter financial results, which can be viewed on the webcast of this call or found it meso 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.
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 2024 second quarter earnings Conference call.
I'm joined today by Rob <unk>, our Chief Financial Officer.
Both Ron and I will have opening comments and then we'll take your questions.
Let's begin on slide four.
Sales for the quarter were a solid $288 million.
Sales were down year over year, primarily due to program roll offs.
Comp to the prior year in Asia due to Covid delayed sales in China.
Continued softness in the E bike market.
Of course, the impact from the UAW strike.
All of these headwinds that are all of the segments.
Sales in the quarter were helped by the acquisition of Orange life in the industrial segment.
Turning back to the auto segment in the quarter, we were required to take a noncash goodwill impairment totaling $57 million related to the North American auto and European auto reporting units.
Ron will go through the financial mechanics later in the call, but the summary of the situation.
With the recent operating track weakness in our North American Auto reporting unit.
Accounting rules required us to review, our goodwill, which in turn to the impairment.
Also in the quarter, we continued to experience operational inefficiencies in our North American auto operations that manifested in the first quarter.
As you may recall, they were caused primarily by salary personnel turnover.
Poor operational decisions and vendor issues, which led to subsequent protection planning deficiencies.
Turn out a domino effect, leading to inventory shortages unreimbursed spot purchases and premium freight and labor.
And our lean manufacturing environment disruptions like this ultimately generate significant costs to address material shortages and maintain and maintain customer delivery integrity.
In auto delivery. In addition to quality is absolutely paramount to both maintaining current.
In obtaining new business.
I want to stress that we have not let our internal inefficiencies negatively affect our customers.
We also continue to see increased expenses related to our numerous new program launches some of which are now also being delayed.
I am confident that these operational challenges have now been largely identified and corrective action plans are actively being executed.
However, the residual effects are now expected to linger longer than we'd previously communicated and will impact the remainder of our fiscal year.
In fact, they are the cause of approximately half of our reduction to adjusted earnings guidance for the full year.
It is not lost on me that last quarter, we were overly optimistic with the time required to remedy the situation.
On a more positive note. We are pleased with the <unk> acquisition, which is now fully under methods control. The business is performing as expected and integration efforts are underway.
Moving to orders.
We had a modest quarter with over $20 million in annual program Awards. These programs were once again led by electric vehicle programs.
As we often communicate our order trend is rarely linear and often ebbs and flows.
I can share that the pipeline of potential awards remains drawn.
In fact, we have near term opportunities to win business due to smaller both of our competitors who are not performing to the Oems expectations.
Turning back to E b activity.
In the quarter were 19% of our consolidated total.
In regards to awards, we won over $15 million in annual EV program Awards in the quarter.
For fiscal 2024 sales, let's say these will be strong, but will still be very dependent on the OEM take rates as well as the timing of EV program launches.
In the quarter, we had an increase in debt, which was driven by an investment in working capital to support our sales and launches.
Our debt and consequently, our leverage has increased it is still at a reasonable level.
As such we are very comfortable with our flexibility for capital deployment.
Whether it's for internal investments or share buybacks with.
The Nordic life's acquisition behind US, we resumed our share buyback in the quarter.
<unk> just under $8 million in shares.
Given the low net income in the quarter, we consequently have negative cash flow.
With the expected lower net income for the full year, we now expect free cash flow to be neutral for fiscal 'twenty, four but we'll be positive in fiscal 'twenty five.
Turning to slide five.
In summary for the quarter sales were solid despite several headwinds.
The northern Glades acquisition is complete and the business is performing well we continue to have a heavy focus on improving operational efficiency and executing new program launches.
Lastly, we resumed our share purchase program.
Looking at the remainder of fiscal 'twenty, four and into fiscal 'twenty five.
We have a definitive path forward and wed like to clearly articulate.
Our fiscal 'twenty four has been challenged by auto program roll offs and market headwinds in commercial vehicles data centers and E bikes.
<unk> also been hindered by unacceptable, but fixable operational FERC.
They are taking longer to resolve than originally anticipated.
Lastly, we've experienced substantial price cost pressure during the year, which we are addressing via pricing and increased cost improvement initiatives, such as vendor price reduction and value engineering.
As such fiscal 'twenty four is a pivotal year of investments and transition with the objective of a clean start to fiscal 'twenty five.
As mentioned, we are launching over 20, new programs this year, which requires significant investment and resources.
That ongoing investment is in items like facility preparation product qualification staffing and training expenses.
Along with the additional cost required to ensure that our operational issues.
Here have required us to lower fiscal 2020 for guidance.
For our third quarter, we now expect a modest improvement over the second quarter. We then expect further improvement in the fourth quarter.
Turning to fiscal 'twenty five our outlook continues to be positive supported by multiple years of strong awards.
Over the year will be very dependent on a number of items, including but not limited to EV OEM launch schedules and take rates.
A rebound in the E bike commercial vehicle and datacenter markets.
Further market inroads with our lighting franchise.
While we have confidence in our ability to execute in that environment. Some factors will simply be out of our control.
Of particular concern to the EV market.
Our outlook for <unk> remains very positive long term, but in the near term. It is tempered by program delays and moving take rate projections.
However, we have no doubt that this market will fuel our growth over the next three years.
As such we have reduced our guidance for fiscal 2025, mainly due to the EBIT market trends.
To illustrate we have had one major EBV program get partially delayed from fiscal 'twenty five to fiscal 'twenty six.
To summarize we're decisively making good investments in fiscal 'twenty four to ensure profitable growth in fiscal 'twenty five.
We firmly believe that our business model is healthy and is positioned to prosper from the strategic direction that.
That we have taken and the lighting and power solutions to grow our business.
Turning to slide six.
In order to give you a more granular picture of our sales guidance. We have updated the bridge that we provided last fourth quarter for our guidance walk from fiscal 'twenty to 'twenty five.
Program roll offs, while still sizable have been less this year than expected probably now more next year.
However, the most notable change is the new program launches in fiscal 'twenty five have been reduced by approximately $70 million due to customer delays into fiscal 'twenty six.
Together these drivers have caused us to lower our fiscal 'twenty guidance by $100 million at the midpoint.
At this point I will turn the call over to Ron who will provide more details on our second quarter financial results as we're more details on our outlook.
Thank you Don and good morning, everyone.
Please turn to slide eight.
Second quarter net sales were $288 million compared to $315 9 million in fiscal 'twenty three a decrease of 9%.
This quarter sales included $29 million from the Nordic Life's acquisition, and $3 5 million from favorable foreign currency translation.
Excluding Arctic lights, and foreign currency sales decreased by 16, 6%.
The quarter saw a continuation of two key automotive program roll offs, one in North America and one in Asia.
We also had a difficult comp in Asia as in the prior year Asia benefited from sales that were delayed from the first quarter to the second quarter as a result of the Covid shutdowns in China.
The quarter also saw lower sales for your bike sensors as that market continues to be overstocked.
That inventory headwind is expected to last at least through the end of this fiscal year and potentially.
Next fiscal year.
Second quarter loss from operations was $51 3 million down from $32 8 million of income in fiscal 'twenty three.
The major factor in the decrease was a goodwill impairment charge of $56 5 million at the edge.
End of the second quarter, we experienced a goodwill impairment triggering event, but our market cap was less than our book value.
Based on a triggering event, we performed a quantitative analysis of our two reporting units and determined that the current fair value of the goodwill was less than the carrying value, resulting in an impairment at two of our automotive reporting units.
Income was also down due to lower sales volume and the ongoing operational inefficiencies, which drove higher premium freight and labor expenses.
Adjusting for the goodwill impairment of $56 5 million restructuring costs, mainly related to the exit from the beer up $6 million and costs related to the Nordic life's acquisition, a $1 2 million or non-GAAP adjusted income from operations was $6 million.
Please turn to slide nine.
Second quarter diluted earnings per share decreased to a negative $1 55 from a positive 75 cents in the same period last fiscal year.
Aps was negatively impacted by the goodwill impairment the lower operating income and the higher net interest expense of <unk>.
<unk> benefit in the quarter as compared to a tax expense in the prior fiscal year was a partial offset.
Adjusting for the goodwill impairment of $1 58 restructuring costs of one said a loss on sale of assets of <unk>.
And purchase accounting adjustments related to inventory of one our non-GAAP adjusted diluted EPS decreased to <unk> <unk> per share.
Shifting to EBITDA, a non-GAAP financial measure second quarter, EBITDA was a negative $36 7 million versus a positive $46 1 million in the same period last fiscal year.
EBITDA was negatively impacted by the goodwill impairment lower operating income and higher selling and administrative expenses the.
The contribution from Nordic light helped partially offset the decrease.
Adjusting for the goodwill impairment restructuring costs of <unk> 6 million loss on sale of assets of <unk> 6 million and purchase accounting adjustments related to inventory of $1 2 million or adjusted EBITDA decreased 55% to $21 2 million.
Please turn to slide 10.
We increased gross debt by $25 2 million in the quarter, mainly due to working capital investments and higher Capex, both to support sales and new program launches.
We ended the quarter with $122 5 billion of cash down $34 5 million from the end of the last fiscal year.
Net debt and non-GAAP financial measure increased by $59 7 million to $209 5 million for the quarter up from $148.
$9 million at the end of fiscal 'twenty three.
Again, the main drivers of the increase were an increase in working capital and higher Capex.
Please turn to slide 11.
Second quarter net net cash from operating activities was an outflow of <unk> 6 million as compared to an inflow of $15 4 million in fiscal 'twenty three.
The decrease of $16 million was primarily due to lower net income in the quarter.
Second quarter capital expenditure was $10 7 million as compared to $8 4 million in fiscal 'twenty, three an increase of $2 3 million.
The increase was mainly a function of investments to support new program launches and what's keeping in line with our guidance.
Second quarter free cash flow, a non-GAAP financial measure was a negative $11 3 million as compared to a positive $7 million in fiscal 'twenty three a decrease of $18 3 million.
This decrease again was primarily due to reduced net income and increased capex.
Please turn to slide 12.
Regarding forward looking guidance is based on management's best estimates and are subject to a change due to a variety of factors as noted in the bottom of the slide.
Net sales for our third quarter should be similar to our second quarter.
However, the operational efficiencies experienced in the second quarter will carry over to the third quarter and likely into the fourth quarter. This is longer than we had previously estimated.
As a result, the expected adjusted diluted earnings per share in the third quarter will only be modestly higher than the second quarter.
Turning to the full year the expected net sales range for fiscal 'twenty four is still.
$1.140 billion to $1 billion $180 million unchanged from the previous guidance.
The expected diluted earnings per share range is now a negative $1 42, and negative dollars 14 down from our previous range of a positive 80 to $1 per share.
The drop is predominantly related to the goodwill impairment and continued operational efficiencies at North American automotive.
Adjusting for the $1 58 goodwill impairment <unk> of costs related to the de beer exit and <unk> related to the Nordic Glades acquisition. The expected adjusted diluted earnings per share range is 24 to 50.
From 88 to $1 an acre.
This fiscal 'twenty four guidance assumes an income tax rate of 14% to 16% in the second half of the year with no discrete tax benefits or expenses.
Assumed capex of $60 7 million $60 million to $70 million for the full fiscal year and assumes depreciation and amortization of $55 million to $60 million there'd been no changes to any of those three items.
Looking further ahead to fiscal 'twenty five the expected net sales range is now $1 billion $150 million to $1 billion and $250 million down from $1 $250 million to $1.350 billion. The midpoint of the new range is lower by 100 million primary.
Due to the E&P customer program delays into fiscal 'twenty six.
We expect a range of income from operations as a percentage of net sales in fiscal 'twenty five is now 6% to 8% down from 11% to 12%.
This reduction is mainly due to the $100 million net sales reduction and its impact on overhead absorption.
It still represents a significant improvement over fiscal 'twenty four and is on par with what metal delivered for operating margin in fiscal 'twenty three.
The fiscal 'twenty five income tax rate is expected to be between 20, and 22% with no discrete tax benefits or expenses the.
The increase in the tax rate from the current fiscal year is largely due to the estimated impact from the anticipated adoption of the pillar two minimal minimum global tax initiative.
Don that concludes my comments.
Thank you very much.
We are ready to take questions.
Thank you Sir.
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One moment, please before we pull for questions.
Thank you.
Our first question is coming from Luke.
With Baird Your line is life.
Good morning, Thanks for taking the questions.
Morning, John.
Good morning, Don hoping to start with the just the ongoing inefficiencies in North America of course, they came to the surface last quarter.
Put corrective actions in place and the prior guidance and implied we should be seeing some lift in the second half of your fiscal year and the bottom line with guidance now moving Laura today, just hoping to put a finer point on what changed in the expectation or the actions not having the desired effect are you seeing additional headwinds in the back half I'm just.
Anything to help us understand the bridge from the old expectation to the new especially where maybe you were overly optimistic previously thanks.
So as I said I was overly optimistic.
And it is taking us longer to go through the.
Various routing.
Hum.
Part numbers are made corrective actions.
To give you.
More color on that these initiatives probably existed.
Prior to this fiscal year, but they were masked by.
Very high inventory in certain areas and we took.
We do and what are we trying to lean out our operations, we brought inventory down in that.
What are your analogy is that lean experts, sometimes the use of the ponds and the lower the bond defined the rocks.
We saw him holders and it took us much longer it is taking us longer to correct.
They're all as I said, all fixable, but it's a mismatch between.
Our various systems, we do.
Manufactured product in.
The only one in China that is shipped to Monterrey.
Engineering changes and where we recorded properly and we said.
A lot of it was due to salary personnel turnover.
There was a certain amount of knowledge or that probably got lost at the end of the end of Covid. So it's really dealing with.
Routing was MRP lead time.
And we have some lead times on the silicon about two weeks.
It probably should have been closer to two months also there we saw changing and Thats I don't know if this is the colon leftover, but we're seeing.
Tremendous changes in schedule is something that we have not seen.
How much in the past and that also puts a.
I'll stress on the system. So around is there anything that.
From an operational perspective I think.
And there was probably a lag.
Some of the invoicing.
You don't get Invoiced next week.
Premium shipments and there was probably some of that occur in the first.
In the first quarter of the carryover in the second quarter again, all fixable as we underestimated the amount of time.
And then just to maybe put a finer point on that time.
Hearing is it.
More of these actions are continuing but in terms of the corrective actions. It doesn't sound like you necessarily needing to put new actions into place or it's more and more a scope issue not that there's kind of new problems that you've found is that right.
Yes, that's correct.
It's really a time.
Factor in that we uncovered nothing.
Nothing new.
Well that would cause us to change anything in terms of any of our actions.
Got it that's helpful and then.
For my follow up just hoping to understand how we incorporated our updated expectations for EV volumes in.
Typically what I'm, hoping to tease out is how much. This is a timing delay in terms of the new fiscal 'twenty five guidance you mentioned the program that had slipped partially from 25 to 26 versus just absolute reductions in your expectation for take rates.
Don't know if there's any anecdotes on that latter piece in terms of take rate that you can share just to help us understand the level of conservatism. That's in this new fiscal 'twenty five guidance. Thank you.
We had.
Two of our.
Long term vice president to do a deep dive into our.
And forecasting.
And.
And overlaid that with the various expectations.
Sure.
We were hearing from our customers or forecast along with L. M C in IHS.
And what program delays that we knew about and that really was what contributed to the chain.
Change.
We're four months.
Four months plus out from 'twenty, five and I'm sure there will be.
Additional revisions as we get closer to giving guidance some of that good.
It could go up on one of the reasons were.
We'll have 250.
The upside is.
There are some opportunities that are surfacing on some of the smaller competitors that are having difficulties that are presenting us some opportunities.
<unk>.
So in general as we did a deep dive into the forecast.
Just the guidance.
Okay.
From my standpoint.
As the EV market.
<unk> or is there a major problem now.
I don't know if I want to use the word or the phrase over exuberant, but there was probably some of them.
Some of that in the forecasting.
<unk>.
By the market.
But I fully believe that 25% will.
There will be a good year for some <unk>.
But we'll see some fluctuations in forecast until the industry really sorts out what's up what's the really the adoption level.
Got it I'll leave it there thanks Tim.
Thank you.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone.
Our next question is coming from Gary <unk> with Barrington Research your line of sight.
Hi, good morning, all.
Gary could.
Could you refresh my memory are are your EV programs, what is the split there between commercial.
Vehicles like.
Last mile delivery vehicles and regular passenger cars.
No.
On our largest program I want to say, it's probably a.
2020.
20 or something the last.
Last mile and is slightly higher than that.
I don't know what we've revised.
That too, but it's still probably in that range I I've said before I like the last mile vehicle. They are they are definitely cost effective for us.
The Amazons of the World. So we do place emphasis on that in our.
Our largest program part of that is last mile.
But did you say, it's about 80 20 passenger last mile.
Yeah, Yeah yeah.
Okay.
That's fine Thank you and then.
Just getting into this write down again.
Exactly could you just briefly explain what happened your actual book value or your market value sell below book and by accounting Convention you had to.
Test your goodwill and that caused the write down is that very simply out of.
That's correct that's correct Gary.
First day of the quarter, the closing stock price.
Our market cap was less than our book value of the company.
It is named a trigger.
And we go back to the business units that have goodwill a rerun their projections and all that valuation performed and.
Came up with.
The impairment amount two of those reporting units.
Okay.
Okay.
We do tests for this annually.
Each year about whether it's triggering events between the annual impairment test we do.
Test in between the annual ones and this is what happened in this particular quarter.
So the trigger was there anything about the performance of the divisions. It was really all the auto it was just a trigger by accounting conventions of your market.
Value went below your book.
Correct, there was a triggering value the triggering events and then we recast all of the projections as part of this we recast all of the project for the current fiscal year and going out forward.
Used to develop the models.
For the discounted cash flows and then to bring that back to <unk>.
Doesn't value and assess whether the carrying value is higher than the.
Or not of the fair value and that is compared and then the impairment was taken as of two businesses in <unk>.
Yes, a $56 million.
Doug.
Doing an impairment like this on a longer or long term longer term basis does this.
Really change your outlook for what your capital spending would be.
<unk> with the businesses that had the impairment.
Yeah.
Go ahead, I guess first of all I mean.
It's more about the impairment resulted from more about acquisitions that occurred in the past and okay.
The performance of those cash flows and that it doesn't necessarily mean that youre not going to reinvest in the business, Obviously North America what are they doing.
A lot of investment in Capex.
To support our new program. So it's that part of it is forward looking the impairment and the goodwill that was created was backward looking.
Thank you Brian.
Got it thank you very much appreciate it.
Hmm.
Thanks Keith.
As we currently have no further questions on the line at this time I would like to hand, it back over to Mr. Duda for any closing comments you may have.
Okay. Thank you very much I'll, thank everyone for listening and for their questions and wish everyone, a very safe and enjoyable holiday season.
Hey.
Thank you ladies and gentlemen. This concludes today's conference and you may disconnect. Your lines at this time and we thank you for your participation.