Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Methode Electronics Fourth Quarter Fiscal 2022 Results At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session.

I would now like to turn the call over to the host, Vice President of Investor Relations, Robert Cherry. Sir, please go ahead..

Thank you, operator. Good morning, and welcome to Methode Electronics fiscal 2022 fourth quarter earnings conference call. For this call, we have prepared a presentation entitled Fiscal 2022 third quarter financial results, which can be viewed on the webcast or found at methode.com on the Investors page.

This conference call contains certain forward-looking statements, which reflect management's expectations regarding future events and operating performance and speak only as of the date hereof. These forward-looking statements are subject to the safe harbor protection provided under the securities laws.

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

The factors that could cause actual results to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission, such as our 10-K and 10-Q reports. At this time, I'd like to turn the call over to Mr. Don Duda, President and Chief Executive Officer..

Europe, the U.S. and Asia. The EV market growth trend and our exposure to it continues to be robust. In other applications, we’re awarded programs for an e-bike sensor, an off-road vehicle control module and a datacenter busbar assembly, all strategic and growing markets and applications for Methode.

Overall, it was a very successful quarter for awards that will drive organic growth in future years. Turning to Slide 6 and our fiscal 2022 highlights, we delivered sales growth for the fifth year in a row and finish with record sales of $1.164 billion for the full year.

Even excluding $22 million in cost recovery and a favorable impact on foreign exchange, we have over 4% year-over-year sales growth. Supply chain challenges and the market disruptions during the year took a toll on earnings. However, program awards were very strong, reaching almost $300 million.

We had record sales in the EV application for the year and they reached 70% of our total sales for the full year. As I already mentioned, we see that number reaching 20% in fiscal 2023. Our balance sheet story is one that we continue to be proud of, with our debt level now at the lowest level since the 2018 acquisition of Grakon.

While our free cash flow generation was down year-over-year, it was still healthy and supported the purchase of over 1.4 million shares of stock as well as our ongoing dividend program.

With a strong award pipeline for the past two years and the effort Methode was made to diversify its product portfolio further the lighting power and sensors, we’re now confident to announce a three-year organic sales compounded annual growth rate target of 6%.

This target demonstrates that our business model is not just healthy, but it's prospering from the strategic steps that we've taken to grow the business. Turning to Dabir, we achieved over $4 million sales for the year.

The key factor to the success of this business has always been and will continue to be the ability to conduct product evaluations at hospitals.

While the interest in the product has remained high in recent years, the COVID-19 pandemic has been a headwind over the last two-plus years to our ability to execute these valuations, such as sales, growth of business has been started and continues to be hampered as sales always lag evaluations.

However, we remain confident in those prospects, but we're also exploring options to engage external mechanisms to help accelerate the growth of the business going forward. To conclude, it was a challenging year and a year plagued by ongoing demand headwinds and supply chain challenges.

However, our worldwide team still delivered organic sales growth through the year. Moving forward, I am confident with the team's experience and operational expertise that Methode is positioned to mitigate these pressures and deliver sales and earnings growth for fiscal 2023.

Looking beyond 2023, we are confident in our strategy and our award pipeline continues to be robust. This firmly puts Methode on a path to deliver on our 6% compounded annual sales growth target over the next three years. At this point, I'll turn the call over to Ron, who will provide more detail on our fourth quarter and full year financials.

Ron?.

Thank you, Don. And good morning, everyone. Please turn to Slide 8. Fourth quarter net sales were $288.7 million in fiscal ’22, compared to $301 million in fiscal 21, a decrease of $12.3 million or 4.1%.

Fiscal ‘22 sales include a $7 million of spot buy in premium freight cost recovery, partially offset by an unfavorable foreign currency impact of sales of $5.7 million. Excluding the spot by premium freight cost recovery and foreign currency impact, sales decreased by $13.6 million or 4.5%.

Sales declined in the automotive industrial interface segments but increased in the medical segment. The decrease in the fourth quarter sales was mainly due to program roll offs in North America, supply chain issues in North America and weakness in Europe due to the conflict in Europe.

While year-over-year sales in Asia were higher in fiscal ‘22 as compared to fiscal ’21, the lockdown in China due to the zero COVID policy impacted our fourth quarter results, especially to our expectations to our March guidance issuance.

This weakness was partially offset by higher sales of EV product application which amounted to 17% of sales in the quarter and for the full year. We now expect EV sales to represent over 20% of our full year fiscal ‘23 consolidated sales.

Income from operations decreased to $14.6 million from $33.7 million, mainly due to higher costs due to material cost inflation, spot buys, an increase unreimbursed freight which accelerated during the quarter and our ability to fully recover the increased costs from our customers was hampered from a timing perspective.

Also, reduced sales and unfavorable product mix contributed to the decline in the operating margin. Fourth quarter net income decreased $14.9 million to $16.2 million or $0.43 per diluted share from $31.1 million or $0.81 per diluted share in the same period last year. Please turn to Slide 9.

Fiscal ’22 fourth quarter gross margins were 19% as compared to 25.1% in the fourth quarter of fiscal ‘21. A key factor in the decline of consolidated gross margin profile was the sharp decline in the industrial segment margin profile, which is our highest margin segment by far.

Industrial segment gross margins decreased to 24.4% in the fourth quarter, down sharply from the 40% gross margin in fiscal ‘21 4Q and the fiscal ‘22 third quarter year-to-date gross margins of 34.3%.

Of the overall margin decrease in this segment, approximately 50% was due to material cost inflation and premium freight and related issues and 25% was related to inventory related items such as unfavorable absorption due to the China lockdown, increased profit and ending inventory eliminations and other year-end inventory adjustments.

While some of the items may recur in fiscal ‘23, we anticipate the impact to be noticeably less than what was incurred in the fourth quarter. In the automotive segment, the margin decrease was due to higher costs due to material inflation and premium freight spot buys, lower sales volumes and unfavorable product mix.

Cost recovery actions did not keep pace with the accelerated inflation and other increased costs. It will take time to catch up on cost recovery, but actions are in place in process for recovery in future periods.

Our inability to pass along premium cost to our customers amounted to $3.4 million, or approximately $0.07 per diluted share in the fourth quarter. We do anticipate cost inflation and supply chains disruptions to continue in our fiscal ’23.

Fourth quarter selling and administrative expenses as a percentage of sales was flat at 12.3% in both relevant quarters. Our selling and administrative expenses percentage of sales is consistent from a cost structure perspective and should yield any efficient flow through from gross margin to income from operations. Please turn to Slide 10.

Net income was negatively impacted from the items mentioned prior and lower other income partially offset by a lower tax expense. The effective tax rate in the fourth quarter of fiscal ‘22 was 5.8% as compared to 15% in the fourth quarter of fiscal ‘21.

Most of the effective tax rate difference was due to a mix of jurisdictional earnings and the impact of us guilty tax on foreign earnings. Shifting to EBITDA, a non-GAAP financial measure. Fiscal ’22 fourth quarter EBITDA was $30.8 million versus $50.8 million in the same period last year.

Even though it was negatively impacted by higher cost of material, cost inflation spot buys and premium freight, lower sales volumes unfavorable product mix and lower other income. Please turn to Slide 11. Full year net sales increased $75.6 million to $1,164,000,000, which is a record and the fifth consecutive year of increased sales.

Sales included $22.1 million of spot buy and premium freight cost recovery and $5 million attributed to foreign exchange. Without the cost recoveries and foreign exchange, sales increased approximately $48 million or 4.4%.

For the full year, income from operations was $111.7 million, a decrease of $16.2 million or 12.7% from the $127.9 million of income from operations in fiscal ‘21.

Income from operations was negatively impacted by lower gross margins and increased selling and administrative expenses, mainly due to increase stock compensation expense, as fiscal year ‘22 had 12 months’ worth of expense as compared to seven months in fiscal ‘21.

Fiscal ‘22 diluted earnings per share was $2.70, compared to $3.19 in fiscal ‘21, mainly due from the impact from higher costs due to material cost inflation premium freight spot buys, higher selling and administrative expenses and a higher effective tax rate of 13.8% as compared to only 9.3% in fiscal ‘21, which benefited from a significant amount of foreign investment tax credits.

Please turn to Slide 12. In fiscal ‘22, we reduced gross debt by $29.6 million. Since our acquisition of Grakon in September of 2018, we have reduced gross debt by $147 million.

Net debt, a non-GAAP financial measure, increased by $31.6 million to $38.5 million in fiscal ‘22, from $6.9 million at the end of fiscal ‘21, mainly due to the share repurchases of 64.5 million and unfavorable working capital changes, especially related to inventory which increased significantly due to the supply chains related challenges.

We ended the fourth quarter with $172 million in cash. Our debt to trailing 12 months EBITDA ratio which is used for our bank covenants, is approximately 1.19, well below our covenant threshold of 3.5. Our net debt the trailing 12 month EBITDA ratio was 0.22. Please turn to Slide 13.

Free cash flow, a non-GAAP financial measure is defined as net cash provided from operating activities minus CapEx. Fiscal year ’22 fourth quarter free cash flow was $33.6 million as compared to $31.2 million in the fourth quarter of fiscal ‘21. Improvements in working capital allowed for the higher generation of cash in the quarter.

For the full fiscal ’22, we generated net cash provided by operating activities of nearly $99 million as compared to $180 million in fiscal ’21, lower net income of $20 million and a nearly $77 million unfavorable swing and changes in working capital accounted for most of the difference.

For the full fiscal ’22, we generated free cash flow of nearly $61 million as compared to $155 million in fiscal ‘21. CapEx was higher by $13 million in fiscal ‘22 as compared to fiscal ’21.

For fiscal ‘22 cash generation was solid but trailed the following year, mainly due to fiscal ‘21 working capital reductions which were noted at the time as not being likely repeatable in fiscal ’22. We expect free cash flow to improve in fiscal ’23 as we target reduced inventory levels and other positive working capital initiatives.

The strengthening of the USD in fiscal ‘22 costs and nearly $12 million unfavorable swing and the FX on cash and cash equivalents and the cash flow statement year-over-year.

Regarding capital allocation, on June 16, 2022, we announced a $100 million increase to our existing stock buyback program, of which approximately $29 million remains bringing the total amount available for purchases to approximately $129 million. The authorization expires in June 2024.

Investing for future organic growth and vertical integration remains a key priority from a capital allocation strategy perspective, especially as we rationalize our global footprint for the future, including expanding our EV capabilities so we can better support our build where we sell strategy and better positioned ourselves to capitalizing on the EV megatrend.

We do have a strong balance sheet and we'll continue to utilize it by continuing to invest in our businesses to grow them organically pursue opportunities for inorganic growth and measured return of capital to the shareholders. Please turn to Slide 14.

Regarding fiscal ‘23 guidance, it is based on management's best estimates, including the impact of the COVID-19 pandemic, the headwinds from the ongoing semiconductor shortage, and both short and long-term supply chain rationalization, other logistic challenges the conflict in the Ukraine and the latest impacts on our financial results, which remain an ongoing challenge.

While we have experienced some success and recouping some cost recoveries, we weren't as successful in the fourth quarter as we were in a third, and we do expect some of these headwinds will likely be with us for the majority of fiscal ‘23. The revenue range for full fiscal ‘23 is between $1,160 million to $1,210 million.

The anticipated growth at the midpoint of our range considers the impact of the GM T1 program rolled off, which had sales in fiscal year ‘22 of over $100 million. We expect EV sales to be at least 20% of consolidated sales in fiscal ‘23, up from 17% in ‘22.

The diluted earnings per share range is $2.70 to $3.10, unchanged from the June 14 preannouncement and contemplates continued headwinds from supply chain inflation and other macroeconomic events. We are expecting softer earnings in the first quarter of fiscal ‘23 with EPS improving as the fiscal year progresses.

Our estimated effective tax rate is between 16% and 18% without any discrete items.

We anticipate increased CapEx of between $40 million and $50 million as we expand our capabilities to support the growth and EV sales and strategically positioned our footprint to support production of our significantly increased order pipeline that we have built over the last two fiscal years.

Depreciation and amortization expenses is expected to be between $54 and $58 million. Lastly, based on the strong bookings we have realized over the past two fiscal years, much of which is for the EV market, we announced the organic compounded annual growth rate target of 6%.

This CAGR takes into account the anticipated roll off of the relevant programs and reinforces our organic growth strategy is putting the company on a nice future organic growth trajectory. Don that concludes my comments..

Thank you very much. Kelly, we are ready to take questions..

Certainly. The floor is now open for questions. [Operator Instructions] Your first question is coming from Luke Junk with Baird. Please pose your question. Your line is live..

Good morning. Thanks for taking the questions today..

Good morning, Luke..

For starters, was just – I want to start on the top line. Hoping you could help us unpack the lower sales and power distribution that you said in the quarter.

Should we read that as purely a reflection of the market and the weakness that you called out in China? And I would assume probably Europe to some extent as well, or is there anything else that we should be aware of there?.

I would say, there's nothing unusual. This is the way the orders flow. Ron, do you have any additional comments? It was the slowest quarter and the last of several, but nothing particularly notable.

Ron?.

Yeah. Luke, I think the lockdown that we experienced in China negatively impacted our ability with our products as well. As that has lifted, we would expect that to relieve that pressure in the first quarter of this year after the lockdown is lifted..

Okay, thank you for that. And then switching to margins, but staying with industrial, maybe a question for you, Ron. Can you just help us better understand the earnings bridge versus last year in the segment? If I look at the top line down to few million dollars, but income from operations off more than $10 million.

And what I'm wondering is, how much of this is timing-related or temporary in terms of things like mix or whatnot, as opposed to something that you'll need to ultimately recover from your customers and could have more of a lasting impact as we look into the first half of next year, I’d say?.

Yeah, Luke, yes, I took extra care to talk about the industrial segment because it is our highest-margin segment. And you're absolutely right. I think, if we look at some of the margin mix compared to our year-to-date, or 40% margin last quarter.

Of that margin mix, about 50% of it was due to the - the material, excess freight and spot buys of which we don't anticipate -- we anticipate some recovery in the future.

And then part of it was due to some of the inventory-related items that I had mentioned, whether they be booked to physical adjustments, a profit elimination of any inventory based on the amount of inventory that's on the water. We would expect those types of costs to not continue are certainly much harder to forecast.

So we anticipate in fiscal ‘23 our industrial gross margins gravitating more towards where we have historically been as opposed to what we experienced in the fourth quarter. .

Okay, thank you for that clarification, especially the last comment there. And then the last thing I wanted to ask is a related question, but in the auto business. And just want to make sure we're reading the $7 million of spot buy and premium for a cost recovery in the quarter correctly.

Specifically, I don't know if you can disclose how much of that pertained to the current quarter i.e.

offset to the cost of the experience in the quarter versus some kind of clawback of cost that you had incurred in prior quarters?.

Probably half and half look at a high level 50% each. .

Okay, great. Well, I will go ahead and leave it there. Thank you..

Yes. And Luke, I just want to clarify on your first question when we were talking about power and actually the effect. I agree with Ron the EV power certainly affected by the shutdown in Asia. But also our non-EV power had a slower quarter than in the past.

And again, there's nothing special there perhaps a little bit affected by the lockdown, but more just the order rate. But I just wanted to clarify that, that was really two areas of our power group..

[Operator Instructions] Your next question is coming from John Franzreb with Sidoti & Company. Please pose your question. Your line is live..

Good morning, guys, and thanks for taking the questions. Take a step back, you've carved out freight, labor and material as the reasons for the margin degradation.

For the company as a whole, okay, how much either dollar values or percentages that impact the fourth quarter on either relative or sequential basis?.

So, on the fourth quarter, we had about $3.5 million net impact..

On all three of those buckets or --.

Yeah. So what we billed as price recovery and what we incurred as price recovery was a net negative of about $3.5 million..

Okay.

And would you look at the slope of clawing back those costs, is it something is going to take time for any specific reason? Or could you get that back relatively quickly?.

Now, let me answer that. First, let me say this. And am I correct? I've never had to go back to a customer twice in such short order for price increases or to gain expedited class. So it's very unusual in auto and in the commercial vehicle group. So what we have seen -- and we do recover those costs.

And the team did -- up until the third quarter, I thought did a very good job. In the fourth quarter, we ran into more resistance because this has been going on for a while. I think I've said in the past that this can be a six to 12-month process.

Now, if you have a situation where you present it to the customer, we can ship you parts, but we have to incur extra overtime or something very unusual and the customer agrees or increase in purchase order and all that will occur in the same quarter.

But generally, if you're going for material price increases, or even in the freight recovery, it's a process and customers are getting the same pressures that we are and there's - we saw a fair amount of resistance in the fourth quarter.

I thought we won't prevail and that we've -- over the years we've done a good job of that, but it is a headwind that I said in my prepared remarks, it's going to be there until inflation subsides. Do I think whatever we incurred here in the fourth quarter, we're going to recover at some point in this new fiscal year? Yes.

The timing of that is a bit unpredictable..

Okay. Regarding the GM T1 program.

Are you supplying? Is there any more revenue from that program that's going to be hit in the first quarter of this year?.

On the on the GM T1 lightweight truck program that has rolled up we will have zero revenue this quarter, and it’s fully rolled off fourth quarter..

Right. Just make sure that. And you've referenced that you expect the first quarter EPS to be soft. I'm just wondering if you're comparing to a year ago, or you're comparing it to the fourth quarter.

The cadence from -- for the full fiscal year, that we anticipate quarter by quarter basis for this year coming up, that will be -- we anticipate that being the softness. So kind of a continuation, I guess for the lack of better word just coming out of the fourth quarter, our first quarter will be -- we anticipate that being starting off soft..

Okay. So in cadence wise is the softest. But you're not suggesting that it's going to be down versus the fourth quarter..

That's correct. .

Perfect. Okay.

And just I guess one last question regarding your CapEx? Are there any significant programs you plan on initiating, that we should be aware of in the coming year?.

Well, a fair amount of our CapEx is going to be increased capacity for our EV grants that we've won. It's going to be a significant amount of CapEx to do that. So I don't know that there's any particular program that will be CapEx intensive that is rolling on this year.

But overall, with the two years of robust bookings that we've had, especially in the EV space, and the power side, especially, we're going to have to increase our CapEx to accommodate that growth..

Okay, thank you very much for taking my questions. I appreciate it. .

Thank you..

There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Donald Duda for any closing remarks..

Thank you, Kelly. Well, thank everyone for listening and their questions. And wish everyone a very safe and pleasant summer. Good day..

Thanks. Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time. And have a wonderful day. Thank you for your participation..