Good day ladies and gentlemen and welcome to the Methode Electronics fiscal year 2020 first quarter conference call. For this quarterly conference call, the company has prepared a PowerPoint presentation, entitled Fiscal 2020 First Quarter Earnings, which can be found at methode.com in the Investor Relations section.

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 speaks only to as to 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 these statements to actual results or changes in Methode's expectations on a quarterly basis or otherwise. Forward-looking statements in this conference call include 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.

Number one, dependence on a small number of large customers, including two large automotive customers. Two, dependence on the automotive, appliance, commercial vehicle, computer and communications industries. Three, international trade disputes resulting in tariffs and our ability to mitigate tariffs.

Four, timing, quality and cost of new program launches. Five, the ability to withstand price pressure, including pricing reductions. Six, ability to successfully market and sell Dabir Surfaces products. Seven, currency fluctuations. Number eight, customary risks related to conducting global operations.

Nine, the ability to withstand business interruptions. Ten, recognition of goodwill impairment charges. Eleven, ability to successfully benefit from acquisitions and divestitures. Twelve, investment in programs prior to the recognition of revenue. Thirteen, dependence on the availability and price of materials.

Fourteen, fluctuations in our gross margins. Fifteen, dependence on our supply chain. Sixteen, income tax rate fluctuations. Seventeen, ability to keep pace with rapid technological changes. Eighteen, breach of our information technology systems. Nineteen, ability to avoid design or manufacturing defects. Twenty, ability to compete effectively.

Twenty-one, ability to protect our intellectual property. Twenty-two, success of Grakon and/or our ability to implement and profit from new applications of the acquired technology. Twenty-three, significant adjustments to expense based on the probability of meeting certain performance levels in our long-term incentive plan.

And twenty-four, costs and expenses due to regulations regarding conflict minerals. All lines are placed on a listen-only mode for today's call and the floor will be open for your questions and comments following the presentation. [Operator Instructions]. At this time, it is my pleasure to turn the floor back to your host for today. Mr. Don Duda.

Sir, the floor is yours..

Thank you Jess and good morning everyone. Thank you for joining us today for our fiscal 2020 first quarter 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. To start, I will ask you to turn to slide four.

Our strong first quarter results was improved record sales as well as record EBITDA were attributable to both sales growth and operational efficiencies. The automotive segment outperformed relative to the global automotive market which continued to be weaken during the quarter.

Importantly, the segment's organic revenue decline slowed to just 1.4% year-over-year below its level in four quarters versus a global automotive volume decline of about 10%. Additionally, we saw the benefit of the initiatives we took last year to reduce costs and improve profitability as well as successful tariff recovery efforts.

Ron will cover this more in his detailed remarks. Also during the first quarter, new business wins and business development efforts of both and automotive and industrial segment continued to capitalize on important trends including safety and electrification.

Finally at Dabir, we continue to add new customers and made significant progress in lowering the average evaluation time. Turning to slide five for a few comments on our key financial metrics. Year-over-year, consolidated sales improved 21%, in line with our internal expectations.

Additionally, GAAP net income improved 19% while adjusted net income which excludes expenses for initiatives to improve operations and acquisition-related expenses in the applicable periods, improved 14%. On slide six, you can see that our automotive segment is successfully navigating some significant industry and macro headwinds.

While our Asian operations affected by the decline in passenger car sales and the ongoing trade and tariff dynamics, the fact that our exposure to domestic Chinese OEMs is limited to 8% of sales has somewhat mitigated the impact of these macro factors.

Additionally, we believe new products launching during fiscal 2020 should help us offset these headwinds. In fact, in Europe the new launches have nearly offset the effect of the economic uncertainty and revised GDP forecast.

Grakon sales to Tesla as well as new launches and the strong mix of products for SUVs and pickup trucks have bolstered the North American operation. It is important to note that the new launches I just mentioned will continue to ramp throughout the next three quarters. Please turn to slide seven.

Our booked business in sensors grew 11% year-over-year and it is anticipated to grow from $56 million this year to over $94 million by fiscal 2022, further validating our strategy to move the company into higher margin technology business.

Our highly patented magnetoelastic technology also provides steering assist on sport and recreational vehicles and clutch plate position for automobiles as well as roll control to improve safety. Moving to slide eight.

Our portfolio of technologies and solutions for the hybrid and electric vehicle market in RGB, LED-based ambient and direct lighting led to a solid quarter of new business awards totaling $30 million. European automotive was awarded Jaguar Land Rover's Common Architecture Program.

They are strategy to common modules and standardizing all future electric and hybrid vehicles within their portfolio utilizes our power operated tailgate switch, steering panel shift as well as glove box and internal panel switches. With a five year program life, annual revenue is $5 million launching in the second quarter of fiscal 2021.

Grakon was awarded additional content on Rivian's electric pickup and electric SUV models for reading console lamp and the footwell and floor tray lamps launching in the second quarter of fiscal 2021. With these new awards, total content for Rivian vehicle between Grakon and Pacific Insight is $188 for pickup truck and $228 $228 for the SUV.

Grakon was also awarded the Tesla Model Y combination reading light with estimated annual revenue of $3 million launching in the third quarter of fiscal 2020. With this award, total content per vehicle across all Methode businesses for the Tesla Model Y is $160.

Notably, for the Tesla Model S and X, Methode's total content per vehicle has grown to $300. Our automotive group in Asia was awarded [indiscernible] and two current electric transmission programs, both beginning in the third quarter of fiscal 2022. The bus bars are for PSA's new DS 3 Crossback and Hyundai's Lafesta and [indiscernible] vehicles.

Additionally, Nissan-Mitsubishi awarded a bus bar program for an electric vehicle with average annual revenue of $11 million launching in the second quarter of fiscal 2021.

Pacific Insight and Grakon's lighting technologies and capabilities together with Methode's expertise in both power distribution solutions and automotive manufacturing will provide opportunity for market share gains and increased content across Methode. Moving to an update on Dabir.

During the first quarter, we added five new customers, including our third pediatric hospital. Additionally, our evaluation time for systems at hospitals averaged 48 days in the first quarter, down from 77 days in the first quarter of last year. We also began the first evaluation using our Gen2 system at a Midwest hospital network in the ICU.

Our Gen2 system was designed for patient care areas at the hospital. That is care areas outside the operating room. It has the same therapeutic characteristics as the Gen1 system yet more compact and lightweight and provides the bedside clinician with more display information such as remaining service light.

It also has an auto brightness for patients to sleep better at night. In closing, our performance in the first quarter gives us confidence in our full year outlook and ability to execute in a very challenging macro environment.

At this point, I will turn the call over to Ron who will provide additional detail on our financial results and give you guidance. Ron Tsoumas Thank you Don and good morning everybody. Please turn to slide nine. First quarter sales improved 20.9%, or $46.8 million to $270.2 million in fiscal 2020 from $223.4 million in fiscal 2019.

Sales from Grakon and new automotive launches more than offset overall market weakness in Europe and China as well as lower radio remote control, appliance and data solution sales. Foreign currency exchange continued to be a headwind as the euros and renminbi exchange rates were weaker than the prior year. Moving on to slide 10.

On a GAAP basis, first quarter net income increased $4.6 million to $28.3 million or $0.75 per share from $23.7 million or $0.63 per share in the same period last year.

First quarter GAAP net income benefited from the result of Grakon and the net benefit we received from initiatives to reduce costs and improve profitability from last year which included the absence of the expense for those actions we had.

Negatively impacting first quarter GAAP net income were lower radio remote control, appliance and data solution sales, higher expenses for net interest, intangible amortization, income tax, stock-based compensation and net tariff as well as the impact of foreign currency translation.

Our first quarter tax rate of 20.5% was impacted by discrete items recorded during the period. Excluding the impact of these discrete items, our first quarter tax rate would have been approximately 16.5% which is comparable to the first quarter of last year.

Our expected rate for the remainder of the fiscal year is expected to be lower than we experienced in the first quarter.

Therefore, in spite of a higher than anticipated effective tax rate in the first quarter, we now estimate that our tax rate will be in the range of 18% to 20% in fiscal 2020, slightly lower than the 18% to 21% rate announced in June. China tariff continues to be a headwind, although we are aggressively working to mitigate the impact on our results.

In the first quarter, our net tariff expense of $0.3 million also included tariff revenue reimbursement offsets related to fiscal 2019 which were agreed to during the first quarter by some of our customers. Therefore, the amount recognized in the first quarter does not represent the run rate for the remainder of the year.

We expect the negative impact of tariffs to be higher for the remaining quarters of fiscal 2020 but lower than the $8.5 million net expense we estimated during our fiscal 2019 earnings call. We also are closely monitoring the announcement from last week that tariffs could increase to 30% from 25% beginning on October 1.

Currently, we believe tariff for the fiscal year will be in the range of $4.5 million to $5.5 million at the current 25% tariff rate. Moving to margins on slide 11. First quarter GAAP gross margins and non-GAAP adjusted gross margins improved 120 basis points year-over-year in fiscal 2020.

Gross margins improved due to Grakon sales, partially offset by the negative impact of foreign currency translation and reduced Hetronic sales. Non-GAAP adjusted gross margins exclude expenses for initiatives to reduce costs and improve profitability in the applicable periods.

First quarter GAAP selling and administrative expenses as a percentage of sales decreased 120 basis points year-over-year, positively impacted by the absence of the expense for operational improvements and the benefit of those improvements, lower acquisition costs and foreign currency translation and by selling and administrative expense attributable to Grakon, which is lower as a percentage of sales than Methode as a whole.

Non-GAAP selling and administrative expenses as a percentage of sales which excludes acquisition-related costs and expense for operational improvements still improved 60 basis points year-over-year in the first quarter of fiscal 2020. Shifting to EBITDA on slide 12.

The company generated a record $50.3 million in the fiscal 2020 first quarter or 18.6% of sales versus $36.8 million or 16.5% of sales in the same period last year.

However, adjusting for expenses for initiatives to reduce overall costs and improve operational profitability and acquisition-related costs in the applicable periods, first quarter 2019 adjusting EBITDA was $38.2 million or 17.1% of sales. A few additional items to review.

Year-over-year intangible asset amortization expense in the fiscal 2020 first quarter increased $2.9 million or 152.6% to $4.8 million, primarily through amortization expense related to the Grakon acquisition.

In fiscal 2020 first quarter, we had invested approximately $13 million in CapEx mainly to support programs and launches in North America and Europe. Expense for depreciation and amortization for the fiscal 2020 first quarter was $11.8 million. Let's move to slide 13. Free cash flow for fiscal 2020 first quarter was $26.9 million.

Our debt-to-EBITDA ratio which is used for our bank covenants is approximately 1.6.We paid down nearly $11 million of debt during the quarter and since purchasing Grakon, we have reduced our debt by $85 million. We ended the quarter with just over $73 million in cash. Move to slide 14. I will finish up my remarks with guidance.

As a reminder, the guidance ranges for fiscal 2020 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 the Form 10-Q and our Form 10-K.

As we announced this morning, we affirm fiscal 2020 sales in the range of $1.13 billion to $1.17 billion, pretax income in the range of $150.3 million to $164.3 million and earnings per share in the range of $3.25 per share to $3.55 per share.

As discussed during our last earnings call, the majority of our new automotive and e-bike program launches will not be at full production volumes until the second half of the fiscal year. Additionally, the laundry care program is anticipated to launch in our fiscal third quarter.

While our estimated tariff expense is now potentially lower than originally anticipated, market choppiness related to a number of industrywide and macro headwinds will continue to impact our fiscal year.

These include a shift away from sedans and traditional passenger cars, with dollar strengthening against most major currencies and the anticipated softening in the commercial vehicle markets in the second of our fiscal year.

For fiscal 2020, we are estimated capital investment to be in the $48 million to $54 million range and depreciation and amortization to be between $51 million to $54 million. Lastly, we expect our fiscal 2020 free cash flow to be between $122 million and $136 million.

In conclusion, please look to slide 15 to look at the key drivers of our anticipated EBITDA performance for fiscal 2020.

Looking at EBITDA based on our $155 million of EBITDA in fiscal 2019, adding EBITDA from new automotive and laundry program launches of about $19 million, adding EBITDA from a full year of Grakon which is about $21 million, subtracting the impact of the loss of EBITDA from reduced passenger car production which we estimate to be around $14 million, adding the benefit of the initiatives to reduce costs and improve profitability of about $11 million and adding back one-time costs we incurred in fiscal 2019 for acquisitions and restructuring of about $29 million.

Don, that concludes my comments..

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

[Operator Instructions]. We will go first to Chris Van Horn of B. Riley FBR..

Good morning. Thanks for taking my call and congrats on the quarter..

Good morning Chris..

I just want to dig a little bit deeper, if we could, on the award activity, because it seems like you had a strong quarter in terms of awards across the board here.

Any sort of drivers that stuck out to you, either from a competitive standpoint or just from a customer pickup perspective?.

Sure. We have said this in the past. Methode is somewhat unique in that we are seasoned automotive manufacturer and we are in the bus bar business. And so our awards, in other words I think half probably were in electrification, come from that fact where we supplied Tesla for a number of years. We have got a good track record there.

So it's not necessarily surprising that we are getting other business. We have announced wins with Volkswagen. Now we have got Rivian and several others. So I think that makes us somewhat unique. Then some of the lighting wins is just Grakon doing a good job of booking business and Methode as well. And some quarters are better than others.

This was a good booking quarter. I think last quarter was a little lighter, but it was a nice quarter, $30 million of wins, hitting $21 million and $22 million, well definitely half of that were organic growth..

Okay. Got it. And then maybe on that point, I remember when you made the Grakon acquisition, there was a lot of possibilities or opportunities, if you will, to get with your existing customers who you were supplying, as well as kind of showcase some of the maybe traditional Methode capabilities to some of Grakon's great customers.

Have you seen that come to fruition?.

We have done that. I think we talked about it last quarter. We have done the Tech Days for many of the key customers that has given us opportunities. We have got some nice opportunities that we are working on. But at this point, nothing major to announce. But we are seeing progress there for sure..

Okay. I did notice during the quarter, it seems like acquisition-related costs and profitability improvement costs came down, almost eliminated, if you will.

Do you see that coming back up in the out quarters or for the year? Or do you feel like you have kind of made all the moves that you need to make in that department?.

I will just talk about acquisitions first. I mean, obviously, if we did an acquisition, we would have some additional acquisition cost. But we have nothing pending that would significantly impact the P&L. And last year, very quickly, we took actions to reduce our costs as soon as we saw the declining revenues.

Again, we have nothing planned this year, so we don't anticipate any costs there. But it's a very challenging environment so I wouldn't rule that out, if things went or declined further. But we have nothing planned..

Okay. And then I guess last for me. The free cash flow profile is looking really strong. Maybe a two-part question.

One, is that CapEx number that you gave us, majority growth CapEx? And then two, with this free cash, what are your kind of plans going forward? Dividend, share repurchases, et cetera?.

Sure. Ron may comment on it. But the majority of the $48 million is for growth. And as you know all of the programs take a fair amount of capital to launch. And we have got launches going on throughout the year here. So that's a good portion of that. I think I am drawing a blank on that. But we will use the free cash, I mentioned that..

Yes. So we are certainly looking at just growing our business and deleveraging until we are going to support organic growth and to support the growth of the business and possible future acquisitions. And until then, just deleverage.

So we pay a quarterly dividend and have for many years and we will continue to return capital to the shareholders in that regard. But mostly we would focus on future growth, organic and inorganic..

Yes. And until we find an appropriate acquisition, our mission is to reduce our debt. I think that's the best way of serving the shareholders is to let's get our debt down even further..

Yes. That's a good point. And then the 1.6 adjusted EBITDA ratio, we get it to 1.5, we then get some relief on our interest rate and unused line fees. So that's a pretty big number for us that we want to get to do as quickly as we can..

Okay. Great. Thanks so much for the time this morning..

Thank you Chris..

[Operator Instructions]. We will go next to Steve Dyer, Craig-Hallum Capital Group..

Hi guys. Ryan Sigdahl, on for Steve..

Good morning..

So you mentioned the generation two Dabir system for patient care areas outside of operating room.

Do you expect a similar ramp, I guess, as the legacy product there? Or are there different structural dynamics between an operating room versus other patient care areas of a hospital?.

No. Gen2 was developed, as we said, for the patient care areas, but also to go into post acute. And say, I mean, it's just a more advanced system than we had with generation one. Generation one will continue to be used in operating rooms. We are not obsolete in that.

It's just we felt that we needed a smaller and a portion of Gen2 is the battery operated lithium-ion. So it doesn't really change the basic therapeutic value. It's just a different controller..

So there is no reason to believe that you could launch faster or expand into hospitals quicker with this new generation two product?.

It was designed with a lot of input from post acute and what we learned from Gen1. I don't think that would accelerate Dabir's adoption. Dabir, as we have said, is a design and so you really have to go and improve the efficacy of the product, whether it be Gen1 or Gen2..

Yes. Go ahead..

Let me just make another point there. When you go into ICU, you go into med-surg, there are more, there are obviously more beds, so there's a larger available market. But again, I don't think the Gen2 enables that. It's just us doing the design and we continue to do in the operating rooms. I am sorry, I interrupted you..

Yes. No, I was just going to ask one. So presumably the Gen1 in the operating room has proved out efficacy and et cetera.

Will that carry over or do you need to go, kind of start from step one here with this product? Or can you use some of that leverage some of that previous experience there with this product?.

In a hospital that has used Gen1 in the operating room, no, you don't have to go through another trial. The efficacy is proven now. We are doing a trial now and in a new hospital system and they decided they wanted to use it in ICU first versus operating room and again, that's a new opportunity. So it's a new trial.

But presumably, that trial will be successful. If they wanted to use it in an other area, if they wanted to go into the operating room, they wouldn't need to do another trial..

Got it. I will leave it there with Dabir. Switching over to industrial. Margins were really solid, 37.4% in the quarter.

Where do you think that can go over the next few quarters kind of with all the cross currents with a bunch of synergy potential, but also a softening in the commercial market, et cetera?.

That's a very good question. We are going to see softening in the commercial market. That's built into our second half. That does impact margins. We have a number of cost improvement programs going on particularly in our Chinese operation for Grakon. Some of those will offset that reduced margin from volume.

But I wouldn't anticipate that we are going to see higher than what we forecasted. There's just too many headwinds. I know that may help 2021, but I don't see that. We will hold our own, let's put it that way, by the initiative, but that was our design.

And Ron?.

Yes. I would just add to that maybe that the product is part of that group too as well. So any headwinds there could degrade the margins a little bit. It was a great quarter, as you noted, over 37% margin and I think our target, we had low to mid 30s. So that's, we really crossed it this quarter for sure.

And we have seen some softening in electronic European business now. We think that will continue into the second quarter. We will see what happens in Q3 and Q4. But we have seen some softening there. It's a very good margin on product for us. So if we see decline, then it obviously affects margins..

And maybe just to clarify, I think I heard two different things here that, this year related to all the headwinds, but potentially that margins could expand next year fiscal 2021 and going forward. But I also heard kind of low to mid 30% gross margin.

So maybe, I guess --?.

Well, I think, well, we have said there..

In the press release we have communicated..

Yes, we have communicated as our target..

As the target this quarter was obviously higher than that. But as I said there's pressure on that margin..

Got it. Last one for me and then I will turn it over. So on slide eight, I am showing the content on the two different EV vehicles between $200 to $300.

Maybe how does that compare to a different platform, say GM's truck and SUV platform?.

If I look at the average sale price and right now we are a combination K2 and T1, it's around $150 on a lot of volume. But what we have seen with PI, with Grakon and our own bus bar business, we have been able to add content to these vehicles quite nicely.

Now again, it's not the 700,000 units you see from GM, but the average sale price is higher and the margin is better..

Great. Thanks guys and good luck..

Thank you..

Mr. Duda, at this time, I have no other questions holding. I will turn the conference back for any additional or closing remarks..

Alright. Thank you Jess. We thank everyone for listening and have a very safe and enjoyable Labor Day weekend..

Thank you. Ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may disconnect your phone line at this time and have a great day..