Welcome to the Methode Electronics Fiscal Year 2019 Fourth Quarter and Full-Year Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. For this quarterly conference call, the company has prepared a PowerPoint presentation entitled Fiscal 2019 Fourth Quarter and Full-Year Earnings, which can be found at methode.com in the Investor Relations section. [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, commercial vehicle, computer and communication industries; international trade disputes resulting in tariffs; changes in U.S. trade policy; success of Pacific Insight, Procoplast and Grakon and/or ability to implement and profit from new applications of the acquired technology; ability to successfully benefit from acquisitions and divestitures; customary risks related to conducting global operations; significant adjustments to expense based on the probability of meeting certain performance levels in our long-term incentive plan; recognition of goodwill impairment charges; ability to keep pace with rapid technological changes; ability to withstand business interruptions; 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; ability to successfully market and sell Dabir Surfaces products; dependence on our supply chain; dependence on the availability and price of materials; income tax rate fluctuations; fluctuations in our gross margins; breach of our information technology systems; ability to avoid design or manufacturing defects; ability to compete effectively; ability to protect our intellectual property; debt levels and the effect on operations and liquidity; and costs and expenses due to regulations regarding conflict minerals. Additionally, this conference call will present both GAAP and non-GAAP financial measures. A reconciliation of these measures is included in today’s earnings release, which you can find on our Investor Relations website. I would now like to turn the call over to Don Duda, President and CEO. Please go ahead, sir.

Thank you, Christine, and good morning, everyone. Thank you for joining us today for our fiscal 2019 fourth quarter and full-year financial results conference call. I’m 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 4. In fiscal 2019, we continued on our deliberate path to transform the company into a higher-margin business that should command a higher multiple compared to the typical automotive suppliers today. Methode has been focused on this objective for sometime, and the acquisition of a Grakon solidifies our Industrial segment, clearly setting us on a path to diversify into new end markets, expand our customer base and product line offering and reduce our automotive concentration. In fiscal 2019, Methode eclipsed $1 billion in revenue for the first time in our history, despite the decline in global passenger car production and tariff-induced headwinds, as well as the introduction of the new European emission and testing standards, all of which reduced our automotive sales by $47 million for the fiscal year compared to fiscal 2018. Through our acquisitions and continued investment in technologies and vertical integration, we have positioned Methode to become a one-stop shop for LED lighting solutions, integrated user interfaces and sensors. Today, these complimentary products, technology and manufacturing capabilities will allow us to capitalize important trends in both the Automotive and Industrial segments, safety, autonomous and electrification. OEMs are talking less about discrete functionality and more about feedback control, and this is where our sensor solutions can bring innovation and unique custom solutions. For instance, our magnetoelastic sensing technology, already deployed to provide pedal assist on e-bikes, steering assist on sport and recreational vehicles, clutch plate position and active-role control for…

Thank you, Don, and good morning, everyone. On a GAAP basis, fourth quarter net income decreased $14.2 million to $22.6 million, or $0.60 per share from $36.8 million, or $0.98 per share for the same period last year. For fiscal 2019, GAAP net income increased $34.4 million to $91.6 million, or $2.43 per share from $57.2 million, or $1.52 per share in fiscal 2018. As you’ll recall, in fiscal 2018, we incurred $53.7 million of tax expense related to U.S. Tax Reform. For the fourth quarter, tax expense increased $13.5 million, or $0.36 per share, mainly due to a decrease in investment tax credits of $8.9 million this fiscal year and a tax benefit of $3.1 million in the fourth quarter of fiscal 2018 related to U.S. Tax Reform. This resulted in an effective tax rate of 24.9% in the fourth quarter. For the full-year, tax expense decreased by $54.6 million, mainly as a result of lower tax expense of $58.5 million from last year, partially offset by lower investment tax credits of $7.8 million year-over-year in this fiscal year. The net impact of these two factors was a benefit to fiscal 2019 net income of $50.7 million, or $1.35 per share. This resulted in an effective tax rate of 11.6% for fiscal 2019. Lower than anticipated investment tax credits for the year had the effect of increasing our effective tax rate from the guidance range of 9% to 11%, which we provided throughout the year. Negatively impacted fourth quarter and full-year GAAP net income was increased intangible asset amortization, stock-based compensation and interest expenses, reduced passenger car demand and production globally and currency rate fluctuations. Full-year GAAP net income was also negatively impacted by increased acquisition-related costs, initiatives to reduce costs and improve profitability, net tariff expense and lower…

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

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] One moment please while we poll for questions. Thank you. Our first question comes from the line of Chris Van Horn with B. Riley FBR. Please proceed with your question.

Good morning. Thank you for taking my call.

Good morning, Chris.

I was wondering if you could get a little bit of detail of what you’re assuming for automotive production? Are you using, either LMC or IHS as kind of a benchmark, or we’ve heard from some other suppliers that they might be kind of handicapping that either direction based on what they see from their mix in terms of how they’re thinking about production rates?

We use LMC. And probably the correct term, we do handicap that up and down based on our knowledge of the customers demand. But we, for the most part, use that. And then we’ll – occasionally, we will double-check with IHS if we see a number that doesn’t look right to us. But generally, it’s – we’re looking at LMC.

Okay, got it. And then so it seems like, you’ve got some visibility into the back-half of your fiscal 2020, as you mentioned in the comments in terms of, is that – do you see program launches for you on the automotive side, or is there a macro event that you’re seeing? What’s kind of driving that comment?

I think, for the most part, we take a conservative approach to worldwide auto and, again, handicapping LMC and maybe we handicap it more to the negative than to the positive. But we do have the visibility of the launches. We know when the launches will come. We know what the ramp up is, like the variable there is, do they launch at the volumes that we’ve predicted. And then also we talked about – Ron talked about the delay in the laundry program that’s going to launch in October. So as we showed on the one chart, those launches contribute to our income and EBITDA for the year, although, again, more in the second, third and fourth quarter than in this for the first quarter. We’ve also built in a decline in Class 8 sales in the second-half of the year.

Okay, got it. Very helpful. Thanks for that color. And then, obviously, tariff, you’re assuming some tariffs in your guidance here. Maybe you could highlight, what are your mitigation efforts there, if at all, or do you intend to pass along some of that to the end customer? How do you see the tariffs playing out assuming it actually happens?

Well, I mean, from a – Chinese tariffs were there. I mean, we built in 25% and that equates to about $8.5 million. We have – we are sharing some of the expenses with our customers and we’ve provided them a mitigation plan, some of which is just shipping into Mexico for Mexico production versus shipping into the U.S. and then transferring to Mexico, and then some of it is using our other plants for manufacturing. And when we’re in the, I would say, the trial period of various shipments and gets fairly complicated from a tariff standpoint of what constitutes material transfer – transformation. So we’ve communicated with our customers. Here’s what we can do for you. Here’s the timeframe. And if we can do it center of that $8.5 million, will be reduced obviously, if China and the U.S. come to terms, that’ll help also.

Okay, got it. And then last for me. Just on capital deployment, obviously, you’re generating some decent free cash here. And just curious – I know, you paid dividend. But have you considered buybacks and anything else you’re considering from a capital deployment standpoint?

I think, we always do look at our various options and discuss that with the Board. Our preference right now is to pay down debt…

Yes.

…and we have the capability of doing that. So that would probably be the number one deployment. I don’t rule out another acquisition if one came about. But right now, the main uses, obviously, our capital uses to support our businesses and our program launches, but – and the dividends. But we’re focusing on debt reduction.

Okay. Thanks so much for the time, guys. I appreciate it.

Yes. Thank you, Chris.

Our next question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your question.

Hey, guys, it’s Ryan Sigdahl on for Steve.

Good morning.

To start, what does revenue guidance imply for organic growth? And then secondly, given the challenging automotive environment, what gives you the confidence to significantly outperform that? I know the EBITDA bridge shows new awards and whatnot, but a little more color, that would be helpful?

Sure. I mean, the bridge shows $19 million of our organic growth, that’s what we’re anticipating. But to the question, what gives us confidence in, let’s call it, our legacy auto business. I mean, we do have the benefit of re-leases from the customer. We know the launch schedules are. Could there be a further decline in Europe? Yes. I mean, that – when you’re looking out, you’re fairly confident in your first three months, the second three months get a little fuzzier, and then the second-half of the year that, it could be up or it could be down. So I don’t know if we can add any more color to the math. We tend to be conservative, but we saw in our fourth quarter that our European revenues were down further than we thought they would be.

And that’s been baked into the – to the forecast for this year, so.

Yes. And if I – if you’re a revenue guy and I’m, I can take the fourth quarter and you take all the noise and you multiply it by four, it is okay, that proceeds were not there completely, but we’re getting there. And then I’ve also got the benefit of looking at the first quarter. So based on that, we’re confident in the numbers that we put out in guidance.

Then, as it relates to GM’s truck and SUV platform, transitioning from K2 to the T1, any thoughts there, I guess, based on what you’re seeing from current forecasts on? Is that a flattish type production this year, or do you think that can grow?

In an area that I really have to be careful, because now I’m talking for the customer and wee can’t do that. So I would refer you to what GM has put out. I really can’t go any further than that.

Fair enough. As it relates to EBITDA, the bridge on Slide 14 is very helpful. So I appreciate that. By my math, based on the other guidance, that implies kind of the midpoint of guidance assumptions. Is it $221 million? If I recall correctly…

Yes, that’s correct.

Okay.

Yes.

If I recall correctly for accrual accounting for the long-term incentives, it requires at least 75% confidence in achieving that. Is that correct? And then does that kind of imply the midpoint is on – fairly on the conservative side, I guess, based on that 75% confidence level?

Yes. It’s actually – the good question is, 70% confidence level that Don and I have to attest to, to the target number of 221. And for the accrual purposes for the accounting rules, that’s where the plan is capped out, and that’s what we accrue true on the long-term incentive accrual. So that’s why we just maintained it.

Great. I’ll leave it there. Thanks, guys.

Thank you.

[Operator Instructions] Our next question comes from the line of David Leiker with Robert W. Baird. Please proceed with your question.

Good morning, everyone.

Good morning, David.

I want to start with a comment you made about the quarterly pattern and thanks for sharing it. If – what I heard – if I heard – what I heard is correct, you’re saying your Q1 revenues are going to be the lowest revenue number for the year, is that right?

That’s correct. [That can jump beyond launches.]

Right.

Yes. Well, Q1 is going to also benefit from Grakon where…

I’m sorry, David. Go ahead.

Grakon sales, I mean, is going to be added into that number versus last year as well though?

Oh, sure. Absolutely.

Okay. Well, I cut off what you said.

Q1 tends to be one of our slowest quarters.

Right. Okay. That’s why I just wanted to make sure I heard that correctly. And then as we look at this – the laundry program, is this the timing of this? It’s been – it seems to be a little bit of a moving target. How confident are you that that’s going to hit when you’re thinking it’s going to start to hit?

Yes, that’s a very good question, because it’s been delayed in the past. We’re starting to see a movement towards launch. There’s – here you start to see releases and meaningful footprints to the customer hitting their projected launch day, which I think is October. So that doesn’t mean, it doesn’t change. But we’re starting to see positive signs. So let’s put it that way.

And you’re at a point right now where you’re ready to go. They just have to say, start shipping, right?

Absolutely.

Okay. And then you also dropped in there on the Interface, a commentary about some of the legacy data products. You talked a little bit about what’s going on there. What’s the size of that? What’s the run off or impact of that??

It’s one gig transceivers, which I’ve been under tremendous price pressure for three, four or five years, if not longer. Ultimately, that will wind down, and we’re seeing slower sales. And then we thought maybe even a year ago, 10 gig is improving, but not enough to offset the one gig product. So it’s note worthy, it’s not going to make or break the year, but it was just worthy for commentary.

Can you give us some sense of scale of how large that is for you right now?

The two combine about $15 million in sales annually.

That one in the 10 combined?

Yes.

Okay.

Variable, but it could go to $12 million or $10 million.

Okay. And then when we look at your sensor business, how large is that today in terms of the revenue contribution for you when you take the whole portfolio of sensors?

$40 million. They’re going to in 2022 $80 million some – $85 million…

Yes. And we anticipate actually will go higher to $200 million.

Yes.

What we said.

Okay. And then what – you didn’t make any comments about any new contract wins or anything Any color you can offer there?

It’s been relatively slow and we kind of anticipated that we have some very good booking early in 2019. And I don’t want to say that the automakers are in reuse mode. But that’s potentially why we’ve seen less large – or excuse me, we had bookings, but not enough that we wanted to comment on. We’d have low like this before. One thing, I’d comment on is, our move in the lighting and our EV business has really allowed us to expand our vehicle content. I often say, we don’t really measure ourselves by what the SAR is doing. We measure by what program is done and what our content is. I’ll give you two examples. I can’t name the customers. But if we were just looking at HMI business, we’d be in – the one customer would be in about the $60 per vehicle content. And you start to add EV and lighting to that and we’re over $122 million in book business, that’s the European customer. We got another European customer very similar going from $26 per car to $96. So our expansion in lighting and in our prominence in EVs is definitely helping us with our dollar content per vehicle, but, again, nothing to speak this quarter.

Okay, great. That’s all. Thanks.

Thank you, David.

Thank you, David.

Thank you. It appears we have no further questions at this time. I would now like to turn the floor back over to Mr. Duda for closing comments.

Christine, thank you very much, and we’ll ask – thank everyone for participating today. Have a good day.

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.