Greetings, and welcome to the Methode Electronics Fourth Quarter and Full Year Fiscal 2023 Results Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Robert Cherry, Vice President of Investor Relations. Sir, you may begin.

Thank you, operator. Good morning. And welcome to Methode Electronics fiscal 2023 fourth quarter and full year earnings conference call. For this call, we have prepared a presentation entitled Fiscal 2023 Fourth Quarter and Full Year 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 2023 fourth quarter earnings conference call. I’m joined today by Ron Tsoumas, our Chief Financial Officer, and 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 a healthy $301 million. They were up 4% compared to the prior year, but up 9%, excluding a significant headwind from foreign exchange and a drop in material spot buy and premium freight cost recovery. The increase was mainly due to higher sales in the Industrial segment, driven by lighting solutions for commercial vehicles and by power distribution solutions for electric vehicles. The sales growth from lighting and power products is another data point in our strategic pivot to reduce our reliance on user interface solutions. In the quarter, we continued to face ongoing cost increases due to inflation in material and labor, which continued to be a drag on margins. The ongoing cycle of inflation and subsequent efforts to obtain price increases from customers is a persistent challenge, I cannot stress that enough. We can, however, report a significant reduction in spot buys and expedited shipping as supply chain constraints have improved over last year. On the order front, we had a very strong quarter with over $250 million in annual program awards. These programs were once again dominated by electric vehicle programs. The Nordic Lights acquisition, which is an exciting opportunity to grow our lighting franchise and gain more industrial and non-auto market exposure is nearing completion. While we have secured over 99% of the outstanding shares, we are still working through the squeeze-out process for the remaining shares. Once that legal process is complete, we will…

Thank you, Don, and good morning, everyone. Please turn to slide 10. Fourth quarter net sales were $301.2 million compared to $287.7 million in fiscal ‘22, an increase of 4.3%. This quarter’s sales had $7.7 million unfavorable currency impact and $2.5 million favorable spot buy and premium freight cost recovery impact. Also impacting the quarter’s prior year comparison was the roll-off of a large automotive program in North America. Excluding the foreign currency and year-over-year cost recovery impacts, sales increased by 8.8%. The strength in the quarter was driven by lighting solutions in commercial vehicles and power solutions in EV. EV product applications were 23% of sales in the quarter. Fourth quarter income from operations decreased 41.8% to $8.5 million from $14.6 million in fiscal ‘22, mainly due to acquisition costs, material cost inflation, and unfavorable foreign currency translation. Partially offsetting those factors was the higher sales volume. Adjusting for acquisition costs of $6.8 million and costs related to the reorganization of a foreign subsidiary of $0.5 million, our non-GAAP adjusted income from operations increased 8.2% to $15.8 million from $14.6 million in fiscal ‘22. Please turn to slide 11. Fourth quarter diluted earnings per share decreased 48.8% to $0.22 per share per diluted share from $0.43 per diluted share in the same period last fiscal year. The EPS was negatively impacted from the acquisition cost, material cost inflation and unfavorable foreign currency translation. Adjusting for the net acquisition cost of $6.6 million and the net benefit related to the reorganization of our foreign subsidiary of $7 million, our non-GAAP adjusted diluted EPS decreased 51.2% to $0.21 per diluted share from $0.43 in fiscal ‘22. Shifting to EBITDA, a non-GAAP financial measure. Fourth quarter EBITDA was $21.9 million versus $30.8 million in the same period last fiscal year, a 28.9%…

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

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from John Franzreb with Sidoti & Company. You may proceed.

I’d like to start with a couple of quick clarifications. First and foremost, it looks like Nordic is part of the balance sheet. I’m curious if it’s part of the P&L, too, because I didn’t hear any mention of any revenue contribution from Nordic in the fourth quarter. So, can you just kind of walk me through that?

Yes. You’re absolutely correct. The -- it’s on the opening balance sheet, but we had -- did not have any profit and loss activity in fiscal ‘23 related to Nordic Lights due to its very late closing right prior to the end of the fiscal year. And we will report it in fiscal ‘24. Yes.

Okay. All right. So, you mentioned legal fees that you’re going to continue to incur from Nordic. Are there any other cash expenses that we should be worried about or incremental debt that you’re going to have to bring on board that will be part of Q1 that was not part of Q4?

We mentioned from a legal expense perspective, the Supreme Court ruling, if that comes through next week that we could have the contingent legal fee related to that matter in the first quarter. I think from a -- we would not expect to take on any further debt in the first quarter. And if anything, depending on cash flows and how everything going, we might even delever a little bit.

Yes. Interest rates obviously are something -- cost of borrowing has gone up, and we have some fixed interest -- variable to fixed interest rate swaps that will be expiring. So, we do expect an increase in debt, higher interest expense -- significantly higher interest expense in fiscal ‘24 as compared to fiscal ‘23.

What is your expected interest expense embedded in your guidance for fiscal 2024?

It’s in the -- about $13 millionish range, somewhere around there.

Okay. Perfect. And then, just switch gears real quick. On the program roll-offs, just to clarify, you mentioned the impact in 2023 of the North American program roll-off that we’ve been talking about for quite some time. Two questions here. One, how much was that impact in the fourth quarter? And secondly, when you’re talking about the fiscal 2024 guidance, it’s a plural. It’s a program roll-offs. So in addition to the one that we’ve been going through, what’s the incremental number on top of that from new program roll-offs?

So, the program roll-offs in total, we would expect around $150 million.

Yes, I agree.

And how much of that is the -- is it left over from the one that we’ve been incurring in 2023?

So, it would be approximately, from that program, another $100 million. And then there’s another program in the EV space that would take a lot of the balance of that.

Perfect. That’s what I was looking for. You know what, I’ve been taking a lot of time, guys. I’ll get back into queue for follow-ups. Thank you.

Thanks, John.

Thank you. Our next question is coming from Gary Prestopino with Barrington Research. You may proceed.

My question kind of revolves around what the last questioner was, but -- in terms of this North American program roll-off, is that over in fiscal ‘24, or is there some residual going into fiscal ‘25 with -- again, there’s a plural roll-offs there?

In round numbers, the roll-off in ‘25, and I talked about in ‘24, their -- headwinds in ‘25, our increased business becomes a tailwind, even with about $120 million of roll-offs in fiscal ‘25.

Right. I understand that, but I’m trying to get at is -- I guess, let me just ask you, is the North American roll-off over in fiscal ‘24, or is there still some residual in fiscal ‘25.

That depends on the customer. There could be some additional business in ‘25. It depends on -- they launch their new programs. I really can’t get into too much of that. But we have seen programs extend a little longer. So there could be some of that in ‘25.

Gary, I think what I would say, too, about the other program is the one that started rolling off in fiscal ‘23, that’s rolling off in ‘24, the preponderance of the roll-off will be done by the end of fiscal ‘24. There will be some in carryover in ‘25, but the preponderance is in ‘23 and ‘24.

Yes. And I don’t look at -- is that extending into 25 is a huge upside. It’s just the timing of the customer’s launch.

Okay. That’s kind of what I was getting at. Thank you for that answer. And then, in terms of the D&A range for fiscal ‘24, how does that break down between depreciation and amortization? Can you give us some rough numbers there?

I guess, at a high level, $20ish million in the A part and the rest in the D part.

Okay. Thank you. And then, I also want to just ask in terms of -- it’s great you’ve got all these new product launches. Could you maybe detail, first of all, what are some of the expenses that are upfront that are associated with these new product launches? And then, -- are we -- as we model things out, our -- is the expense front end loaded in Q1, Q2 and then you start generating less level of expenses or less upfront expenses and then revenues start to accelerate from the new programs in the back half of fiscal ‘24? Could you help us out with that, please?

Sure. It’s equipment, it is people, it is prototyping costs that we’re starting to incur and we’ll continue to incur throughout fiscal 2024. As we get into the end of ‘24, those costs will start to be absorbed into the product launches. So, factored into the guidance, and we will -- we are starting -- or we’ve been hiring. We’ve been procuring equipment. The plant is probably 30% complete from an equipment standpoint. So, that will continue throughout the year, and then we will be launching a lower volume at the end of the year. That’s not a significant amount, but it will start to absorb the costs.

All right. And I know you didn’t give this as a point of your guidance, but it looks like you had almost a 13% adjusted EBITDA margin in fiscal ‘23. Given the range of what you’ve given us for fiscal ‘24, where do you see that adjusted EBITDA margin range, if you have that calculation handy?

Well, in terms of the range, it would be somewhat comparable to this fiscal year, i.e., our fiscal ‘24 from an EBITDA margin percentage as a percentage of sales.

So, it’d be comparable to FY23, is what you’re saying?

Yes.

Thank you. [Operator Instructions] Our next question is coming from Matt Sheerin with Stifel. Sir, you may proceed.

I have a couple of quick questions. One, your commentary in terms of your outlook for data centers. It looks like that will continue to be a headwind. Is that due to the inventory build at the hyperscale customers that’s yet to work off? And are you having any visibility in terms of that picking up in the back half of your fiscal 2024? And then, the second question, in your preliminary earnings release, your pre-announcement a couple of weeks ago, you talked about a sunsetting of an EV program due to a change in technology by that customer. Could you be more specific about what that technology changes and how that may impact you on other programs? Thank you.

Okay. I probably can’t answer that exactly -- I can’t give you detail on that because of that -- because of the customer. I can tell you this, it is one customer, one product, we do not sell that product to other customers. I don’t -- of course, I don’t want to lose the business, but I understand it. But it is not -- that does not impact our strategic thinking in terms of EVs. It is on the top hat, which there’s more volatility on the top hat as there are on passenger cars are on -- ICE cars as well. So, does it concern me long term? No. Does it -- would I like the business, to say, yes, I understand it, but I apologize, I can’t really go into to any more detail than that. I have to be respectful of the contract we have with the customers and the customer we continue to do business with. The other question, more of an inventory -- over inventory. Do I expect that to maybe improve it towards the tail end of the year, I don’t -- we don’t think so. We haven’t put that into our numbers. Could it -- but when I look at commercial vehicles alone, and I know you asked about data centers, but ACT has the market down 29%. And they’re not always -- the market people aren’t always spot on. We’re not spot on. But that’s a definite direction and a headwind we’re going to face in ‘24. And in ‘25, they have it going back up.

Got it. And just so on data center, you’re just not getting visibility into that picking up anytime soon?

No. We know -- I mean, we know when we set the customer, we kind of know their usage and they told us they’re over inventory. So until they work that down and we can model, here’s what they’ve taken in the last three quarters. And if they have all that in inventory, you can pretty much expect you’re not going to have much business for the next three quarters. And that’s -- we have visibility to that. And that’s why we’re guiding that down.

Fair enough. Okay. Thanks very much.

Thank you.

I want to make a just quick clarification on Gary’s question. The A part of D&A is -- will be about $25 million instead of $20 million. I think I said $20 million. $25 million is the correct answer.

Thanks, Ron.

Thank you. As we have reached the end of our question-and-answer session, I will turn the call back over to Mr. Duda for any closing remarks.

Thank you. We will thank everyone for their questions and for listening and wish everyone a very safe and enjoyable summer. Good day.

Thank you. This concludes today’s conference, and you may disconnect your lines at this time. And we thank you for your participation.