Good morning, ladies and gentlemen, and welcome to the Methode Electronics Q3 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 third 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 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 third 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 $292 million, helping our sales by $9 million, were successful premium freight to cost recovery efforts. However, our Automotive segment encountered demand headwinds in Europe due to the ongoing supply chain disruptions, particularly the semiconductor shortage, leading to various European auto OEM production slowdowns. In our Industrial segment, we saw strength across all our product categories, but particularly in power and lighting products. In particular, the segments saw growth in electric vehicle, busbars, commercial vehicle lighting and radio remote controls. These products continue to benefit from the macro growth trends and electrification, e commerce and automation. As such, our industrial sales again outgrew our automotive sales, a trend we expect to continue. As I mentioned, our team continue to face the ongoing supply chain challenges in the quarter. They have worked diligently to mitigate these challenges, which required remedial action such as expedited shipping, and premium component pricing. We have worked relentlessly with our customers to share in the absorption of these increased costs, particularly with the premium freight. In addition, we've taken the proactive steps to consolidate an operation into another existing facility in response to these logistical challenges. We are confident this action will help reduce some supply chain risk, improve customer service and ultimately drive margin expansion. Rob will provide more details on this restructuring later in the call. On the order front, with a very strong quarter with over $100 million of new program awards, of…

Thank you, Don. And good morning, everyone. Please turn to slide 7. Third quarter net sales were $291.6 million in fiscal year '22 as compared to $295.3 million in fiscal year '21, a decrease of $3.7 million or 1.3%. The year-over-year comparison includes $8.6 million of premium freight cost recovery, partially offset by an unfavorable currency exchange impact on sales of $2 million. Excluding the premium fright cost recovery and the foreign currency impact, sales decreased by $10 million or 3.5%. The decrease in third quarter sales was mainly due to the lower automotive sales in Europe. This sales decrease was partially offset by higher sales of electric and hybrid vehicle products, which amounted to 19% of sales in the quarter, which is higher than our previous communication that electric and hybrid electric vehicles sales would comprise a mid teens percentage of our fiscal year '22 consolidated sales. We now expect electric and hybrid electric vehicles sales to represent the high teens of our full year fiscal '22 consolidated sales. In addition, stronger commercial vehicle and power product sales contributed to the industrial segment growth. Income from operations decreased by $5.6 million, mainly due to marginally lower gross margins, and marginally higher selling and administrative expenses. Third quarter net income decreased $2.5 million to $29.4 million or $0.78 per diluted share from $31.9 million or $0.83 per diluted share in the same period last year. Please turn to slide 8. Third quarter gross margins were lower in fiscal '22 as compared to fiscal year '21, due to lower sales volume, unfavorable product mix, higher restructuring costs, partially offset by premium freight cost recovery. Fiscal year '22 third quarter margins were 23.7% as compared to 24.6% in the third quarter of fiscal year '21. In addition, we do anticipate a degree…

Thank you very much, Matt, we're ready to take questions.

Certainly. [Operator Instructions] Your first question is coming from Chris Howe from Barrington Research. Your line is live.

Good morning, everyone.

Good morning.

Thanks for taking the questions. Starting first off, two questions here. With the new business wins, you mentioned approximately 70% of the applications going to the EV market. Can you talk about these new business wins in a little bit greater detail as far as how you anticipate the potential or maturation of these new business wins, as we move further out into the future over the next several years. I would imagine that we're just at the kind of initial stages of this and the potential for additional EV application wins should only increase from here?

Yes, I would agree with that. You know, as I said, the EV awards, they'll get the full launch as short as a 12, 15 months from now. The major ones are at least 24 months out to maybe even 30 months till you get the full launch. Just because it launches doesn't mean you're running at the full rate. And they - run the usual launch cycle of our of our ICE [ph] awards, really nothing unusual there. And you right, of the potential, you know, as you launch these programs, you'll see that carry over on to other platforms. So, you know, maybe a $20 million annually might turn into 30, 35 as you go through the launch. So we do anticipate some of that occurring. A little more color. A lot of those are on the skateboard, which is exciting for us. It's hard to predict the length of the programs, you know, the contracts are four or five years, some of them even longer. But we're all in uncharted territory on how long the words will go, I think it will be like a transmission program where the our lead frame program is 10 years plus, I think we can anticipate that. So we like the skateboard awards because there's not as much refresh, it's going on there. And I would also say the majority of the awards, particularly the larger ones are with established OEMs, which would also like to see – with more competence in the volumes rather than nothing against the start ups we deal with, but it's a little easier to predict future revenues with it - with an established automaker.

Perfect, very helpful. And next about the semiconductor situation semies [ph] we're still undergoing the situation, I think you think that it's going to go into fiscal year '23. As we think about that challenge, and perhaps also the challenges you're seeing in Europe, on a directional basis, how do you think that plays out in the first half of fiscal '23, and the second half of fiscal '23? When we kind of look at that versus how this past year is playing out.

If you take the approach that it takes about two years to add capacity, and that might be a little light on the two years. We're about a year into it, may be a little longer depending on what was happening before the shortage in terms of capacity addition by the suppliers. So maybe a conservative way of looking at it is, the duration of this calendar year, I think that's going to be an issue. Now it may - people have predicted that it'll start to get better in the second half, but we're kind of looking at it, this is a - until capacity has been added sufficiently, this is going to be - going to be with us. And that's really how we look at guidance. And that's certainly how we will look at our fiscal '23 as well.

Yeah, I would say that it's still buys a lot of uncertainty not only to us and securing components, so we can ship to our customers. But the OEMs that we serve, we're still dependent on how well they have navigated the search. So we expect that to continue. One thing we have done a better job and we spiked it out in success is, you know, recovering costs and getting into more of a cost sharing arrangement than we did in the first and second quarter of the year. So we're certainly navigating the negative impact of the as best we can. But - so obviously a lot of uncertainty on how it's going to impact our customers ultimately, and the demand for our product.

Okay. Yeah, a lot of industrial companies are going with the second half thesis, but in my opinion, that just means it's not going to be like the first half. We'll see how the second half plays out. But as a follow up on some of your comments there. Q4, typically your strongest quarter, you know, Q3 is typically weaker. Any puts and takes there that you can see at this point with how that plays out in fiscal year '23. Or too early to tell and the typical seasonality of the business should run its course?

I agree, that generally our fourth quarter are strongest. But then it was well, Bob [ph] has mentioned here, the supply chain issues can impact that. And as far as we look forward, I think we're like everybody else, there's so much uncertainty, it's hard to - we can look at on paper as they are organically we're looking good. But you really have to see what starts to happen on the second half of the year. And we're - audit can be very tough. But one thing that generally it's fairly predictable, but in the past, really two years, running against that - that theory. So it's very hard to say, what June or July [indiscernible] I like to answer that, but it's just like anyone else, we don't know.

Thanks for taking my call. I'll hop back in the queue to give others a chance. Thanks.

Thank you. Your next question is coming from John Franzreb from Sidoti & Company. Your line is live.

Good morning, everyone. And thanks for taking the questions. I like to start with the industrial business, had a good quarter on a year-over-year basis and was up sequentially despite the seasonality of having the days off in the third quarter. What is January and February tell you about the recovery in the Class A truck market and how it's kind of looking for the balance of calendar 2022.

The way we look at the commercial vehicles, that's a definite tailwind for us as we go into the second half of the year or that's been - sales have been good. last mile vehicles, I think ACT has the numbers up. So we're very positive on that. And that certainly helped the third quarter no question about that. Now, to what degree, as I said to Chris, to what degree that's negatively affected by shortages, and so on, we'll have to see. But in general, we see that as a bright spot, looking forward.

No, no, that's - we follow the ACT, and everything is looking pretty good. And, you know, unless something happens, we would expect, you know, the fourth quarter to improve.

And one of the things that we talked about restructuring, we did logistics move out of Seattle, and the port congestion there and consolidated in our Mexican logistics center. So that'll take a while to sort through. But we did that to a one to certainly reduce inventory and some of the volatility of able to service our customers better, that we did to best [ph] step in the quarter.

And I would imagine go through the system, it'll be the first quarter of next year, we - first quarter of fiscal year before we see the results of that.

Got it, got it. And just a little clarity on the free recovery costs. It seems like in the press release, it's a zero impact to profitability. But then when I was perusing the Q, it seemed like it did have an impact on the gross margin profile. Please help me understand how this mechanism is working, so I can get a better grasp of the whole concept here.

Sure, we – we're in a position now as compared to before, where before we do any premium freight, we either contract up to cost share, or in - we're getting the improvement from previously incurred costs. And that was what that $20 million was a recovery for costs in the third quarter that occurred in the first and second quarter when we were significantly negatively impacted by that. So we're going to continue to get straight up before we do things agree to cost sharing. So we don't have that negative impact. And we're going to continue to try to recover any previously premium freight or any other costs. For that matter, we're going to continue to do so. And the case of that success could happen in this quarter. It could happen in the first quarter of next year. But those are the mechanisms that we did. But we just thought it was pretty important to spike that out as, quote, non product sales. And, that we are starting to see some significant success. And you know, in the first two quarters, one was 240 basis points, $7 million, $8 million in each of the first two quarters. And in this quarter, it was negligible, right. So we're - we've made an impact, and that's how we should be, you know, kind of thinking about that on a go forward basis.

Got it. That was helpful. And it gets one less question on the other income line. Are there two items there? Or is there one, is there a $2.2 million and $1.1 million? One's a grant and one's a COVID recovery number? How - what were those numbers? I mean, how should I think about actually that line going forward?

Yeah, so you know the other income line consists of any government assistance, that whether it's COVID related, or whether it's related to some other opportunity that we have to secure funds. And the other one is the foreign exchange from re-measurement and all of our financial assets and accounts payable accounts, all those financial assets. So those are the two main parts, but we keep all government assistance in that other income line.

Are you still receiving government systems since the fourth quarter? Is that part of your guidance?

So in the fourth quarter, we will - we continue to try to secure all that - that's an always an ongoing thing for the company and any success in that has been contemplated in our guidance.

Got it. All right. Thank you for taking my questions. Okay. I’ll get back into queue, guys. Thanks for taking the questions.

Thank you.

Thank you. [Operator Instructions] Your next question is coming from Nick Stephen from Baird. Your line is live.

Hey, everyone. Thanks for taking my questions. So my first one is and so far that you updated 2022 guidance is also [indiscernible] 4Q guidance, and considering already a month into the quarter, could just walk us through the puts and takes assumed at the high end, low ends of the guidance range respectively and what do you see is the main swing factors for your fiscal 4Q?

So frankly so, you hit to the fact of 4Q guidance and some of the puts and takes are the recovery, the cadence and the amount of recovery in European auto as compared to the $60 million decrease we had in the third quarter, that’s from a product standpoint, and having a bit of you know, recovery in some of our sensor products and things of that nature. So the cadence and the amount of that would – we know the range the $10 million, right. So those are the main puts and takes that we contemplated from a product standpoint and getting to that tightened up range.

Perfect. Thanks.

Thank you. That concludes our Q&A session. I would now hand the conference back Don Duda, President and CEO of Methode Electronics for closing remarks. Please go ahead.

Matt, thank you very much. We'll thank everyone for listening today and enjoy the coming weekend. Thank you.