Good morning, ladies and gentlemen, and welcome to the Methode Electronics Second Quarter Fiscal 2022 Results [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Robert Cherry, Vice President of Investor Relations of Method Electronics. Sir, the floor is yours.

Thank you, operator. Good morning, and welcome to Methode Electronics Fiscal 2022 Second Quarter Earnings Conference Call. For this call, we have prepared a presentation entitled Fiscal 2022 Second 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 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.

Thank you, Rob, and good morning, everyone. Thank you for joining us for our fiscal 2022 Second Quarter Earnings Conference Call. I'm joined today by Ron Tsoumas, our Chief Financial Officer. Both Ron and I will have opening comments, and then we will take your questions. Let's begin with the highlights on Slide 4. Our sales for the quarter were $296 million. We had a significant headwind in our automotive segment due to the ongoing supply chain disruptions particularly the semiconductor shortage. That shortage led to auto OEM production slowdowns and in some cases, production shutdowns. This, in turn, led directly to lower sales in our Automotive segment, especially in North America. Helping to offset that auto headwind were near record sales in our Industrial segment. There was strength in sales across all our industrial product categories, but in particular, we saw growth in electric vehicle busbars, commercial vehicle lighting and radio remote controls. Respectively, these products are benefiting from the macro growth trends in electrification, e-commerce and automation. The industrial sales in our portfolio relative to our automotive sales continue to grow. As I mentioned, our team continued to face supply chain challenges. These include the ongoing semiconductor chip shortage, pandemic related supply chain disruptions and port congestion, all of which are increasing costs and consequently negatively impacting margins. Our team has worked diligently to mitigate these challenges, which, in many cases, require remedial actions, such as expedited shipping and premium component pricing. In addition, we are working relentlessly with our customers to share in the absorption of these costs. The timing of these cost recoveries is not certain. At this point, our expectation is that these conditions will last until the end of our fiscal year. This extended period of demand recovery and margin pressure is a driver…

Thank you, Don, and good morning, everyone. Please turn to Slide 7. Second quarter net sales were $295.5 million in fiscal year '22 compared to $300.8 million in fiscal year '21, a decrease of $5.3 million or 1.8%. The year-over-year quarterly comparisons included a favorable foreign currency impact on sales of $2.8 million in the current quarter. Sequentially, sales increased by $7.7 million or 2.7% from the first quarter of fiscal year '22. The decrease in second quarter sales was mainly due to lower automotive sales, especially in North America as compared to the same period in fiscal '21, which benefited from the rebound from the depths of the impact of COVID-19 pandemic experienced in our first quarter of fiscal year '21. The sales decrease was partially offset by higher sales of electric hybrid vehicle products, which amounted to 16% of sales in the second quarter of fiscal '22, which was in line with our previous communication that electric and hybrid vehicles sales would comprise a mid-teens percentage of our fiscal year '22 consolidated sales. In addition, stronger commercial vehicle sales contributed to the robust industrial segment sales growth. Second quarter net income decreased $11.1 million to $27.5 million or $0.72 per diluted share from $38.6 million or $1.01 per diluted share in the same period last year. Net income was negatively impacted from decreased sales, the impact of higher materials and logistics costs and other operating costs and the efficiencies due to the global supply chain shortages and logistics challenges, higher stock based compensation costs and lower other income, partially offset by lower restructuring costs and favorable foreign currency translation. Please turn to Slide 8. Second quarter gross margins were lower in fiscal year '22 as compared to fiscal year '21, mainly due to higher material and logistics costs,…

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

[Operator Instructions] Your first question is coming from Luke Junk from Baird.

So first question I want to ask is on guidance. So I know you're not giving third quarter guidance, just wondering at a very high level, if there's any factors that you could discuss that we should be thinking about from a modeling perspective, 3Q versus 4Q in your fiscal year, especially be interested in your perspective on underlying auto and commercial vehicle trends? And also just want to make sure there's nothing that's sort of one-off in nature that we should be aware of. Ron, you mentioned the FX remeasurements in the current quarter, for example, I just want to make sure there's nothing that we should be looking for in the back half of the year that could be impactful like that?

I think the main thing that will affect the cadence of the second half is we're going in the holiday production shutdowns that always has an impact both in the US and in Europe. So if I was -- the Q3 tends to be a lesser revenue quarter historically. So I think that would be the biggest factor. And the balance is really unknown on supply chain disruptions. I will comment that to some degree maybe we've reached in the US a bottom of that that's, I guess, a qualified maybe. And then in Europe, we've seen more disruptions in the previous quarters than we've had in the past. So one may be getting slightly better and the other one might be getting a little bit worse. Ron, is there anything…

Clearly, I mean, historically, our third quarter due to, as Don mentioned, the holiday shutdowns and simply less shipping days tends to be our weaker quarter and our fourth quarter tends to be stronger, and we would expect that to follow through that type of cadence

Second question would be in terms of the state of your supply chain, obviously, a number of comments in the prepared remarks on that. I'm hoping we can maybe discuss sequentially what you saw in the second quarter versus the first quarter of the year, sort of where you exited the previous fiscal year, especially wondering where you're seeing incremental challenges right now from a supply chain and material standpoint? And as we zoom out and look at what this might look like going forward, how much permanence do you see in costs that are in the P&L right now versus things that might be, say, less permanent in nature over a subject to potential customer recoveries, let's say?

Let me answer that one first. I mean we -- as I said in my remarks, we are diligently working with customers to mitigate the entire supply chain issues from a cost standpoint. That takes some time. We think that's going to be with us for the duration of the fiscal year that's -- the success on that is contemplated in the high and low end of our guidance. COVID is still part of the supply chain issues that in certain areas is subsided and other areas, it's still contributing to labor shortages and causing our inventory to be higher than it needs to be. We will work down the inventory as the disruption subside, exactly when is very difficult to say. From a cadence standpoint, from Q1 to Q2, it was 250 basis points. The things get worse. They did not get better. I think that's the best I can say about that. Are we getting maybe a little more confident in our ability to deal with the shortages maybe from a labor standpoint, port congestion? Yes. But again, I see that continuing through the end of the fiscal year, and every day is really a new challenge. Normally in auto all the production schedules are pretty well cast at the end of the quarter. This whole year, it's been changing on a daily basis. Ron, is there anything…

And I would just say that as time goes on, I mean this is -- from a basis point perspective, we did a little better than we did in the first quarter. And as time goes on, we'll be better positioned to eventually get better or get more accommodating in terms of cost sharing and things of that nature. So one quarter doesn't make a trend but certainly, we can be in a position to maybe do better with that down the road and that's contemplated in our guidance.

Next thing I want to ask about -- I appreciate the disclosure in terms of the existing large truck center console program and just hoping to understand -- the revenue numbers that you provided are really helpful. Just hoping to understand the margin puts and takes related to that. I know there's certainly going to be gross margin impact in terms of mix as that business rolls off and certainly, there's a manufacturing overhead impact as well. Where do those two lines intersect and I don't want to get into fiscal '23 guidance per se, but just any high-level considerations as we think about the margin progression would be helpful?

That's been a very good program for us. And I think we've said this in the past, it's not the highest margin program, and it is being replaced by higher margin EV program. So we would expect, without getting into the exact timing of it, we would expect that our margins as that rolls off and other programs roll on that our margins would improve. In terms of overhead and the associated cost of that, we're pretty good at looking at programs and how rolling off, how do we adjust the factory overhead accordingly, what are we bringing in, we look at floor space, we look at indirect because we look at labor and that will -- those are all being put in place now as we start to see the roll off of that program. Inventory is another area that we look at. You don't really want to have a whole lot of inventory left as the program goes end of life, but there's also a service that we have to provide for three to five years at a minimum. So we'll take that into account. But I would say that we're on top of that. We've had other programs roll off and other ones roll on, and you adjust your factory accordingly.

And then if I could just ask a last question, a little bigger picture. I noticed on the business awards that one of the awards that was interesting this quarter was busbars for charging. And just hoping you could expand on what that opportunity set might look like for Methode going forward?

That is for commercial vehicle charging, not the charge stations that you might see in a parking garage. And that's -- I don't know if there's any more to say on that. It's a busbar. It deals with the commercial vehicles. In other words, at a FedEx, I mean not saying at FedEx, but at a depot, those charges would be charging the vehicles overnight, and we're providing the busbars for that.

[Operator Instructions] Your next question is coming from Matt Sheerin from Stifel.

I just had a quick follow-up question regarding your comments on the cost headwinds and your ability or inability to pass them along to your auto customers? Some of your peers selling into auto appear to have more success. So I'm wondering, are you sort of locked into contracts that make it difficult, how are those conversations with customers going?

I would say as well as can be expected in terms of we're asking for price increases and logistics relief, that does take time and we've been there before. And we're confident that we will recover our margin. Maybe some of our competitors are ahead of the game. We track it on a weekly basis. We know what conversations are taking place. The answer is not -- we won't get increases, this is really a matter of timing. And the other thing to point out is some tiers have material writers and so the price increases are automatic. We don't have those -- in our typical automotive contract, we do have that in some of our EV or power distribution contracts where we have material adders. So some of that could be automatic. In our case, it's not. Our programs tend to be four to five years, they are contractual and it's unusual time so that takes some discussions. And I think I would also point out that actually auto has been -- I don't know if accommodating is the word, a little bit easier to have those discussions than actually with our commercial vehicle. I think this is the first quarter, I can say we've made some progress. So that's been a little tougher going than auto. I'm not saying that auto is easy. We've had some very tough discussions whenever you're asking for a price increase. Ron…

No I was just going to mention on this EV space.

And just regarding the strength you're seeing on the EV side, it seems like you've got some good content gains. Are you also winning new programs and new logos in terms of customers?

Yes. And I think it's important to point out that it's -- some of it is some of the start-ups and also the traditional OEMs as well. So we've been very pleased with the bookings we've had there and that supports our growth going forward.

[Operator Instructions] There are no further questions in the queue. I will now hand the conference back to Donald Duda, CEO, for closing remarks. Please go ahead.

Matt, thank you very much. We'll thank everyone for listening today and your questions, and we wish everyone a very safe and pleasant holiday season. Good day.

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time, and have a wonderful day, thank you for your participation.