Don Duda - Director, President, Chief Executive Officer Ron Tsoumas - Vice President of Corporate Finance, Chief Financial Officer.

Christopher Van Horn - B. Riley FBR David Leiker - Robert W. Baird & Co. David Wetherell - Oberweis Asset Management Ryan Sigdahl - Craig Hallum Capital Group.

Welcome to the Methode Electronics fiscal year 2018 fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

This conference call does contain 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 a safe harbor protection provided under the securities laws.

Methode undertakes no duty to update any forward-looking statements to conform the statements to actual results or changes in Methode's expectations on a quarterly basis or otherwise. Forward-looking statements in this conference call involve a number of risks and uncertainties.

The factors that cause these actual results to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission, such as our annual and quarterly reports.

Such factors may include, without limitation, the following, dependence on a small number of large customers, including two large automotive customers, dependence on the automotive, appliance, computer and communication industries, investment in programs prior to the recognition of revenue, timing quality and cost of new program launches, ability to withstand price pressure, including pricing reductions, currency fluctuations, customary risks related to conducting global operations, ability to successfully market and sell to Dabir Surfaces, dependence on our supply chain, income tax rate fluctuations, dependence on the availability and price of raw materials, fluctuations in our gross margins, ability to withstand business interruptions, ability to keep pace with rapid technological changes, breach of our information technology systems, ability to avoid design or manufacturing defects, ability to compete effectively, ability to protect our intellectual property, successfully benefit from acquisitions and divestitures, recognition of goodwill impairment charges, significant adjustments to expense based on the probability of meeting certain performance levels in our long-term incentive plan, success of Pacific Insight and Procoplast and/or our ability to implement and profit from new applications of the acquired technology and costs and expenses due to regulations regarding conflict materials.

It is now my pleasure to introduce your host, Don Duda, President and Chief Executive Officer of Methode Electronics..

Thank you Sherry and good morning everyone. Thank you for joining us today for our fiscal 2018 fourth quarter and full year financial results conference call. I am joined today by Ron Tsoumas, our Chief Financial Officer. Both Ron and I have comments and afterwards, we will take your questions.

First, I would like to congratulate Ron on his well-deserved promotion to Chief Financial Officer. He is a 34 year veteran of the company and is well suited to lead our finance team as CFO. Moving on to review the financials. Year-over-year, fiscal 2018 sales increased 13.3% in the fourth quarter to $29.3 million.

Fiscal 2018 sales improved 11.2% to a record $908.3 million. Earnings per share increased to $0.98 from $0.62 in the fourth quarter of last year. In the fiscal 2018 fourth quarter, the company recognized a tax benefit of $10.5 million or $0.28 per share related to foreign investment tax credits and a change in the provisional estimate related to U.S.

tax reform. For the year, earnings per share decreased to $1.52 from $2.48. In fiscal 2018, the company recognized a tax charge of $53.7 million or $1.43 per share due to the enactment of the U.S. tax reform.

The fourth quarter and year benefited from higher sales in the automotive and power product segments, increased international government grants and lower legal fees. The full year also benefited from lower expense for stock award amortization and the gain from the sale of exclusive rights for a licensing agreement.

The fourth quarter and year were negatively impacted by higher wages and compensation, travel and intangible asset amortization expense, increased investment in Dabir, customer price reductions and unfavorable commodity pricing.

The year was also negatively impacted by acquisition related expenses and purchase accounting adjustments, unfavorable currency impact and the absence of commodity pricing adjustments and one-time reversal of accruals in the automotive segment in fiscal 2017.

Compared to last year, consolidated gross margins decreased 20 basis points in the fourth quarter to 24.9% and 30 basis points in the full year to 26.4%. In both periods, margins were negatively impacted by sales mix related to newly acquired businesses in the automotive segment.

Full year margins were also negatively impacted by purchase accounting adjustments, unfavorable currency impact, price reductions, higher commodity pricing and the absence of the commodity pricing adjustments and reversal of customer commercial accruals in the automotive segment in fiscal 2017.

However, in both periods, this was also partially offset by a favorable sales mix in the interface segment and higher sales volumes in the power product segment. Year-over-year, fiscal 2018 fourth quarter selling and administrative expenses increased due primarily to expenses from new acquisitions and increased expenses for wages and travel.

This was partially offset by the absence of expense related to operating units exited at the end of fiscal 2017. For the full year, selling and administrative expenses increased year-over-year due mainly to M&A expense, selling and administrative expenses from acquisitions and higher wages and travel expenses.

These increases were partially offset by lower legal and stock award expense and the absence of expense related to operating units exited at the end of fiscal 2017. Year-over-year fiscal 2018 fourth-quarter pretax was $30.8 million compared to $27.8 million in the previous year.

Fiscal 2018 pretax income was a record $123.8 million compared $115.9 million in fiscal 2017. Fourth quarter operating margin was 11.1% this year compared to 11.8% in the fiscal 2017 fourth quarter. Fiscal 2018 operating margin was 13% compared to 13.6% for fiscal 2017, mainly due to acquisition costs. Moving on to a review of our segment results.

Year-over-year, automotive segment sales increased 17.6% in the fourth quarter and 15.3% for the full year due to sales from Procoplast and Pacific Insight acquisitions, favorable currency impact, higher customer funded tooling and design fees and increased hidden switch sensor and user interface product volumes.

In both periods, these improved sales were partially mitigated by lower transmission leadframe assembly and steering angle sensor product volumes and price reductions.

Year-over-year, automotive gross margins declined 180 basis points to 25.6% in the fourth quarter and 120 basis points to 27.7% for the year due to sales mix related to newly acquired businesses, unfavorable currency impact and price reductions.

The full year was also negatively impacted by acquisition related purchase accounting adjustments and the absence of the commodity pricing adjustments and one-time reversal of accruals related to customer commercial issues which occurred last year. Moving to interface.

Year-over-year segment sales decreased 9.2% in the fourth quarter and 9.1% for the year driven mainly by the exit of the Connectivity, which contributed $2.9 million in the fourth quarter and $15.5 million last year and decreased legacy product sales in Asia, which were $300,000 less in the fourth quarter and $1.4 million less for the year over fiscal 2017.

In both periods, these decreases were partially offset by improved radio remote control sales. Compared to last year, interfaces gross margins increased 290 basis points to 21.7% in the fourth quarter and 90 basis points to 21.8% for the year due to improved radio remote control sales partially offset by price reductions.

Fourth quarter gross margins were also negatively affected by an unfavorable currency impact. Fourth quarter Hetronic litigation costs were $2.1 million this fiscal year versus $2.8 million last year. In total, these costs were $8.1 million in fiscal 2018.

We anticipate litigation cost to be $4 million to $5 million for fiscal 2019 with the majority to be incurred in the first half of the year as we currently anticipate litigation ending in fiscal 2019.

In our power product segment, sales increased year-over-year by 12.2% in the fourth quarter due to higher PowerRail sales and busbar sales in North America and Asia.

Segment results also improved year-over-year by 12.3% mainly due to higher power connector volume and increased busbar volume in Asia, partially offset by lower busbar volumes in North America.

Year-over-year segment gross margins in the fourth quarter increased 240 basis points to 30.4% and 40 basis points for the year to 27.2%, primarily due to higher sales, partially offset by increased copper prices.

As we announced in the release this morning, Methode anticipates fiscal 2019 sales in the range of $950 million to $970 million, pretax income in the range of $127 million to $134 million and earnings per share in the range of $2.81 to $2.96.

Fiscal 2019 guidance considers price reductions of approximately $14 million on purchase displays negotiated by a customer in the automotive segment as discussed last quarter, a significant amount of previously announced automotive new business not launching until late fourth quarter of fiscal 2019, the delayed launch to fiscal 2020 of a [laundry][ph] program in the interface segment which results in lower than anticipated revenues of $7 million in fiscal 2019 and pretax expense of approximately $6.5 million for initiatives to reduce overall costs and improve operational profitability with most of that expense to be incurred in the first three quarters.

The guidance ranges for fiscal 2019 are based upon management's expectations regarding a variety of factors and involve a number of risks and uncertainties which have been detailed in this morning's release and Form 10-K.

I want to talk briefly about the expenses we will occur this year to reduce overall costs and improve operational profitability and margins. As a matter of practice, Methode develops and undertakes initiatives that enable us to serve our customers better at lower operating costs.

Among other benefits, rationalizing our expenses increases our cash flow which enables us to make investment that can have a positive impact on our growth. These actions are designed to improve efficiency while reducing organizational complexity.

At this time, I am unable to provide any more details on these initiative but will do so on our second quarter call. Before moving onto new business wins, I want to provide some insight as where we currently stand in our 2020 EBITDA target with the start of fiscal 2020 now approximately 10 months away.

First, the expenses associated with the Hetronic litigation, which we currently expect to end this year, as well as the initiatives to reduce overall costs and improve operational profitability will not reoccur in fiscal 2020.

Additionally, we see the benefits from these cost initiatives next year plus a full year of the new automotive programs launching late in the fourth quarter of this fiscal year and the benefit of the launch of the delayed laundry program previously discussed and a significant increase in our eBike business and sales growth in our Dabir, Hetronic and power businesses, all of which would contribute to a successful 2020.

As far as new business in the fourth quarter, leveraging our expertise in overhead consoles and our TouchSensor technology, we booked an overhead console or roof module as it's known in Europe with Volkswagen for average annual revenue of $16 million for six years beginning in fiscal 2021.

This overhead console encompasses not only the typical LED lighting, ambient lighting, switches and [indiscernible] slider but also an integrated digital microphone.

Additionally, our European automotive group booked hidden and ergonomics works programs for premium vehicles for $2.5 million in average annual revenue for five years beginning in fiscal 2020 and another $1.5 million average annual revenue for five years beginning in 2021.

In interface, our TouchSensor team, a supplier to Coca-Cola for over 15 years was awarded the integrated lighting on Coca-Cola soda dispensing machines designed to attract customers and offer unique look.

Launching later this fiscal year and running for several years, this backlit brand labels the first of several lighting-only opportunities that TouchSensor group is pursuing coordination with our Pacific Insight division. Now let's move on with an update on Dabir.

Since the third quarter, Dabir added two new health system customers for a hospital in Greenville health system. Additionally, successful clinical evaluations were completed at six hospital sites and new clinical evaluations began at five others.

Dabir now has extensive experience managing clinical evaluations in critical care units, diagnostics areas, MedSurg units and a variety of perioperative specially areas including cardiovascular, neurology, transplant, colorectal, plastic, oncology and post-anesthesia care.

The 2018 conference season kicked off this spring with Dabir participating in several national congresses including the Association of periOperative Registered Nurses and the -American Organization of Nurse Executives.

Dabir's Chief Clinical Officer delivered continuing education units to over 300 OR nurses at eight sessions entitled pressure injury prevention throughout the continuum of perioperative patient care. These continuing education sessions enable Dabir to drive collaboration with the customers and prospects and more sessions are scheduled.

Dabir's publication strategy is on tired target delivering a peer-reviewed special report on pressure injury prevention last month. Now I will turn the call over to Ron who will give further details regarding our financial results..

Thank you Don. Good morning everyone. I have a few brief comments on the quarter and full year period. Before I begin my commentary, I want to clarify that my comments include seven months and nine months of results for our acquisitions of Pacific Insight and Procoplast respectively.

The company's effective tax rate was 54% for the fiscal year ended 2018 based on a tax expense of approximately $67 million. This higher tax expense was a result of a few significant events that occurred during the year. First, the U.S. enacted the Tax Cuts and Jobs Act in December 2017.

This resulted in a total tax reform charge of approximately $54 million or $1.43 per share for the year. This charge is comprised of two components. The tax toll charge of $49 million, which was primarily related to accumulated overseas profits and the remaining $5 million was due to the remeasurement of net deferred tax assets.

In addition, the company recorded a discrete tax benefit of $7.4 million related to investment tax credits resulting from a tax law change in a foreign jurisdiction which occurred in the fourth quarter. U.S. tax reform reduces the statutory U.S.

federal tax rate from 35% to a blended 30% for 2018 and will further be reduced to 21% for fiscal year 19 and beyond. For the fourth quarter, the company reported an effective tax rate benefit of 19%.

This was primarily driven by the benefit from the tax law change in the foreign jurisdiction of $7.4 million and a tax expense reduction to the provisional estimate for U.S. tax reform of $3.1 million. The two adjustments combined to $10.5 million or $0.28 per share.

Without these two discrete tax items, the fourth quarter tax rate would have been 14.6%. For the full year of fiscal 2018, the company's effective tax rate excluding the impact of tax reform charge and the foreign tax law benefit mentioned above would have been 16.4%.

The provisional estimates and the adjustments in the fourth quarter of tax reform were based on the company's preliminary analysis. The changes included in tax reform are very broad and complex.

The final impacts of the tax reform may differ from the amounts estimated thus far due to, among other things, changes in the interpretation of the tax reform act and legislative guidance.

The company currently anticipates finalizing and recording any resulting adjustments within the one year allotted remeasurement period which will occur in the third quarter of our fiscal 2019.

We anticipate that our effective tax rate will normalize for fiscal year 2019 and we estimate the full year effective tax rate to be in the range of 16% and 18%. Turning our attention to SG&A.

You will note that in the fourth quarter SG&A, including intangible amortization, as a percentage of sales was 13.8% as compared to 13.3% in the prior year or an increase of $5 million. During the quarter, we had increases of $3.8 million of selling and administrative costs and $1.4 million of intangible amortization from our new acquisitions.

We also experienced increases in wages and travel of $1.1 million and $0.5 million, respectively.

The increases were partially offset by the absence of $900,000 of expense related to our connectivity and active energy systems reporting units exited in Q4 of fiscal 2017 and lower legal and stock-based compensation expense of $500,000 and $400,000, respectively.

For the full year of fiscal 2018 SG&A, including intangible amortization, as a percentage of sales was 13.3% as compared to 13.2% one year ago or $13.8 million higher.

This was driven primarily of $6.8 million of acquisition related expenses, $9.4 million of additional selling and administrative expenses from our two acquisitions and $3.3 million of associated intangible amortization. We also incurred increases in wages and travel of $7.8 million and $1.5 million, respectively.

The increase was offset in part by the $6.9 million reversal of performance-based stock awards in 3Q, lower legal fees of $2.8 million and the absence of $3.8 million of expense related to our connectivity and active energy reporting units which we exited in fiscal 2017 fourth quarter. Moving to capital expenditures.

In fiscal 2018, we invested $47.7 million, which was in line with our previous guidance of $44 million to $48 million. We are estimating our capital investment for fiscal 2019 to be in the $52 million to $58 million range.

Depreciation and amortization expense for fiscal 2018 was $28.1 million, which was in line with our guidance of $28 million to $30 million. For fiscal year 2019, we expect depreciation and amortization to be between $34 million and $36 million. Shifting to EBITDA. The company generated $39.5 million in the fourth quarter or 15.9% of sales.

For fiscal 2018, EBITDA was $152.8 million or 16.8% of sales. For fiscal 2019, we expect EBITDA to be between $161 million and $170 million or in the 16.5% to 17.5% of sales range. Free cash flow for fiscal 2018 was stated at $37.6 million.

Adjusting for the $53.7 million tax reform charge and the discrete foreign tax credit of $7.4 million, free cash flow would have been $84 million. Please note that the transition tax for U.S. tax reform is payable over a eight year period and is back-loaded. We expect fiscal 2019 free cash flow to be between $85 million and $90 million.

Don, that concludes my comments..

Ron, thank you very much. Sherry, we are ready to take questions..

[Operator Instructions]. Our first question is from Christopher Van Horn with B. Riley FBR. Please proceed with your question..

Good morning. Thanks for taking the call..

Good morning..

I was hoping you could comment on Procoplast and Pacific Insight and where we are in the integration and kind of your vision of getting to kind of improving the margin structure there and getting it more into the Methode line of margins? And then maybe comment on any revenue or cost synergies that you see really you can take advantage of?.

Sure. We are knee-deep in integrating the back-office functions where we see some near-term benefits from that. Most of the action we are taking are on our deck for this year.

Procoplast, in particular, we need to get the cost of quality in line with ours and we are taking significant actions to do that and I would anticipate that we will make significant progress this year with them.

Without being specific to customers, Procoplast has their ongoing customer relationships, has afforded us a number of RFQs, nothing that we won but certainly we are seeing more opportunities there than that we would have without Procoplast. So that is proceeding as planned and integral to our earnings this year and also to 2020.

Moving on to Pacific Insight, I would say the same. That's a larger operation. So there is much more going on in the production areas which Methode excels at. I think the team has identified a number of areas that they can reduce costs in. We do have to be sensitive to our customers.

They have to approve the changes we want to make as we do in any of our automotive lines. So that's proceeding. We are seeing more opportunities with them. I talked about TouchSensor. That's a minor win, but it does demonstrate that our teams are working together to garner business.

Pacific Insight has been slightly impacted by some of the changes at Ford. And we have taken that into account. They are much more heavily weighted towards passenger cars. Right now they did win the F-150, but that hasn't launched yet.

So they have been affected by that and we pretty much took that into account when we looked at their projections and when we priced the purchase of that. So there are really no surprises there but we did have to take that into our guidance. But, again, I would say that's going as planned.

So in summary, that is our mission in fiscal 2019 is to get them to our standard margins because while they are impacting positively our income and our sales, they are affecting margins because of the mix there..

Got it. Thanks for all the detail there.

And then from a macro perspective, have you guys looked at the potential and I know it's early and I know we don't really anything done yet, but have you looked at the potential impact of a NAFTA tariff or in addition, have you looked at any impact from the Chinese tariffs as well?.

Well, from a macro level we have. We really have to wait for the fine print on all of those from a tariff standpoint. We have sketched out contingency plans but it really will be dictated, Chris, by our customers. They will tell us what they want us to do. And that's all I can comment on. It's just really sales. We just have to wait and see what happens.

NAFTA, again, we operate as maquila. So there is some benefit there, but again if the tariffs are put on then that would affect us as well. But that's about as far as I can go with that..

Okay. Got it. And then lastly for me. The radio remote control had some good strength in the quarter. Could you just comment on what you are seeing on there? And then maybe a little bit of a follow-on. It seems like transmission leadframe volumes are declining in both Asia and North America.

And I just wondered, was that a program roll-off and are there opportunities maybe to, if that is the case, are there opportunities to backfill that? Thanks..

Yes. Let me answer that one first. That leadframe goes into passenger car transmission. So we are going to be at the mercy of what the customers - and we are Tier 2 on that to Continental. So that's going to ebb and flow with pass cars. That has that not been announced but that's going end-of-life. It's been on a long run.

Transmission program has run a long time, but that's just normal fluctuations in business. But there are also some price reductions in there to, which off the top of my head, I don't recall what those were, that contributed to a decline there. But we have seen that in the past.

As far as Hetronic, I have to give the Hetronic team a plug here because they have done an excellent job of reducing their costs, introducing new products, reducing their inventory and probably most importantly, reducing the lead time. And that's key in that business.

If you have a $0.5 million piece of machinery that you want to ship and you don't have radio remote control for it, well, you can't ship it but our team has jumped through hoops to improve dramatically, improve their on-time delivery plus shorten their lead times and that translates into more business.

Because those customers, they will pay the prices that we offer because of the lead time. It's not a pricing issue, it's a lead time issue often times and so I think the team has done an excellent job in that business and we are seeing that. And we believe we are going to continue to see it going forward..

Okay. Great. Thanks for the time..

Thank you..

Our next question is from David Leiker with Robert W. Baird & Co. Please proceed..

Hi. Good morning everyone..

Good morning David..

So some of this has been answered, but if you look at the automotive business, organically you are down 7%.

How much of that can be attributed to the leadframe business?.

We can get you that number. I don't want to guess, but I don't want to say it's significant but we would have to calculate that number..

Okay.

Because the broader question I was going to ask is, if you could fill in the blanks or details a little bit of that organic growth being negative 7% where you have been running mid to upper single digits here and then what that swing factor was in Q4?.

I am hesitating because I don't want to get in the customer specifics. I am trying to figure out how to answer that. Let's talk about Asia. Our steering angle sensor business was down there just as a result of customer demand. And then overall, our North American business was down with Europe being up.

But Dave, I can't get into specifics because I would end up talking about customer volumes and so on. But that's really, Europe was up, Asia is down because of steering angle sensors and as also mentioned leadframes and just U.S. volumes were less..

Let me come at it this way.

So if we looked at and for the sounds of it, it seems these are more customer mix or product mix related issues than business that's running off or new business that's slow to launch? Is that fair?.

Yes. It is, as I have often said, we cannot affect revenues other than to ship everything a customer wants in a given fiscal year. We are booking now for really 2021. So yes, it is demand. And the price reductions go into affect the first of the year. So you have to take into account price reductions at the beginning of the calendar year.

So all of that contributed to where we are..

Okay. As we look at the 2019 guidance, you male the comment, I am going to throw out the three things here and you can just fill in the blanks here. But you were talking about the automotive launches are backend loaded in the year.

Is that what they always were? Or have those been pushed back a bit?.

No. We went back and tracked and those has always been late in the year..

Okay.

The laundry?.

We will see the benefit of them in 2020..

Okay. And then the laundry --.

When I say late in the year, I mean --.

Okay. And then on the laundry side --.

That was a delay by the customer. We didn't lose any business. They just and not for any Methode or TouchSensor reasons, the customer delayed the launch. And so we are that occurred in our fourth quarter..

And then on the cost actions you are taking. It sounds like these are actions that are beyond what you would normally do for your typical cost reduction to offset price downs.

Can you just give a little background on what you are doing there and what's precipitated it?.

As I said, I really don't want to comment on specific actions because we are still sorting through exactly how we will implement some of those but those are across the board.

As we look at our businesses, we have acquired companies, we have exited companies, we felt that as we wind down the launch of a major program we looked at to how should we adjust our expenses, is probably a good way of putting it going forward. And we do want to reduce the complexity of Methode. You have seen us exit a couple of businesses.

So that's what that's geared to and we will see the benefit of that in 2020..

Okay. And then one last item. I appreciate the comments you made as it relates to 2020. If I recall correctly, last quarter, maybe the quarter before, that's a $200 million EBITDA number. It would seem to me like that's still intact.

Or is that something that we need to be looking at adjusting?.

No. That's really why I made that comment. I always give the disclaimer that it depends on what the auto market does and what the economy does but we anticipate the lawsuit ending. We are not going to reoccur the initiatives we just talked about. So there's a number of things that, if you do the math, gets close to that number.

And then we have to execute, of course, on improved sales, but it's not much of a gap as one might initially look at..

Well, it seems from the announcement that you have made over the last several years, most of the revenue that you need for that has already been booked in contract. So it's just a matter of some of these exogenous things, mix and build rates and things like that..

What's very interesting about the automotive business is that normally there is a predictability to it. You get some fluctuations based on the customer demands but our job for 2020 is to launch everything successfully, watch our expenses and then we do need to grow our non-automotive businesses which right now we are doing quite well.

As I mentioned earlier to Christopher, l am very pleased with what Hetronic is doing and power is having a very good year and Dabir our mission this year is to get multiple hospitals in our health system. So there is work to do but we are feeling very good about that..

And then just to close the loop on all of this, it sounds like the actions that you are taking now looking to 2020 are to help to offset some of these mix related issues that are headwinds.

So that jump from 2019 to 2020, part of it is already booked, the other part, some of these cost actions fill the gap that you are missing right now on the guidance?.

Yes. I couldn't say it better..

Okay. Thank you..

Thank you..

Our next question is from David Wetherell with Oberweis Asset Management. Please proceed with your question..

Good morning gentlemen. Thank you very much for your time and for taking the call this morning. I just have one very quick question and that is related to the price reduction scheme.

Without going into any detail, of course, with respect to terms of your contracts with your customers, do you get the sense, do you believe that you have seen increased purchase volumes and will see increased purchase volumes as a result of the price concessions you have given?.

That's a very good question. The automakers don't, as a matter of practice, tie cost reductions to new business. You have to remain what is referred to as green from a number of aspects.

You have to be launching well, be supporting the factories and routinely giving them cost reductions or price reduction opportunities and that's a heated negotiation every year, but in the end, why we do that is that we want to say in the favorable graces of the automakers.

And so we plan for that in our operations and generally it gets much harder towards the tail end of the program. We have been able to offset that with cost reductions in our own factories.

That's probably all I can say, if you don't do it, we are not going to book more business and that's, as I just said to David, one of the nice things about automotive is its predictability. One of the things that's not so nice is there is constant pressure for price reductions. And that's just part and parcel of being in the automotive business..

No. That's very helpful color. Thank you very much. Let me ask just one more related to that, if you don't mind, because your answer is a little bit of a question.

I was curious whether there is relationship building as well with that maintaining the positive relationship with the automakers and those price reductions, can you tell whether you believe it's tied more to the customers seeing competitive pressures across the industry or the fact that Methode has been hitting these very positive benchmarks along the way?.

I have been asked that question before. That pressure is constant and it is high pressure. So in good times the automakers looking for through the same reductions in bad times.

As I said, it's a fact of life in auto and for the most part we have good relationships with our customers, but it does get a little difficult when you are looking at price reduction because that takes the topline and the bottomline. Those are painful. I don't know about more I can say.

I suppose in certain instances there is more pressure, but for the most part, I would say it's constant and it's intense..

Okay.

So is it fair to say that the pricing reductions you have seen this year is in line with what you see on an annual basis?.

Yes, absolutely. We did comment last quarter and I commented in our prepared remarks is that one of our customers in North America negotiated a price reduction on displays. We don't make the display itself.

We become what, that's actually the display supplier becomes what's called a directed sub to us but then since that's part of our cost of goods sold, that price reduction is passed directly through to the customer.

So in this instance, we saw $14 million less revenue, not because of really anything in the marketplace or anything because of Methode, it's just the price reduction that the automaker received. So we do get those occasionally and I think the prior year was $25 million, if I remember it correctly.

So that's the other thing we take into account, not so much from a bottomline standpoint, but from a topline. So you get the cost reductions and I think I said, they are average for an auto supplier plus occasionally you get something like that and we usually call that out as far up in advance as we can..

Okay. Thank you very much. I sincerely appreciate your time again and the color you have offered on that. That's all I had..

Thank you..

Our next question is from Steve Dyer with Craig Hallum Capital Group. Please proceed..

Hi guys. It's Ryan Sigdahl, on for Steve. Just a couple of quick ones for us. You mentioned the Coke award. I didn't catch.

Did you give how big that award is?.

No. I didn't. As I was reading that I realized we didn't. It's sub $1 million. I just wanted to mention it because, one it's Coca-Cola, it is also involves our Pacific Insight group working with TouchSensor and we see that as an avenue for our TouchSensor group to garner more business. But it's sub $1 million.

It will run five, six, seven years, as I would expect..

And is there opportunity to grow it then? I know you said, I mean Coke is obviously big, $1 million a year.

Do you think you can grow that pretty meaningfully or is that the endgame there?.

No. I believe it can. That's really why I mentioned it. A good collaboration with the two groups, I like that. And just as lighting and the vehicle is very important today, point-of-sale is important and it's not necessarily easy to do and if you look at the interior of a vehicle, you need uniform lighting. Well, point-of-sale, it's very challenging too.

That's not something that you can go to a third-party that doesn't have expertise in lighting and just have them put some LEDs in the display. So you are right, we should be able to grow that area and again that's why I mentioned it..

All right. And then you guys have had an international government grant.

So do you expect anything in fiscal 2019?.

We apply for them. And we have had two years in a row, I believe. But that's something I can't guarantee because really we are dealing with a government entity and that's not an exact science, let's put it that way. But we certainly apply for it..

So safe to assume, nothing is included in guidance.

That would be incremental upside there?.

Yes. It would..

All right. Lastly, digging into the 2020 EBITDA target, $200 million. Don, you mentioned the need to grow non-auto business. Previously Dabir was a big part of that plan, but it seems like there is a bigger emphasis on power, Hetronic et cetera now.

Have expectations been lowered for Dabir and then offset by the other stuff? Or is the ramp still as it was before there? Thanks..

Yes. I would say that's equal. We mentioned power and Hetronic, I was thinking TouchSensor for a second, because they have had the issues in the past and we have taken corrective actions, both from a management standpoint and internally I spend a lot of time on Hetronic a few minutes ago. So us emphasizing them does not diminish Dabir.

It's just that those are integral to our plan and now they are starting to hit their stride and it was worth talking about. Dabir, this is a pivotal year for Dabir in that it needs to penetrate multiple hospitals in a system. The team has done a good job of one hospital that we just talked about Florida hospital.

Well, there is a number of hospitals in that system. We need to go beyond just having one hospital. So this is a critical year for Dabir. But if we going to 2020 and we are not where we need to be on Dabir, we have other contingencies there, but I don't mean to deemphasize Dabir, but I thought it was appropriate we talk about these other groups..

Great. And then actually one last one.

Just to confirm that 2020 target of $200 million, that's an organic number, right?.

Yes. That's all organic, yes..

All right. Thanks guys. Good luck..

Thank you..

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks..

Sherry, thank you very much and we thank everyone for listening today and have a good and safe summer. Thank you everyone..

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation..