Greetings and welcome to the Methode Electronics Second Quarter Fiscal 2024 Results Call. [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 2024 second quarter earnings conference call. For this call, we have prepared a presentation entitled fiscal 2024 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 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 fiscal 2024 second quarter earnings conference call. I am 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 on Slide 4. Our sales for the quarter were a solid $288 million. Sales were down year-over-year primarily due to program roll-offs, a tough comp to the prior year in Asia due to COVID delayed sales in China, continued softness in the e-bike market, and of course the impact from the UAW strike. All of these headwinds hit our auto segment. Sales in the quarter were helped by the acquisition of Nordic Lights in the industrial segment. Turning back to the auto segment, in the quarter, we were required to take a non-cash goodwill impairment totaling $57 million related to the North American auto and European auto reporting units. Ron will go through the financial mechanics later in the call, but the summary of the situation is with the recent operating profit weakness in our North American auto reporting unit, the accounting rules required us to review our goodwill, which in turn led to the impairment. Also in the quarter, we continued to experience operational inefficiencies in our North American auto operations that manifested in the first quarter. As you may recall, they were caused primarily by salaried personnel turnover, poor operational decisions and vendor issues, which led to subsequent production planning deficiencies. This in turn had a domino effect leading to inventory shortages unreimbursed spa purchases and premium freight and labor. In our lean manufacturing environment, disruptions like this can ultimately generate significant cost to address material shortages and maintain customer delivery integrity. In auto delivery, in addition to quality is…

Thank you, Don and good morning everyone. Please turn to Slide 8. Second quarter net sales were $288 million compared to $315.9 million in fiscal ‘23, a decrease of 9%. This quarter sales included $20.9 million from the Nordic Lights acquisition and $3.5 million from favorable foreign currency translation. Excluding Nordic Lights, foreign currency sales decreased by 16.6%. The quarter saw the continuation of two key automotive program roll-offs, one in North America and one in Asia. We also had a difficult comp in Asia as in the prior year, Asia benefited from sales that were delayed from the first quarter to the second quarter as a result of the COVID shutdowns in China. The quarter also saw lower sales for e-bike sensors as that market continues to be overstocked. That inventory headwind is expected to last at least through the end of this fiscal year and potentially into next fiscal year. Second quarter loss from operations was $51.3 million, down from $32.8 million of income in fiscal ‘23. The major factor in the decrease was a goodwill impairment charge of $56.5 million. At the end of the second quarter, we experienced a goodwill impairment triggering event when our market cap was less than our book value. Based on the triggering event, we performed a quantitative analysis of our two reporting units and determined that the current fair value of the goodwill was less than the carrying value, resulting in an impairment at two of our automotive reporting units. Income was also down due to lower sales volume and the ongoing operational efficiencies, which drove higher premium freight and labor expenses. Adjusted for the goodwill impairment of $56.5 million, restructuring costs mainly related to the exit from Dabir of $0.6 million and cost related to the Nordic Lights acquisition of…

Thank you very much. Ali, we are ready to take questions.

Thank you, sir. [Operator Instructions] Our first question is coming from Luke Junk with Baird. Your line is live.

Good morning. Thanks for taking the questions.

Good morning, Junk.

Good morning. Don, hoping to start with the – just the ongoing inefficiencies in North America, of course they came to the surface last quarter, you put corrective actions in place and the prior guidance had implied we should be seeing some lift in the second half of your fiscal year in the bottom line with guidance now moving lower today just hoping to put a finer point on what changed in the expectation or the actions not having the desired effect? Are you seeing additional headwinds in the back half? Just anything to help us understand the bridge from the old expectation to the new, especially where may be you were overly optimistic previously? Thanks.

Sure. As I said, I was overly optimistic. There it is taking us longer to go through the various routings and part numbers and make corrective actions. To give you more color on that, these issues probably existed prior to this fiscal year, but they were masked by very high inventory in certain areas. And we took – as normally we do when we try to lean out our operations, we brought inventory down. And one of the analogy is that the lean experts sometimes uses the ponds and you lower the ponds you find rocks, but we found boulders. And it took us much longer, it is taking little longer to correct. They are all, as I have said all fixable. But it’s a mismatch between our various systems. We do manufacture products in Dongguan, China and that’s shipped to Monterrey. Engineering changes weren’t recorded properly, and we have said a lot of that was due to salary, personnel turnover that there was a certain amount of knowledge here that probably got lost at the end of COVID. So, it’s really dealing with routings, MRP and lead time. And we had some lead times in the system at two weeks, when it probably should have been closed in two months. Also there, we saw changing, I don’t know if this is a COVID leftover, but we are seeing tremendous changes in schedule, something that we have not seen much in the past. And that also puts a stress on the system. So, and Ron, is there anything that…

From an operational perspective, I think you…

There was probably a lag on some of the invoicing you don’t get invoiced next week for premium shipments. And there is probably some of that occur in the first quarter, the carryover in the second quarter. Again, all fixable, it’s as we underestimated amount of time.

And then just maybe put a finer point on that Don, what I am hearing is it’s more of these actions are continuing. But in terms of the corrective actions, it doesn’t sound like you are necessarily leaning to put new actions into place or it’s more a scope issue, not that there is kind of new problems that you found, is that right?

Yes. That’s correct. It’s really a time factor that we uncovered nothing new that would have caused us to change anything and change any of our actions.

Got it. That’s helpful. And then for my follow-up, just hoping to understand how you incorporated updated expectations for EV volumes. And specifically, what I am hoping to tease out is how much this is a timing delay in terms of the new fiscal ‘25 guidance. You mentioned the program that had slipped partially from ‘25 into ‘26, versus just absolute reductions in your expectation for take rates. I don’t know if there is any anecdotes on that latter piece in terms of take rates that you can share. Just help us understand the level of conservatism that’s in this new fiscal ‘25 guidance. Thank you.

We had two of our long-term Vice Presidents do a deep dive into our forecasting. And an overlay that with various expectations that we are hearing from our customers are forecast along with LMC and IHS and what program delays we knew about, and that really was what contributed to the change. We are four months plus out from ‘25. And I am sure there will be additional revisions as we get closer to giving guidance. Some of that could go up. One of the reasons where we still have 12-15 as the upside is there are some opportunities that are surfacing and some of the smaller competitors that are having difficulties that are presenting us some opportunities. So in general, it’s just we did a deep dive into the forecast and adjust the guidance accordingly. I don’t – from my standpoint, is the EV market collapsing, or is there a major problem now, I don’t know if I want to use the word over or the freight over-exuberance. But there is probably some of that in the forecasting by the market. But I fully believe that ‘25 will be a good year for us and ‘26 will be a better year, But we are going to see some fluctuations in forecasts until the industry really sorts out what’s the really the adoption level.

Got it. I will leave it there. Thanks Don.

Thank you.

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

Hi. Good morning all.

Hi Garry.

Could you refresh my memory? Are your EV programs – what is the split there between commercial vehicles, like last mile delivery vehicles and regular passenger cars?

Our largest program, I want to say it’s probably 80-20, 20 or something the last mile, maybe slightly higher than that. I don’t know when we revised that two. But it’s still probably in that range. I have said before, I like the last mile vehicle that they are definitely cost effective for the Amazons of the world. So, we will place emphasis on that and our largest program, part of that is last mile.

But you say it’s about 80-20 passenger last mile.

Yes.

Okay. That’s fine. Thank you. And then just getting into this write-down again, exactly, could you just briefly explain what happened your actual book value or your market value fell below book and by accounting convention, you had to test your goodwill, and that was the write-down, is that very simply how to phrase it?

That’s correct, Gary. And the last day of the quarter, closing stock price, our market cap was less than our book value of the company. And there has been a trigger. And we go back to the business units that have goodwill, reran the projections and all of that valuation performed and came up with the impairment amounts on two of those reporting units. Just, we do test for this annually, each year, about when there is triggering events in between the annual impairment tests, we do test in between the annual ones and this is what happened in this particular quarter.

So, the trigger wasn’t anything about the performance of the divisions, it was really – or the auto, it was just a trigger by accounting conventions, your market value went below your book?

Correct. That was the triggering value, the triggering event. And then we recast all of the projections as part of this. We recast all of the projections for the current fiscal year and going out forward and ask you is to develop the models, if it’s some – for the discounted cash flows, and then to bring that back to present value, and then assess whether the carrying value is higher than the – or not of the fair value. And that is compared and then the impairment was taken at the two businesses in excess of $56 million.

Doing an impairment like this on a longer or long-term – longer term basis, does this really change your outlook for what your capital spending would be, particularly with the businesses that had the impairment hit?

Go ahead.

I got first of all and Don you can inject, it’s more about the impairment resulted from more about acquisitions that occurred in the past and performance of those cash flows. And that isn’t necessarily mean that you are not going to reinvest in the business. Obviously, North American auto, we are doing a lot of investment in [indiscernible] support our new programs. So, that part of is forward looking. The impairment and the goodwill that was created was backward looking.

Thank you very much. Appreciate it.

Thank you. As we currently have no further questions on the line at this time, I would like to hand it back over to Mr. Duda for any closing comments you may have.

Thank you very much. I will thank everyone for listening and for their questions and wish everyone a very safe and enjoyable holiday season. Good day.

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