Good day, ladies and gentlemen, and welcome to the Methode Electronics First Quarter Fiscal 2022 Results Conference Call. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host, Robert Cherry, Vice President of Investor Relations. Sir, the floor is yours.

Thank you, operator. Good morning, and welcome to Methode Electronics fiscal 2022 first quarter earnings conference call. For this call, we have prepared a presentation entitled Fiscal 2022 First Quarter Financial Results, which can be viewed on the webcast of this call 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 statement 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.

Thank you, Rob, and good morning, everyone. Thank you for joining us for our fiscal 2022 first quarter earnings conference call. I'm joined today by Ron Tsoumas, our Chief Financial Officer. Both Ron and I have opening comments and then we will take your questions. Let's begin with the business highlights on Slide 4. Our sales for the quarter were 288 million. Excluding favorable currency translation, our organic growth was up 45% from the prior year. However, it should be noted that our prior year first quarter was significantly impacted by the pandemic. In this year's first quarter, our team faced customer demand fluctuations and supply chain challenges. These included the ongoing semiconductor chip shortage, pandemic-related supply chain disruptions and port congestion, all of which created both sales and margin pressure. Once again, our team worked diligently to mitigate many of these challenges and we were able to deliver results within our guidance ranges for the quarter. However, these demand fluctuations and supply chain disruptions continue to require remedial actions such as expedited shipping and premium component pricing. As of today, our expectation is that these conditions will last at least until the end of the calendar year. While we have reaffirmed our guidance for the full year, persistent headwinds could cause our performance to be below the midpoint of the ranges as the situation is very fluid and will remain very challenging. The sales growth that we realized in the first quarter was due to increased demand across most of our businesses, but it was especially focused in the auto and commercial vehicle markets. We also realized growth in our Dabir business. However, that business is still being hampered by the pandemic, thus limiting our product evaluation opportunities in hospital operating rooms and ICUs. On an order basis, we…

Thank you, Don, and good morning, everyone. Please turn to Slide 8. First quarter sales were 287.8 million in fiscal year '22 compared to 190.9 million in fiscal year '21, an increase of 96.9 million or 50.8%. The year-over-year quarterly comparisons include a favorable foreign currency impact on sales of 10.3 million in the current quarter. The increase was mainly due to lower sales in the prior year quarter from the impact of the COVID-19 pandemic and to higher sales of electric and hybrid electric vehicles, which amounted to 16% of sales in the first quarter of fiscal year '22, which was in line with our previous communication that electric vehicles and hybrid electric vehicle sales would comprise mid teens of our fiscal year '22 consolidated sales. In addition, stronger commercial vehicle sales contributed to the robust sales growth. First quarter net income increased 8.4 million to 29.1 million or $0.76 per share diluted from 20.7 million or $0.54 per diluted share in the same period last year. Net income benefited from increased sales and favorable currency translation, partially offset by higher income tax expense, higher costs from supply chain disruption, higher selling and administrative expenses, and lower other income. Please turn to Slide 9. First quarter gross margins were higher in fiscal year '22 as compared to fiscal year '21, mainly due to increased sales, partially offset by higher material costs, higher logistic costs, including freight and supply chain shortages. Fiscal year '22 first quarter margins were 24.9% as compared to 23.6% in the first quarter of fiscal year '21. That negative impact of the supply disruption and higher logistics costs, including freight, on the first quarter of fiscal year '22 gross margin was nearly 300 basis points. These higher costs that were experienced in the first quarter are…

Ron, thank you very much. Kat, I believe we’re ready to take questions.

Certainly. Thank you. The floor is now open for questions. [Operator Instructions]. Our first question comes from Matt Sheerin from Stifel. Go ahead, Matt.

Yes. Thank you. Good morning, everyone. Just a couple of questions for me. First, regarding your guidance for the fiscal year, sounds like you're reaffirming that but a little bit more cautious due to some of the headwinds that you see on the supply side. So are you seeing less visibility into demand because of those issues? Are things getting worse than they were? Just want to sort of understand why you sound a little bit more cautious relative to last quarter?

I think what I can point to is GM’s announcement this morning on additional plant shutdowns. We were anticipating some of that, and that's really what causes us to say, we're going to see enough fluctuation here and uncertainty that if that were to continue, we would be off the midpoint of our guidance ranges. We still remain confident in the range. It’s just, as you mentioned, the uncertainty causes us to be perhaps even more cautious than we were at the beginning of the fiscal year I think that’s fair to say.

Understood. And in terms of how you see sort of the fiscal year playing out, I think typically you're up a little bit in the October quarter sequentially. But would it be more flattish, just because of those near-term headwinds? Obviously, GM is not the only one we're hearing about shutdown. IHS has been cutting its numbers every month it seems. So are you expecting things to sort of stall here before they pick up again?

I think the word is lumpy. I think we're going to see some good months as some of the supply chain issues abate, some of the alternate materials that everyone is working on come into play. But I don't think we can look at the business historically and say, on October or February is going to be better based on history. If you look at the dealer lots, they're empty. So the moment they can build cars, we're going to get business. So that happened in December, which is usually a slower month, then we will see uptick into this December timeframe. It's the unpredictability that is going to make the foreseeable future to revenues, I used the word, lumpy.

Yes. Okay. And just lastly, regarding the gross margin headwinds that you're not the only one seeing, are you having any success talking to your customers about passing some of those costs along?

We're having some success, but I would say it's limited. Ultimately, we're pretty persistent. We'll have some success in that. But in the past, it could take six to eight months to come to an agreement with the customer on that. It took that on tariffs.

Yes. I think the key thing is we incur them and there's going to be a degree of latency between any type of recovery, there will be a little bit mismatched. But as Don mentioned, we're persistent and working with our partners as best we can.

And it's a cycle. As we bid new business, we're taking all that into account as I’m sure as our competitors are too. So that will eventually get passed on, just a little lag.

Okay. All right. Thanks so much.

Thank you.

[Operator Instructions]. And our next question comes from Luke Junk from Baird. Go ahead.

Good morning, everyone. Thanks for taking the question. I'll start with a question probably for Ron. Recently, you've given us guidance for the next quarter out. I appreciate why you didn't do that today. Obviously, the GM announcement went out this morning. But I was hoping you could maybe walk through any key factors sequentially that might help to bridge from the fiscal first quarter to what you're thinking might be likely internally for the second quarter, just at a high level?

Yes. Notwithstanding any GM items that would result from today's announcement this morning, yes, I think we've got a good strong backlog in terms of visibility to our commercial vehicle business. Vehicle electrification continues to go well. So we do have some other areas that have firmed up relative to where we are in the first quarter. So we clearly would expect the second quarter to have some momentum relative to the first quarter.

Okay. And then --

We chose not to -- generally, Methode doesn't give quarterly guidance. We felt that there was enough uncertainty going into a new fiscal year and the first quarter that we wanted to level set things, which we did. And then, of course, on the call here, we gave comments to what pressures we're seeing in the second quarter and the balance of the year.

Okay, I appreciate that. Next question I had, you called out a 300 basis point headwind to gross margin on these various supply chain and product-related issues this quarter. That's up versus I think it's 200 basis points last quarter. Just wanted to dig in to that a little bit further in terms of where you saw changes in terms of increased pressure there. And maybe if you could also expand on how that sets up going forward based on what you know right now?

Clearly, there's a logistics standpoint that really hurt the port congestion. We manufacturer a good amount of our Grakon products in China that have to be shipped and they're in containers. And so our airfreight continues to meet the customer demands, continues to escalate relative to where we were in the first quarter. We're also seeing a lot of spot buy increases in terms of pricing and able to compare components and to secure them seeing some significant material cost inflation as well. So those are the major things that are going. And you can see -- Luke, the other thing I'll add to that besides the 300 basis points as you saw our inventory increase a lot during the three months as well. So it really has -- it got exacerbated in the first quarter. And we hope to see some improvement in that. But port congestion is a real problem. Getting our goods out of our facilities in China and getting them to the rest of the world.

We've increased our surveillance on counterfeit components. We've always had a system in place for that. And we're more comfortable when the components come directly from the manufacturer. But as Ron was mentioning, spot buy sometimes with the distribution and we've increased our surveillance because that represents a heightened concern when you're not going directly to the factory all the time. And so there's a cost associated with that.

And then my last question, bigger picture one and what I'm wondering if there's any updates in the last three to six months, let's say, on some of the emerging opportunities that you're pursuing? I'm thinking areas that you've mentioned in the past, like charging ports, other areas around power in general to load sensors, cameras, those sorts of things.

I don’t know if we have anything to update other than what we mentioned in the awards. We continue to pursue the charge boards. That's a big focus for us. But as of today, we don't have any awards that I can announce. But that is an area we are clearly focused on.

And, Luke, we're still seeing a very robust RFQ opportunity for our busbar and power products regarding vehicle electrification. Those opportunities to quote and to win business are still very robust. So they might not show up as a booking for another 6, 9 or 12 months.

Yes. And I think we remain cautious. We are excited about the newer OEMs on lighting on those. And as that ramps up, we'll definitely benefit from that. I believe we're a little cautious at our forecasting. But that is an area that we do expect to see upside from it at some point. I don't predict exactly when, but it’s certainly in our plan.

Okay. Well, thanks for the color this morning. I'll go ahead and leave it there.

Thanks, Luke.

And it appears we have no further questions at this time. I would now like to turn it back over to management. Go ahead, Don Duda. The floor is back to you.

All right, Kat, thank you very much. I want to thank everybody for listening today and wish everyone a very pleasant and safe Labor Day holiday. Good day.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.