Q2 2025 Methode Electronics Inc Earnings Call
It's where our concern.
Speaker Change: While we experienced a timing issue on cash we were comfortably in full compliance with all debt covenants Lastly program awards were solid.
Speaker Change: Going forward our focus this fiscal year is to transform the business while positioning it to return to profitable growth next fiscal year. Meanwhile.
Speaker Change: Meanwhile, we're focusing intensely on executing our 30 programs, while taking decisive actions to address execution and costs.
Speaker Change: Led by our new leadership team that we have systematically built over the last several months Methodius focus on transforming its business. We are also committed to compliance and taking steps to invest in our compliance resources and processes.
Speaker Change: Regarding compliance method has disclosed that the company has received a subpoena from the SEC seeking documents and information.
Speaker Change: We take all compliance matters seriously and are cooperating fully.
Speaker Change: While we are limited in what we can say about this matter we are committed to transparency won't keep you informed.
Speaker Change: Lastly for fiscal year 2025, we are reaffirming guidance for flat sales and raising adjusted pre tax income guidance to approximately breakeven.
Speaker Change: I spend a tremendous amount of time traveling over the past quarter meeting with customers visiting our plants and talking about <unk> employees.
Speaker Change: I can share with great confidence that our team is clearly energized and the results from this quarter demonstrate that our business is heading in the right direction.
At this point I will turn the call over to Laura who will provide more detail on our second quarter financials.
Laura: Thank you John and good morning, everyone.
Speaker Change: I am very excited to join the <unk> team and thanks to John for his remarks. Please.
Speaker Change: Please turn to slide 10.
Speaker Change: The second quarter net sales were $292 6 million compared to $288 million in fiscal 'twenty four an increase of 2%.
Speaker Change: On a sequential basis sales increased 13% from the fiscal 'twenty five first quarter.
Speaker Change: As John referenced the company's typical fiscal year, it's 52 weeks, but occasionally requires an additional week in order for the fiscal year to end on the Saturday closest to April 30 up.
Speaker Change: The current fiscal year, ending May 32025 is a 53 week fiscal year with the additional week being included in this fiscal quarter, making it a 14 week period.
Speaker Change: The prior year second quarter as well as this year's first quarter or 13 week periods. As a result, the extra week contributed to our financial comparisons.
Speaker Change: And that's core to our sales of power products into data center applications grew both year over year and sequentially. We also saw some modest growth in EV sales sequentially. The quarter also benefited from our launch activity in Europe.
Speaker Change: Offsetting those strengths with the impact of the previously disclosed roll off of an EV lighting program in Asia that program ended towards the end of the last fiscal year and has had no sales this year.
Also creating a headwind with the market weakness for our lighting products in commercial vehicle and off road applications.
Speaker Change: First quarter adjusted income from operations was $14 3 million up $8 3 million from fiscal 'twenty four.
On a sequential basis adjusted income from operations improved $19 million from the fiscal 'twenty five first quarter.
Speaker Change: Please see the appendix for reconciliation of all adjusted measures to GAAP.
Speaker Change: The increase in adjusted operating income both year over year and sequentially was driven by the higher sales volume. In addition, we were able to significantly reduce our freight costs, particularly our premium freight due to the operational improvements that John described the increased volume also serve to improve our fixed overhead absorption.
Speaker Change: Yeah.
Speaker Change: Overall, our second quarter sales were on track with our full year expectations.
Speaker Change: Please turn to slide 11.
Speaker Change: Shifting to EBITDA, a non-GAAP financial measure second quarter, adjusted EBITDA was $26 7 million up $5 5 million from the same period last year on a sequential basis adjusted EBITDA improved $16 9 million from the fiscal 'twenty five first quarter.
Speaker Change: The adjusted EBITDA benefited both year over year and sequentially from higher sales and gross profit.
Speaker Change: It was also driven by lower selling and administrative expenses in both comparisons.
Speaker Change: Please turn to slide 12.
Speaker Change: Second quarter adjusted pretax income was $6 2 million up $3 8 million from fiscal 'twenty four.
On a sequential basis adjusted pre tax income improved $15 3 million from the fiscal 'twenty five first quarter.
Speaker Change: Compared to the prior year and the last corner adjusted pre tax income was driven by higher net sales and.
In addition, both comparisons benefited from lower freight while being partially offset by higher net interest expense.
Speaker Change: Second quarter adjusted diluted earnings per share increased to <unk> 14 from <unk> in the same period last fiscal year on a sequential basis. The adjusted earnings per share increased 45 from the fiscal 'twenty five first quarter.
Speaker Change: The second quarter adjusted EPS included a tax expense due to the guilty tax treatment on foreign earnings, which was offset by various tax benefits.
The result was approximately zero adjusted tax expense in the quarter.
Speaker Change: Overall, our second quarter adjusted pre tax income was slightly ahead of our full year expectations.
Speaker Change: Turn to slide 13.
It was up $9 7 million from the prior year and we.
Speaker Change: We ended the quarter with $97 million in cash down $64 5 million elevated program launch activity drove higher inventory investment year to date. This was the primary use of cash year to date.
Speaker Change: Net debt.
Speaker Change: non-GAAP financial measure increased by $74 2 million to $243 6 million the.
Speaker Change: The increase was mainly due to the April mentioned use of cash despite the consumption of cash we were in compliance with all of our debt covenants at the end of the second quarter.
Please turn to slide 14.
Speaker Change: The second quarter's net cash from operating activities was a negative $48 million as compared to a negative <unk> 6 million in fiscal 'twenty for.
Speaker Change: The decrease of $47 4 million was primarily due to a sizable decrease in accounts payable related to the timing of payments between the first and second quarter as well as the 14 week period.
Speaker Change: Second quarter capital expenditure was $10 4 million as compared to $10 7 million in fiscal 'twenty for a slight decrease of <unk> 3 million.
Speaker Change: Quarter free cash flow, a non-GAAP financial measure was negative $58 4 million as compared to a negative $11 3 million in fiscal 'twenty four a decrease of $47 1 million.
Speaker Change: This decrease was mainly due to the accounts payable timing issue that I just described.
Speaker Change: Please turn to slide 15.
Speaker Change: Regarding forward looking guidance is based on management's best estimate and.
Speaker Change: And is subject to change due to a variety of factors as noted at the bottom of the slide.
Speaker Change: For fiscal 'twenty five we are reaffirming expected net sales to be similar to fiscal 'twenty four with the third quarter expected to be similar to third quarter of fiscal 'twenty. Four we are raising adjusted pre tax income guidance to be approximately breakeven.
Speaker Change: This raise is mainly a function of our outperformance in the second quarter.
Speaker Change: Please note that the adjusted pre tax income in the fourth quarter is expected to be significantly stronger than the third quarter with the third quarter potentially having a pre tax law.
Speaker Change: Please keep in mind that our third quarter is historically, our weakest quarter due to the holidays and customer shutdowns. In addition, it will be our first full quarter since the effective end of the GMT. One program and we are also seeing some near term auto market weakness just like others in the industry.
This fiscal year 'twenty, five guidance assumes depreciation and amortization of 60% to $65 million capex of $45 million to $55 million and tax expense of $13 million to $15 million.
Speaker Change: The reduction in Capex guidance is primarily related to the lower run rate year to date the.
Speaker Change: The increase in tax guidance is related to a higher valuation allowance for U S deferred tax assets, which was $7 5 million during the first half of the year.
Speaker Change: Looking further ahead to fiscal 'twenty or 'twenty six we are reaffirming expected net sales to be greater than fiscal 'twenty, five and pre tax income to be positive and notably greater from fiscal 'twenty five.
Speaker Change: That concludes my comments and we can open it up for questions.
Speaker Change: Thank you.
Speaker Change: At this time, we will be conducting a question and answer session.
Speaker Change: If you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Speaker Change: You May press Star two if you would like to remove your question from the queue.
Speaker Change: Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment, please while we pull for questions.
Speaker Change: Thank you.
Speaker Change: Our first question is coming from John <unk> with Sidoti and company. Your line is live.
Speaker Change: Good morning, everyone and thanks for taking the questions.
Speaker Change: Morning, Joe I was wondering if you could if you could quantify the impact of the extra week not only on the top line, but perhaps on operating results.
So John from a from a what we look at with the extra week is it's approximately $20 million worth of revenue.
Speaker Change: And then you would have that would have on the <unk>.
Speaker Change: Follow on operating results that go along with that.
Speaker Change: Okay those drugs got it.
Speaker Change: Good cost control.
Speaker Change: Measures impacted the second quarter results beyond the reduction in freight costs was there anything else that had a positive impact on operating income.
Yes.
Speaker Change: As we said we were seeing.
Saying.
Speaker Change: Extending of.
Overheads.
Speaker Change: We're also seeing improvements in our scrap activities. So.
Speaker Change: His execution driven activities that really are driving the performance execution focused activities that are driving our performance.
Speaker Change: Okay fair enough.
Speaker Change: And of the $50 million in new orders and how much was that directly related to new programs in the EV market versus other markets.
Well the majority of our launches are all in.
Speaker Change: All in these bonds.
Speaker Change: <unk> programs are empowered programs as we've talked about so the all of the awards are in.
In those areas as we said.
Speaker Change: Fair enough and then one last question and I'll get back into queue.
Speaker Change: In regards to the improvement in the data center market can you kind of quantify what kind of impact that is up year over year or any other way.
Speaker Change: Kind of puts it all in context.
Speaker Change: So.
David Dennis: David Dennis centers, or roughly 3% to 5% of our total sales and what we're seeing.
David Dennis: We're about 50% year over year improvement.
David Dennis: It's above average margin for us and we're really excited about the opportunities that we see in that space going forward and trying to expand that business beyond the 3% to 5%.
Speaker Change: Okay fair enough I'll get back into queue. Thanks for taking the questions.
Speaker Change: Thanks for the question Sean.
Speaker Change: Okay.
Speaker Change: Thanks Keith.
Speaker Change: Our next question is coming from Luke junk with Baird. Your line is life.
Luke Junk: Thank you for taking the questions and good morning.
Speaker Change: I wanted to circle back just to the pre tax income walk into third quarter I appreciate it or the things that you should I'm just wondering if there's anything else that we should be accounting for in terms of things that may have been temporary.
Speaker Change: The current quarter beyond the inventory reserve.
Speaker Change: Any impacts that we should think about from that extra week that have an outsize bottomline impact either John.
Speaker Change: Hey, Luke as John Good morning, I'll take the first piece, if lower wants to add color to what you can.
Speaker Change: Yes.
Speaker Change: There were not other than the extra week there were not.
Speaker Change: One off positive performance things.
Speaker Change: Q2.
So as we think about Q3 and as we talk about the perspectives with regard to Q3, it really comes down to.
It's our latest.
Speaker Change: Our lightest revenue quarter.
Speaker Change: So.
Speaker Change: We feel confident about the base performance of the business, where we are in the progress that we're making but we need to be transparent with our investors that Q3 is a challenging quarter, just because of the holiday periods around the world.
Speaker Change: Not because of something else, one off or something else special within method.
Speaker Change: Okay.
Speaker Change: Then switching gears here.
Speaker Change: If you'd be able to comment just where we stand from a.
Speaker Change: Launch standpoint, right now in other words, Youre anticipating 30, plus launches. This year just how many of those are already in motion versus what remains to execute and maybe if you could just remind us of the weighting to Europe and risk of any launches slipping to the right on geographically specifically.
Speaker Change: So.
Speaker Change: From a from a launch standpoint, many of them are.
Speaker Change: Capital is on the floor.
Speaker Change: Moreover in final.
Speaker Change: Shipment phase or we're in ramp up phase.
Speaker Change: The these.
Speaker Change: These launches are mainly between North America and EMEA.
Speaker Change: And they are split.
Speaker Change: Relatively equally.
Speaker Change: The what we do see is we do see certain customers, particularly on EV programs, where they may delay. The they may delay the started their programs in a program cancellations, but it is exactly when they strike those ramp up so we're working and we're working with our customers from the standpoint of making sure that we've got transfer.
Speaker Change: Currency on when exactly they start and how do we how do we manage our pipeline of inventory and some of what we've talked about here with regard to the <unk>.
Speaker Change: Uses of cash, but also what do we do to support our customers there.
Speaker Change: I don't know if youre able to make any specific comments relative to.
Speaker Change: The lantus, but obviously it really important launch customer this year any color there it would be great as well as possible.
Speaker Change: So.
Speaker Change: <unk> is as we've talked about <unk>.
A very important customer for us as as we get the programs ramped up though there'll be one of our largest customers.
Speaker Change: Over $200 million Rev.
Revenue customer for us.
Speaker Change: The.
We do see some.
Speaker Change: If you will.
Speaker Change: Some timing shifts and that's been that's been publicized by them that they're taking their time with regard to their EV launches. So it's not new news.
Speaker Change: But what we see is.
Speaker Change: We're not.
Speaker Change: One EV programs are at 20% of total methods. So we're not overly exposed to EV programs and we're not overly exposed to still answers, we're pretty comfortable with our balance on the different oes.
Speaker Change: So Australia is an important customer to us we stay in very close contact with them and we feel good about where that business is growing but we do watch it closely.
Speaker Change: Got it and then lastly, just on data center, a couple of maybe clarifying items. One can you just help us understand within that 3% to 5% overall exposure industrial segment versus interface and then in terms of the.
Speaker Change: Strong year over year growth are you seeing any AI related.
Speaker Change: And that business or would you say this is more of a core data center, that's driving improvement. Thank you.
Speaker Change: So so.
Speaker Change: As we said it is a relatively small portion of the total.
Speaker Change: Fairly significant year over year growth and we do see both AI and just overall data center growth.
Speaker Change: And what we're exploring right now and when I spend quite a bit of quite a bit of time on is water additional opportunities, where we can use our capabilities more fully to <unk>.
Speaker Change: Actually expand this space.
Speaker Change: Got it I will go ahead and leave it there. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your telephone keypad.
Speaker Change: Our next question is coming from Gary <unk> with Barrington Research Your line is live.
Gary: Thank you good morning.
Speaker Change: Hello, and welcome Laura.
Speaker Change: Good morning, Gary.
Couple of questions initially a little nitpicky.
Speaker Change: Interest expense looked like it was up sequentially.
Speaker Change: Almost all.
Speaker Change: $1 4 million.
Speaker Change: Dollars.
Speaker Change: Was there any one time.
Speaker Change: Expenses in that interest expense number or is that going to be the run rate at $6 2 million per quarter for the remainder of the year.
Speaker Change: Yes that should be the run rate.
Speaker Change: But as that debt does decrease obviously it will go down some.
Speaker Change: Okay.
Speaker Change: And then could you.
Speaker Change: It was a.
Speaker Change: You mentioned something about an inventory reversal.
Speaker Change: Reserve reversal in interface.
Speaker Change: Could you quantify that for us.
Speaker Change: Yes, the inventory reserve reduction in the interface segment was approximately <unk> 5 million.
Speaker Change: 100, <unk> great. Thank you.
Speaker Change: So you mentioned one of the positive aspects of the quarter was.
Premium freight costs are down substantially which is great news.
Speaker Change: Have you reached.
Speaker Change: Here, where you feel that your premium premium freight costs are now more normalized.
Speaker Change: Or is there still room to improve that.
Speaker Change: That metric and if you could could you maybe share how much premium freight was down.
Speaker Change: Okay.
Speaker Change: So the answer Gary is no we're not in a normalized period, both from a premium freight and from a scrap perspective, we're continuing to drive additional.
Speaker Change: Additional improvement there.
Speaker Change: The.
Speaker Change: Yeah.
Speaker Change: In the quarter, we had we had $7 million worth of premium freight.
Speaker Change: And we're.
We're working through.
Speaker Change: Move that down sequentially.
Speaker Change: And.
Speaker Change: As we've said in the past.
Speaker Change: The team, particularly in Mexico.
Speaker Change: I'm, sorry, I misspoke, it's a $7 million reduction quarter over quarter.
Speaker Change: Okay.
Speaker Change: I apologize.
Speaker Change: But.
Speaker Change: The teams both around the world, where particularly the team in Mexico has done a very good job of getting their business stabilized from where we were.
In fiscal 2024.
Speaker Change: And from a scrap and premium freight perspective.
Speaker Change: We would expect to see continued improvement both in EMEA and in.
Speaker Change: North America with regard to how we execute.
Speaker Change: There.
Speaker Change: We've got some additional work going on with regard to.
Speaker Change: Some pretty in depth workshops to try to drive improvement in both Egypt and in Mexico that will drive scrap down and will continue to drive premium breakdown.
Speaker Change: Okay. That's all good news.
Speaker Change: I just wanted to talk about some of these program launches, particularly what's Atlantis, but.
Speaker Change: First of all beyond the Lantus could you maybe talk about where some of this new business is coming from what Oems.
Speaker Change: So.
Speaker Change: Gary as you know in total program until the program is in production we're not allowed.
Speaker Change: <unk> allowed to name customer names okay.
Speaker Change: But it's balanced it's balanced between.
Speaker Change: Sure.
Speaker Change: If you will the European Oems, North American Oems as well as Japanese Oems.
Speaker Change: That's as much detail as I'm able to give you at this point from stuff that Hasnt started production yet.
Speaker Change: Okay.
Speaker Change: And it's both launches are primarily split between.
Speaker Change: Europeans are the European market and the North American market again with the different nameplates that I mentioned to you where the different reason regional comp.
Companies that I mentioned to you.
Speaker Change: But the teams around the world are working to try to make sure that both launches go well.
Speaker Change: Okay. So let me ask a question for you a question to you this way John.
Speaker Change: My follow other companies that are dealing with the EV market.
Speaker Change:
Speaker Change: They put together there.
Speaker Change: Their projections on what.
Speaker Change: But at least some of the companies on what they can do to that particular OEM based on what the OEM is telling them. They think their production levels are going to be.
Speaker Change: And then.
Speaker Change: We're starting to see slippage in the EV market.
Speaker Change: Yes, obviously those projections come down as we go through the year. So could you maybe.
Speaker Change: Could you maybe go through a sequence of how you're determining what your potential sales, we're gonna be meaning we're taking the raw numbers from.
The OEM on what they think their production levels are or just give us some some insight into that because it just appears to me that theres. So many evs coming out in the market.
Speaker Change: But.
They're not really getting purchases as quickly as they had been in the past.
Speaker Change: Yes, yes.
Speaker Change: As we've said in the past.
Speaker Change: So let me talk about how we think about this first.
Yes.
Speaker Change: It's.
Speaker Change: Easy to get focused because of the pressures so focused on just north American EV penetration, while recognizing that we are selling into.
Speaker Change: And the customers in the U S in Europe and in China. So when you think about.
Speaker Change: Electric vehicle market penetration in the U S. It's about 9% in Europe, It's 21, 22% and then China is 27%. So those take rates are in.
Speaker Change: The market penetration.
Speaker Change: Changes depending on the region. So as we talk about launches both in European and North America, We're not we're not as we're not solely exposed to the north American market.
Speaker Change: That's part number one secondly, we don't just take the customer the customer volumes as they give us they give them to us certainly we use that as a consideration that we look at.
Speaker Change: The sources of expert data, if you will whether it's global global insights or IHS or others to try to to try to check.
Speaker Change: What is the retailing us what do we what do we read in the press.
Speaker Change: As well as what are the global experts are saying and we sensitize than the ramp up the timing the overall volumes and therefore, what do we what do conversations do we need to have with customers and what do we have to do with with regard to our inventory plans as well as to our Capex plans.
Speaker Change: That's how the approach that we're taking Gary as we.
Speaker Change: We validate or we sensitize the customer data with third party data as well as our own subject matter expertise.
Speaker Change: Try to then work with customers to make sure that we're covering our inventories and that we are scaling the capital appropriately.
Speaker Change: Okay. That's very helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: We have a question from John <unk> with Sidoti <unk> Company. Your line is live.
Speaker Change: Yes, I'm just curious is there any changes in your <unk>.
Speaker Change: Commercial vehicle.
Assumptions in the coming year versus three months ago.
John: John Thanks for the question.
John: Like we just said with regard to the Evs, we we rely on.
External forecasters like acte for our commercial vehicle and in 2024 is a decline year over year in 2025 is still down and what we're seeing is we're seeing some positivity toward if you will towards the end of calendar year, 2025, which would be the middle of our middle of our fiscal.
John: Year.
John: The what.
John: What we have done.
John: So so.
It hasnt changed materially over the last quarter.
John: But what we are doing is were.
John: Spending a lot of time trying to reinvigorate.
John: Deepen our relationships with the customers and I am headed out to the west coast to visit a couple of customers.
John: Before the holidays here.
John: And we're really seeking to make sure that.
John: All of the relationships that we have on the commercial vehicle side are as robust as possible.
John: We had customers visiting us and Europe to our facilities in Europe, a couple of weeks ago I had the chance to be there at the same time and we will be seeing customers on a couple of weeks on the CV side. So.
John: The CV business is cyclical and it's got a little different cycle than the past car space.
There there are cycles are more dramatic peak to trough than what we see in the past car space, but.
John: They're a very important customer base for us.
John: We look forward to growing with our CV customers overtime.
John: Okay.
Speaker Change: And you touched on Mexico, a few seconds ago.
Speaker Change: Where are we in that process of fixing operations in Monterrey is that.
Speaker Change: Kind of how much more is that a golf you kind of talk through what's going on there.
Speaker Change: So I guess, what I would say to you is there is a difference between fixed and improve.
Fix would fix it would imply that.
Speaker Change: A relatively uncontrolled set of activities, where improve as more of a controlled set of activities.
The team in Mexico have been.
Speaker Change: It's the one place I'd been two twice in my in my tenure.
Speaker Change: And the majority I said to you that we had premium freight reduction on a quarter over quarter basis of $7 million a majority of that premium freight reduction was in Mexico. The team. There has done a very good job of getting from fix into improve theres, a long way to go from an improvement standpoint, but.
Speaker Change: The leadership team down there.
Speaker Change: Our global organization with some specific outside health is really continuing to drive progress. There. So it's it's less about if you will an uncontrolled set of problems and more about control opportunities down there does that makes sense to you John.
Speaker Change: Yes.
Speaker Change: I get it.
Speaker Change: Fair enough and one one other question your reduction in the Capex spending does that represent just lower.
Speaker Change: Required spending or change in the timing of that spending from some niches to next year.
Speaker Change: Some of some of both.
Speaker Change: As I said to you as we look at customer as we look at EV programs or we look at customer needs. So part of it.
Speaker Change: Part of my background, and you and I haven't had a lot of chance to talk about this but part of my background has operations in what we do with all of these programs as we look at what was the initial capital assumption and where our opportunities for capital efficiency.
Speaker Change: We.
Speaker Change: We've done a lot withdrawn driven a line of productivity in a couple of areas SMT being one of them, where we havent needed to make investments that were originally planned. So some of it is us.
Speaker Change: Is actually capital reduction capital spend reduction and others. Other others of it are timing change based on where our customer programs go.
Speaker Change: Alright, and I guess, one last question too to BARDA everybody here.
Speaker Change: Cash outflow.
Speaker Change: It's kind of a sizable in the quarter.
<unk> be able to recapture that with cash inflows by the end of the fiscal year or will be a net cash outflow year.
Yes, we are certainly looking to reverse some of that cash outflow in the next two quarters.
And we certainly expect to be approaching new truck.
Speaker Change: Fair enough perfect. Thank you very much.
Speaker Change: Thank Keith.
Speaker Change: As we have no further questions on the lines at this time I would like to hand, the call back over to Mr. <unk> for any closing comments.
Speaker Change: Yes. Thank you operator, and thank you to everybody who joined US on the call today. Thanks for your interest and for your questions. We look forward to.
Speaker Change: Updating you on our Q3 call and once again, we appreciate all your interest in the company.
Speaker Change: Okay.
Speaker Change: Thank you ladies and gentlemen, this does conclude today's call and you may disconnect. Your lines at this time and we thank you for your participation.