Hello, ladies and gentlemen, and welcome to the Methode Electronics Second Quarter Fiscal Year 2023 Results Call. At this time, all participants are placed on a listen-only mode, and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr. Robert Cherry, Vice President of Investor Relations. Sir, the floor is yours.

Thank you, operator. Good morning, and welcome to Methode Electronics fiscal 2023 second quarter earnings conference call. For this call, we have prepared a presentation entitled Fiscal 2023 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 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 2023 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 four. Our sales for the quarter were a record $316 million, this was achieved despite a significant headwind from foreign exchange, which was partially offset by strong sales in China, loss sales due to the COVID lockdowns in China in the first quarter were recovered in the second quarter. These China sales recoveries are now behind us. Also helping to offset the foreign exchange headwind we’re ongoing material spot buy and premium freight cost recovery efforts. Driving our overall sales performance was a record quarter for sales in our Industrial segment of over $100 million. This surge in sales was driven by power distribution solutions, both for data center and EV applications and by commercial lighting. Some of the increase was related to the China lockdown sales shift. That aside, it is clear that we are successfully executing our strategy to grow our industrial sales and better balance the business mix between the automotive and industrial segments. In the quarter, we continue to face ongoing cost increases, due to the general inflation in material and labor, as well as supply chain challenges, which resulted in remedial actions such as stock buys and expedited shipping. We continue to work relentlessly with our customers to share the absorption of these increased costs. We are gaining traction in these efforts, but our ability to pass along price increases will lag as a matter of process as long as high inflation continues. On the order front, we had another solid quarter…

Thank you, Don and good morning, everyone. Second quarter net sales were a record $315.9 million, compared to $295.5 million in fiscal ’22, an increase of $20.4 million or 6.9%, led by record sales in the Industrial segment. This quarter sales were driven by strength in power distribution solutions for both data center and EV applications and by lighting solutions for commercial vehicles. The quarter also benefited from approximately $15 million of sales recovered from Q1 through the COVID lockdowns in China. As Don mentioned, the Q1 China sales recoveries are behind us. Also helping sales was $5.8 million of stock buy and premium freight cost recovery. Partially offsetting these positive factors was an unfavorable currency impact on sales of $22.2 million. Excluding the spot buy and premium freight cost recovery and foreign currency impact. Sales increased by $41.2 million or 14.2%. EV product applications amounted to 20% of sales in the quarter. We still anticipate electric and hybrid vehicles sales to represent 20% of our full-year fiscal ’23 consolidated sales. Lastly, on sales, the percentage of sales in the automotive and industrial segments in the quarter was 62% and 33%, respectively. The industrial segment is clearly becoming more prominent to the overall company. Second quarter income from operations decreased 1.2% to $32.8 million from $33.2 million in fiscal year ’22, mainly due to higher selling and administrative expenses, as well as unfavorable foreign currency translation. The higher selling and administrative expenses were mainly related to lower annual performance based compensation in the prior year. The leverage from the higher sales in the quarter was more than offset from the impact of higher expenses and currency translation. Second quarter diluted earnings per share increased 4.2% to $0.75 per diluted share from $0.72 per diluted share in the same period last…

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

Ladies and gentlemen, the floor is now open for question. [Operator Instructions] Thank you. Our first question is coming from Luke Junk with Baird. Please go ahead.

Thank you. Good morning, thanks for taking my questions. Don, just to start hoping you could give us your updated thoughts on the macro especially specific to auto. Would be most interested in your updated views on China right now, in light of the recent COVID developments there as well? Any current thinking on energy risks in Europe and based on the prepared remarks, am I hearing that China may have impacted your thinking on the updated guidance specifically?

Let me answer that one first. It was a good quarter. In China, some of that was catch up, as Ron talked about. We are -- what's the biggest risk for us. We are concerned about shutdowns in China. We have seen some of our customers slowed down their releases, particularly in the data center. So we've taken that into account in our guidance, but we do see a little slowing and we are apprehensive about shutdowns of those that we saw that in the fourth quarter last year and the first half of the first quarter, those were dramatic for us and I'm pleased we did probably recover all of that, but that's probably our number one concern. As far as Europe, we're taking a little bit of a wait-and-see approach. I'm not as concerned, but we are seeing softening in our e-bike business, that we view that as temporary, but that came into play into our thinking and guidance. And as Ron pointed out, we did not -- we lowered the high end, because we just didn't think of all the facts that I just talked about. We didn't think that was likely to occur particularly well, also with the FX effect, because that was not taken into account when we initially gave guidance. Ron?

Yes. That those two items are our biggest areas of concern and obviously the dollar against the euro and that has strengthened in the last -- has weakened in the last couple of weeks, so we'll see where FX ends up the remainder of our fiscal year.

But Luke to your energy question as far as Methode facilities are concerned, we are operating in multiple. We're operating in Egypt and we’ve smaller facility in Belgium, but the two major facilities should not be impacted, but our customers could be impacted, which would have a direct effect on ourselves. I think we're okay perhaps maybe there might be an issue in Belgium, but it will be the effect on our customers that could cause us to have issues.

Okay, great, thanks for all that. And then second question for Ron, just regarding working capital inventory of course it's been ramping in the last year plus or so, but it kind of planned out this quarter instead, there is a big step up in AR side to the higher sales, can you just expand on how you're thinking about working capital into year-end and into next year both as it relates to cash flow, which already commented on to some extent, but I'm wondering maybe more importantly strategically relative to the current environment as well?

Yes, so we clearly, look we had a very strong quarter in the AR especially was negatively impacted. We expect that to turn around, I mean, if you look at the midpoint of our guidance from the revenue perspective, it's going to be a little less than where we were for this fiscal, the first half of the fiscal year. So we expect improvement in that. We are pleased to see the inventory at least turn it could put on that and we expect some improvement over the next six months on that perspective though it will likely be a gradual improvement. So with more pronounced improvements as we get through some of our make where we sell strategy and localize things are nearshore things a little bit more, we would expect inventory improvement certainly in the next fiscal year as well. So we clearly haven't been up to the Methode historical standards in terms of how we generate cash, but we are on a trajectory to get that to be where we more had historically been.

And I think comment, there's nothing in AR, but any concerns there and then inventory, inventory in large part is up, because the products that we're keeping an inventory have gone up dramatically. I think more that said was like 30 --

Yes, almost 50% or 60% of the inventory increase was due to the standard cost and things of that nature. So which filled out -- material prices go down. So what we're really focused on what we can control is the logistics and how we order. So that's where the team is focusing on right now.

Okay, and then lastly, just a bigger picture question. Don wondering, if you could comment on the evolution of busbar’s in terms of EV architecture and applications and the awards this quarter you said the busbars not only for battery applications, but also for e-motor and in inverter. I think there maybe had been one inverter weren't in the past, if I look back at your historical bookings. Just wondering, is there an expanding use case for busbars to outside of just the battery that you're seeing right now? Thanks.

Most of those, in general, those are the three areas of the vehicle that you would see busbars, and we've talked, you know, historically about the battery busbars that we've started to ship those quite some time ago. Well, we have moved into the inverters and into the motors. And if you go to our investor deck, I think there’s one slide in there that shows our pictures of all three. So that's the majority of our bookings have been in battery busbars, but we are moving into those -- other two areas. And that would be natural, because I have several busbars suppliers if your major one is the battery supplier should be able to do the others, so that it's a change. It doesn't represent huge bookings at the moment, but we anticipate that is one of the reasons we favor busbars pipeline.

Okay. Great, I'll go ahead and leave it there. Thanks for all the color.

Thanks, Luke.

Thank you. Our next question is coming from John Franzreb with Sidoti and Company. Please go ahead.

Good morning, guys, and thanks for taking the questions and congratulations on a good quarter.

Thank you.

I wanted to circle back to the Asia question, I guess, to how phrase it, sequentially revenues went from $30 million last quarter to roughly $45 million this quarter is how much of that you characterize as a catch-up price and would you expect that business to dip again or stay at this kind of level? What are your thoughts there?

That was certainly a catch up. The other thing we had there John was our power business into data centers, which is a nice business for us, kind of, lumpy business and in the first two quarters, we experienced really great sales from that and we -- in our guidance we contemplated a bit of lowering or tempering of not maintaining that level in the second half of the fiscal year.

Yes, I think really, in both those areas. We achieved our full-year numbers, so we are anticipating a slower third and fourth quarter there and you take that into account and then you taken the catch up, so I would say its going to be down.

Okay, all right, fair enough. And if I look at the Industrial segment and you called out that data centers you just mentioned EV and commercial vehicles, as far as the year-over-year growth. Can you kind of quantify which of those three had the greatest impact year-over-year?

Sure. If we look at that the segment, the power piece of it. The datacenter and the EVP’s had the biggest growth and then the second factor would have been our commercial vehicle lighting and then behind that would have been our Hetronic Radio Remote Control in that order.

Okay, fair enough. And it sounds like your -- the M&A pipeline. They have improved or changed from three months ago. Can you talk a little bit about what you're seeing out there as far as potential inorganic growth?

Sure. I would say the pipeline stays robust we brief, the Board once a quarter of what opportunities there. Those have not -- they've maintained their pace nothing that is imminent, but I'm not unhappy with the amount of looks that we see. The credit facility that was expiring. So we needed to re-up that and then take the opportunity to avail ourselves of more borrowing capacity, if we needed it. Prices I don't know that they've come down appreciably yet. We think they will perhaps private equity is a little bit on the sidelines, which gives us maybe an advantage, but we'll have to see how things pan out, if we get to the point of discussions of pricing with a particular target.

Yes, I would agree on those assessments and getting the expanded credit facility as it was a good thing for us and certainly gives us more flexibility and latitude to -- from that part of the capital allocation strategy.

And I think that gives us an advantage. We're talking to targets down the pay, hey we're ready to go, we can get to the right due diligence and the right price. So I think that's a definite advantage.

Fair enough. I guess one last question, you've been far more aggressive buying back stock than repaying debt, what are your thoughts on that on a go forward basis? Or it's maybe to phrase it differently, do you have a lower share count embedded into your guidance for this year when you closed at the end of the second quarter?

John, I think it's, it's more about timing within our strategy over the next couple of years in terms of how we foresee allocating capital and absent an acquisition, we have been allocating more capital towards share repurchases. In terms of debt reduction prior to the facility that we just updated on October 31, there was a term loan a component to that. And if we were to repay that we would basically lose the ability to reborrow against that and now under the new facility that doesn't have that components so will have more flexibility without it being punitive and our ability to reborrow. So mainly, we just, we just continue to generate cash and allocate capital towards share repurchases and we can pivot and deviate if we were to do an acquisition.

Got it, thanks for the info. I appreciate guys. Thanks for taking my questions.

Thank you.

Thank you. Our next question is coming from David Kelley with Jefferies. Please go ahead.

Hey, good morning and thanks for taking my questions. I wanted to follow-up on the earlier power distribution and busbar EV discussion. I was hoping you could talk about the bidding opportunity there versus what you're seeing with win rates with customers. Are you seeing a step up in both and thus implying some market share gains there?

Yes. We've been shipping busbars since 2006 and Methode has been in the busbar business probably since the 60s maybe. So we're well versed in how to make those that gives us a competitive advantage. We also are -- we are a solid Tier 1 supplier that with a great quality record. So we get -- we don't always get the wins, but we get a lot of looks across the Board on busbars, and as I said earlier, moving into power distribution and the motor busbars. So are we gaining market share? Yes, we have our threshold of pain; however, and we're pretty disciplined on that. We track our wins we've talked in the past about how we looked at our booking opportunities. We have embryonic. We have -- we put a percentage to at 50% and then we have 75% and we track over the years what our win rate is, and I think the last one we looked at and this is across the board for Methode is not just EV, 75% is we're in the 60 some percent rate. If we lose, we lose because we've reached a price point that we don't want to go. So I think that's a definite market share gain for us and we've talked about that.

Yes, I think we've done, the team has done a great job in capitalizing being I guess “early mover within this space because we have such a rich history, we have the capacity in the manufacturing systems and everything on three continents to support all of the EV in a more local manner. So we're really, we were in a good spot. And as Don mentioned [06] (ph) with Tesla. So we've been mixing it up for quite a long time. So we've been getting some good looks with our existing relationships with the OEM, the automotive OEMs, and we've done a good job of closing business.

Okay, got it. That's really helpful. Maybe one more follow up on the -- on the supply chain discussion that's been ongoing here. Curious, if you're seeing any signs of improved visibility or incremental product availability and I guess taking a step further, do you foresee any opportunity for some relief from the spot buys into the back half of the year. Are you assuming any relief there? As we think about updated full year guidance.

I take some comfort is only one quarter in that our spot buys were lower this quarter, I would feel better at the end of this quarter, if they were less than the same in the fourth. So that's only one data point we still we're challenged every day and supply issues, is it less. Yes. Is it coming to an end. I'm not willing to say that yet. I think we're this through the end of our fiscal year. And there's been a lot of people that have been predicting an improvement and they've been wrong. So that's almost a non-answer, but we don't know we can be track it, but it's been, it's still difficult and we've seen our customers continue to have issues.

Okay, got it. So just to clarify, it sounds like you're assuming some cadence of spot buys continuing into the back half of the year and guidance.

Exactly, that's fair.

Okay. Yes. Okay, got it. Thanks guys. That's really helpful. I appreciate you taking my questions.

Thank you.

[Operator Instructions] Our next question is coming from Gary Prestopino with Barrington Research. Please go ahead.

Hi, good morning, everyone. Most of the questions have been answered, just wanted to get an idea, what was your share count at the end of the quarter. I got like 37 million buyback out of the queue. Is that correct? Is that what you using for EPS calculations?

This quarter. Looks like 37. Yes, that would be it yes.

So, then the other question -- a couple of other questions, I would have is our most of the FX headwinds are coming from the euro. Is that correct?

From the euro with the RMB secondary. Yes.

Okay. Euro and RMB, but when you're producing in places like Malta -- in Belgium. You see, have a plant as well?

Yes.

Okay. So there some offsets there would be expenses you're incurring in those local currencies as you translate back in the U.S., is that correct?

There are absolutely and a lot of it is just fortunately for us, we do a good job of making earning a profit in our non US locations. And just from the translation to the financials from the US GAAP perspective, they're worth less than they would have been the dollar strengthening. But we absolutely do a lot of internal offsetting at each of our locations and then have a FX program that looks at everything from a consolidated basis as well when we start getting into receivables and payables and things of that nature cross border, we take actions here as well, so pretty robust FX management protocol.

Okay. And then lastly in terms of your end clients your end users. I know you talked about trying to pass on price increases there has that become any easier for lack of a better word or more acceptable other suppliers. I've talked to have said that they develop them amongst success of passing on some of these cost increases?

I think if we had our sales people in the room, they would say absolutely not. It's difficult with any customer and where a customer do our suppliers and we're pretty tough. So it has to be a justification and it takes a while you're always walking a fine line between say I need to book more business. But I’m going to get pretty tough price increases. So is it easier than it was before the pandemic, I guess you could say it is because that is the customers are somewhat used to that, but it's not, I don't know that it's getting any easier, we're achieving some success, but I think we've had a lot of success, but we need inflation with [indiscernible] performance the benefit of it, but I'm -- I don't know.

No I just if you start going into, well more than once, going a second time it gets the debt part of it makes it more delicate, that's for sure.

Okay, thank you.

Thank you. At this time, there appear to be no further questions in queue. So I will hand it back to Mr. Duda for any closing comments he wishes to make.

Well, thank you very much. I thank everyone for listening today and wish everyone a very safe and pleasant holiday season. Good day.

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