Good day everyone and welcome to the Methode Electronics Third Quarter Fiscal 2023 Results. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Robert Cherry, Vice President of Investor Relations at Methode Electronics. Sir, the floor is yours.

Thank you, operator. Good morning and welcome to Methode Electronics fiscal 2023 third quarter earnings conference call. For this call, we have prepared a presentation entitled fiscal 2023 third quarter financial results, which can be viewed on the website of this call or found at methode.com on the Investors page. This conference call contains certain forward-looking statements, which reflect management 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 2023 third quarter earnings conference call. I'm joined today by Ron Tsoumas, 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 $280 million, they were down 4% compared to the prior year, but up 4% excluding a significant headwind from foreign exchange and a sharp drop in material spot buys and premium freight cost recovery. The increase was mainly due to higher sales in the Industrial segment, driven by power distribution solutions for electric vehicles and data centers. Our power product sales continue to be the catalyst behind our strategic pivot to more industrial business and a reduced reliance on user interface solutions. This also results in a better sales balanced between our automotive and industrial reporting segments. In the quarter, we continue to face ongoing cost increases due to inflation in material and labor, which continues to be a drag on margins. We can, however, as I previously stated report a significant reduction in spot buys and expedited shipping and we continue to gain traction with price increases, which will lag as a matter of process. On the order front, we had a modest quarter with approximately $30 million in annual program awards. These programs were once again dominated by electric vehicle awards. After the end of the quarter, we announced a public tender offer for the shares of Nordic Lights, a very exciting opportunity for us to grow our LED lighting solutions franchise and gain more industrial and non-auto transportation market exposure. I will provide more detail on this shortly. Turning back to EV activity, sales in the quarter reached…

Thank you, Don and good morning, everyone. Please turn to slide nine, third quarter net sales were $280.1 million compared to $291.6 million in fiscal ‘22, a decrease of $11.5 million or 3.9%. This quarter's sales had $13 million unfavorable currency impact and a $1.4 million favorable spot buy and premium freight cost recovery impacts. Also impacting the quarters prior year comparison was the roll-off of large automotive program in North America. Excluding the foreign currency and the year-over-year cost recovery impacts, sales increased by 3.8%. The strength in the quarter was driven by power distribution solutions for EV and datacenter applications. EV product applications reached a record 24% of sales in the quarter. We now expect EV to represent 21% of our full-year fiscal ‘23 consolidated sales. Third quarter impact from operations decreased 8.4% to $27.3 million from $29.8 million in fiscal ‘22, mainly due to unfavorable currency translation and material cost inflation, partially offsetting those factors was lower selling and administrative expense. It is worth noting that absent the unfavorable foreign currency impact of $2.3 million, our operating income would have been flat year-over-year despite the $11 million in lower sales. Third quarter diluted earnings per share decreased 30.8% to $0.54 per diluted share from $0.78 per diluted share in the same period last fiscal year. In addition to the lower sales, the EPS was negatively impacted from the higher other expense, higher effective tax rate and unfavorable foreign currency translation. Of these, other expense was clearly the major driver, mainly due to an increase in foreign exchange remeasurement and the reduction of government assistance related to COVID-19. Other expense increased $7.9 million, going from an income of $4.4 million last year to an expense of $3.5 million this year. While the reduced government assistance was expected by…

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

Certainly. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from John Franzreb from Sidoti & Company. Your line is live.

Good morning, guys and thanks for taking the questions.

Good morning.

I'd like to start with that last comment about your expectations of organic growth being flat in 2024. Has anything you deteriorately changed about your expectations in the automotive or truck market as far as growth or cyclicality compared to three months ago?

We've seen slower growth in our datacenter market, mainly in power and slower sales in Asia, that is changing.

Yes. Clearly, the Asian auto and datacenter, which tends to the datacenter business tends to be lumpy. We've had a really good quarters, we don't expect that to continue into next year at that rate. And some of our third-party market, research and commercial vehicles has also changed in the last -- since we spoke last. So the combination of all of those things would lead us to a more flat organic growth year-over-year.

Got it.

And the projection for truck changed quite a bit for commercial vehicles. Down -- these are -- from a market forecast, down 14%, but we're looking at in ‘24, and recovering in ‘25, but a significant drop in our planning for ‘24.

I guess, I'll just stick with that been quickly, it seems like a lot of people are experiencing better than expected calendar ‘23 truck business than they anticipated, say, in January 1 and that might make the comps are more challenging in the year ahead. You seeing the same kind of scenario planning out.

Yes. I mean we -- it was not a factor much this year, but it will be moving next year. So yes, agree with that.

Okay. And just in regards to your EV wins, it seems like it's becoming increasingly important for us to maybe be aware of the geographic mix involved in your backlog, especially in the EV market. Do you have any sense of what that looks like broken out between North America, China and Europe?

It's really all three. And at any given time on our own user interface was heavily weighted towards North America, now it's quite nice. And then some of the programs that we want are crossing the continent, some of the larger automakers are both North America and Europe, which is very nice.

John, we're investing for this organic growth in all three major locations, on three major continents to support the OEMs in different locations. So a lot of ways, that's a really good thing for us to have that.

And one of the factors, why we're looking business.

Yes.

Okay and one last question, I'll get back into queue. Looking at your Q this morning, it looks like recoveries were down about $9 million year-over-year. Why was that the case and what should we -- how should we think about your ability to or when we reach maybe pricing equilibrium with the current cost environment?

That's a tough one to answer. I mean, the numbers that its improved, but in our ops reviews with the teams, they are still seeing, as we said in our prepared remarks there were still, material price increases and labor is certainly is continues to go up. So I'm very hesitant to say that's behind us, because we're looking at it and going into our next fiscal year.

And John, maybe to differentiate a bit on the spot buys has to do more with the supply chain and all of that and getting premium pay on behalf of the customer procuring that products. We're seeing that start to come down, but remember that's at zero margin, right? So as to differentiate that the price increases, that we’re going after, because of inflation.

Yes. Got it, guys. Thanks. I'll let somebody else have the floor.

Thank you.

Thank you. Your next question is coming from David Kelley from Jefferies. Your line is live.

Hi team. This is Gavin Kennedy on for David Kelley. Thanks for taking my questions. Can you quantify the impact of legacy roll-off had this quarter? And how should we think about the impact in fiscal year ‘24? Any details on timing and the potential magnitude would be great.

Ron, go ahead.

Yes, I think for the full-year, this fiscal year legacy roll-off has been in the $70 million to $75 million range. And so pretty much the same spread out over the three quarters, so went up $25 million to $30 million range, maybe for the quarter.

Sorry, that was this year and then expectations for next year.

This fiscal we have with -- our customer has not announced their vehicle change yet. So there's very little, we can say on that, I can tell you that we've taken that into account in our planning. But I really -- I can't go into that, because of our agreements with our customers.

All right. Fair enough. And then switching gears. You reiterated your organic sales CAGR, even though you expect next quarter or next year to be flat. So, this implies a pretty meaningful step up in fiscal year ’25. I assume this is driven by robust launch rates, but I was just hoping you could provide more details on what gives you confidence in that acceleration in fiscal year ‘25 and if you have any visibility these launches, the potential timing of the first half or second half that would also be helpful. Thank you.

Okay. Well there's always some downside to being the automotive business. One of the big upside as you get from contracts with detail, the timing of the launch and the volumes. Now the volumes can vary that's we've seen that before. But that allows us to really put pen to paper and project what are increases there. And this is ancient history, but if you go back to when we launched K2 from memory, I think it was from fiscal year ‘13 to ‘14, we had a $250 million jump in sales, when we were launching Center Council. So we've done -- we've had that happen before and again we can go through and look at the programs that we want. These aren't somebody a very large established automakers. It's not all, there are some start-ups, but the major ones that are well established, but we feel confident on that.

And for the third-party research on commercial vehicles while that -- it expects to dip maybe in our next fiscal year. The following fiscal year the forecast rebounds and goes up on that as well. So that will certainly help us with our 6% growth.

Yes, and we've seen that before too in commercial vehicles.

Yes.

Thanks for taking my questions.

Thank you.

Thank you. [Operator Instructions] Your next question is coming from Gary Prestopino from Barrington Research. Your line is live.

Hey, thank you. Good morning, everyone.

Good morning.

Could you give me, what the tax rate is going to be for this -- the change in the tax rate, I didn't quite get that down?

Yes. It went down to 60% to 70%. Yeah. So modestly down, just basically 1%.

And that's, where it will be for this year, right?

Without any additional discrete tax benefit expenses, the run rate estimated tax rate based on jurisdictional income, yes.

Okay. And I don't know how -- are you at with liberty to give us any idea of what the Northern Lights revenue was is like? And how it has grown over the years?

I have to stick to what we've announced is a public tender offer, so no, I can't.

Okay.

No then there is [Multiple Speakers] that may be out there, I just can't.

Okay. That's fine, I'll look it up. Look is -- and then what -- are they basically dealing with OEMs on the European continent or is it more of a worldwide business?

Worldwide. I'd like the geography, our business mainly OEMs, but there is a very nice aftermarket business and aftermarket generally is higher margins.

Okay. There is very little overlap with your current customer base.

I don't want to say zero, but very little. That's one of the first things we do on a potential acquisition once we've started due diligence, we look at the product offerings and we're very happy with that.

Okay. Thank you.

Thank you.

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

Thank you everyone for listening and have a pleasant day. Goodbye.

Thank you, everyone. That concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.