Good day, and welcome to the Methode Electronics Fourth Quarter Fiscal 2024 Results Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. I would now like to turn the call over to Robert Cherry, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Methode Electronics fiscal 2024 fourth quarter earnings conference call. For this call, we have prepared a presentation entitled Fiscal 2024 Fourth 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. Kevin Nystrom, Interim Chief Executive Officer.

Thank you, Rob, and good morning to everyone. Thank you for joining us for our fiscal 2024 fourth quarter earnings call. I'm joined here today by Ron Tsoumas, our Chief Financial Officer. Both Ron and I will have some opening comments, and then we'll take your questions. Before we discuss the quarter, I want to reiterate the news that we announced in late June regarding our CEO transition. Jon DeGaynor, former CEO of Stoneridge, has been appointed President and CEO of Methode, effective next Monday, July 15th. We congratulate Jon and welcome him to the Methode team. Jon has significant industry experience and I think will be a strong leader for Methode into the future. Back to the quarter. Returning to the quarter, let's go to Slide 4 of the presentation. Our sales for the quarter were [$227] (ph) million, which were down $24 million year-over-year. The decline was mostly entirely in our Auto segment across all three of our reporting regions. The decrease was primarily due to program roll-offs and continued softness in the e-bike market along with some EV demand weakness. The sales declines were offset by the acquisition of Nordic Lights in the industrial segment around the beginning of the year. After adjusting for goodwill impairment, the lower sales volume along with continued operational inefficiencies in our North American Auto operations drove the net loss in the quarter. These are essentially the same operational challenges that we've experienced and communicated through this past fiscal year. They are being driven by increased program launches, labor turnover, and higher overall costs. With the company in the midst of record number of program launches, it is only natural for there to be production inefficiencies that drive higher costs, often simply as a matter of a timing lag between the investments…

Thank you, Kevin, and good morning, everyone. Please turn to Slide 8. Fourth quarter net sales were $277.3 million, compared to $301.2 million in fiscal 2023, a decrease of 8%. This quarter's net sales included $21.8 million from the Nordic Lights acquisition and $1.1 million of unfavorable foreign currency translation. Excluding Nordic Lights and foreign currency, sales decreased by 15%. The quarter saw the continuation of two key automotive program roll-offs, one in North America and one in Asia. The one in Asia fully rolled off in the fourth quarter. We also had persistent softness in the e-bike market and some weakness in EV demand. The e-bike market continues to be overstocked. Fourth quarter loss from operations was $61.5 million, down from $8.5 million of income in fiscal '23. Income was down to the goodwill impairment, the ongoing operational inefficiencies, which were mainly in our North American Automotive business, which drove higher inventory, labor expense, other increased production costs, combined with lower sales volume. Similar to our second quarter of the past fiscal year, at the end of the fourth quarter, we experienced a goodwill impairment triggering event when our market cap was less than our book value. Based on this, we performed a quantitative analysis on our reporting units with goodwill, and we determined that at our North American Auto reporting unit, the current value of the reporting unit was less than the carrying value, resulting in a goodwill impairment of $49.4 million. There is no remaining goodwill at this reporting unit. Adjusting for the goodwill impairment of $49.4 million and restructuring costs of $2.3 million, which were partially driven by headcount reductions, our non-GAAP adjusted loss from operations was $9.8 million. Please turn to Slide 9. Fourth quarter diluted earnings per share decreased to a negative $1.63 from…

[Operator Instructions] Your first question is coming from Luke Junk with Baird. Please pose your question. Your line is live.

Good morning. Thanks for taking the questions. First, maybe just a point of clarification on the fiscal '25 expectation for pre-tax income to be approaching breakeven. Should we be thinking about that for fiscal '25 in aggregate and just basically trying to square the full year review versus the first quarter coming out of the gates kind of similar to where you were in the fourth quarter? Thank you.

So, Luke, we do expect to approach breakeven for the year, but the first quarter will be much like this as we experienced in the fourth quarter of fiscal '24 with gradual improvement and then stronger in the second half, especially in the fourth quarter where we have launches that are expected to be in full launch at that time.

Got it. Okay. That's helpful. Thank you. And then, yeah, just relative to the flat outlook for sales roughly in fiscal '25, that would imply that you're going to be able to get over the top of the remaining product sunsets with launches, like you said, those launches especially stepping up in the fourth quarter. Can you just talk about guardrails that you have in place internally from an operational standpoint to make sure that those launches go smoothly from Methode's end and then just what you're hearing from customers in terms of timing, volumes, risk-to-take rates, or just risk of any push-outs in that view?

So, Luke, why don't we start with the roll-offs first? We had -- approximately there are two major programs that we described, approximately $90 million rolled off in fiscal '24. And we expect the final roll-offs of those programs in the $100 million range for fiscal '25. So those -- all these new launches will basically fill the pipeline of the void. And it's important to know that these two largest programs that we have will be pretty much fully rolled off at the end of '25, providing a nice path into fiscal '26 as we get in there. So in terms of the operational perspective?

The -- you're right, we're seeing some slowdown, in particular, in EV demand, but we're working with our customers to make sure that we can maximize our pricing adjustments to account for those lower end customer volumes. The other thing I want to add is we're initiating several cost reduction programs, in particular, with sourcing costs and logistic costs. We're doing our legwork now, but those things take time, and we probably won't see real meaningful benefits until the second half of the year.

Got it. If I could ask on just balance sheet-related items, or I guess more cash flow, really, just any high level expectations you can share for cash flow in the coming year, and then CapEx, we saw that come down quite a bit sequentially in the fourth quarter, just guardrails for CapEx in the coming year as well.

Yeah, I think we will see fiscal '25 CapEx to be in the same range or higher than in fiscal '24 as we continue to -- all these awards that we won, we expect to continue to have significant CapEx in fiscal '25. Thereafter, it is a little bit different. In terms of the cash flow, as we approach breakeven relative to fiscal '24, we'll get some net income would be -- or reduced loss would be better. And then from the -- we have a lot of working capital initiatives that we started on and saw some progress in fiscal '24 that we expect to carry on into fiscal '25. And we have additional items such as, we talked about, we had some success in non-core asset sales in the fourth quarter of fiscal '24. We will continue to look at those opportunities as well. So the sum of all of those items should impact our -- the cash flow in fiscal '25.

And then just lastly, if I can ask on cap allocation and new return priorities beyond, the CapEx obviously that's required for the business, thinking especially just prioritization of debt pay down relative to share repurchase, which I guess maybe was a little surprising that there was some repurchase in the quarter and then just maintaining the dividend on a go-forward basis as well.

Well, the share repurchase was part of a pre-existing program. And I think we've pretty -- we've run up almost the entirety of that program. With regard to the dividend, that's a decision the Board makes quarter by quarter. So it's hard for us to predict quarterly dividend payments going forward.

Yeah, Luke, the number one priority, as Kevin mentioned, we had a 10b5-1 type of an arrangement, but we'll be on the balance sheet, deleveraging and things of that nature and protecting the balance sheet. That will be far more than share repurchases or anything along those lines.

Got it. Okay. Thank you. I'll leave it there for now.

Your next question is coming from Saree Boroditsky with Jefferies. Please pose your question. Your line is live.

Good morning. Thanks for taking my questions. So I really appreciate the two-year guidance. I just want to understand, as we think about returning to growth in 2026, how are you -- what's the underlying assumption for EV adoption? And how will that be impacted if we do see a slower curve than expected?

There's definitely '26, a lot of the projected growth is in the EV space. There is certainly some sensitization that is definitely going on in the projections and what the outlooks are going to be. But having said that, we still expect the growth that we outlined.

Understood. Obviously, you talked about the guidance implying a step up in the second half of fiscal 2025. Could you just talk about the key drivers underlying this increase, and then how much is market-related versus what's in your control?

A lot of that is, we talked about some of the new programs being launched, and by the end of the year, we're starting to see some growth from those new programs. Your question of is it under our control? Yes, and we're doing our best to make sure those launches go efficiently. And as Ron implied, we are putting some haircuts or adjustments into our projections for the currently soft EV market into those numbers.

Yeah, the only thing I'll add to the cadence of the fiscal 2025 by quarter is that a lot of it is sales driven and launch driven, but also the cost reductions that are going on. They take -- some of them take time when we think about procurement and other opportunities for us. They may not -- we've initiated those, but sometimes it'll go into the third and fourth quarters. It takes time. So the cost savings cadence also is weighted more towards the third and fourth quarter as opposed to the first and second quarters.

Appreciate that commentary. That's sort of what I was getting at. Obviously, the focus is on improving profitability. And maybe just building on that for my last question, what is that opportunity? Can you size that cost savings opportunity to go into fiscal 2026, maybe sourcing, logistics, and just from a sales and administrative perspective?

We're really just starting these programs, so it's a little bit dangerous to put ranges around it. We do think it will be significant, and we do think that its impact will be more towards the second half of the year.

Appreciate the questions. Thank you, guys.

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

Yeah, good morning, all. Several questions here. First of all, Kevin, in what you're talking about with, getting your costs under control and trying to fix the problems that are coming out of North American auto, I mean, are you -- I would assume that you are working in conjunction with Jon DeGaynor at this point in terms of at least some of these initial thrusts at what you're trying to do to rectify some of the problems that you're having. Is that a correct assumption?

More than correct. I'm working shoulder to shoulder with Jon on these initiatives.

Okay. All right. So maybe for all of us, because I still have a hard time understanding this. You're having the problems in Mexico, correct? That's where your problems are with North America. And you have rolled out programs before in the past. What has changed so much that you're getting a lot of these operational efficiencies in Mexico at this point that is causing the decline in the operating income generated by the Automotive segment?

I think I can say that we've made significant improvements in the discipline around launches in Mexico. And some of the launches that are in process right now that are just beginning to deliver products, they've gone much better than launches in the past. So I think it's just experiencing what we experienced in early this past year and learning from our experience in improving our launch process.

The only thing I'll add to that, Gary -- the only thing I can add to that, Gary, is we are also, at the same time, experiencing the roll-off of our largest program, which we have been running in various iterations for over a decade and we're really good at it and really efficient and all of that. And replacing that, as we've demonstrated with all these booking awards, with launches that -- a lot more launches that are significant but nowhere near the value of that. So when you combine that with the expansion of capacity and getting ready for these launches and all of those things going in at one time, it is a fertile ground for experiencing temporarily some of the things that we're experiencing.

Okay. And I was just going through some of the past slides, but in aggregate, do you have what the business awards were in fiscal '24 in total? And what -- how much of that dealt with electric vehicles?

I believe in the last four years, we have been in the $800 million, $750 million range. And most of it is in -- a lot of those products are in electric vehicle. For fiscal '24, it's in the $200 million to $250 million range for bookings, which the bulk of that is in the EV space.

Okay. And in what you're doing with EVs, are you doing any programs for European manufacturers at this point, for manufacturers that are producing in Europe and selling in Europe?

Yes. Absolutely. And that's one thing we really like is we've spread our seed amongst a lot of the OEMs on three continents. So we're getting diversification from customers and programs, which is really good. And we're in a good position with a lot of it. And we've done some with the startups in that as well. So from a portfolio diversification and geographic diversification, we're sitting in a good spot with our EV opportunities.

What about the Chinese manufacturers?

We do not as much. We're -- certainly, we do more in Europe and now with these launches in North America. We have a presence in China, but it is not as significant on a go-forward basis. And it's a challenging market for sure.

Okay. And then just the last question. I'm just looking at some historical numbers here. I mean, your adjusted EBITDA margin was in the high teens in 2019, 2020. Started to see a drip in '21, '22. I mean, given the composition of the company now, do you think that once all of these issues are rectified, that this becomes a mid to high teens EBITDA margin -- adjusted EBITDA margin business? Or is there something that has structurally changed here that is causing the adjusted EBITDA margin to step down from where you were four or five years ago?

I think -- so let me start with this. Four or five years ago, the business has definitely changed, especially the automotive side with the roll-offs. And a couple of things else have impacted our EBITDA margins over the last couple of years, especially the last two years. And first of all, is the slope in the e-bike market, that is that magneto-elastic torque sensing technology that we have, arguably the best in the world at, is one of our most highly differentiated products. And that business has basically been cut in half. So that clearly has a margin drag on the business. The roll-off of these programs, and then all of the upfront costs and capital that we're expending for '26 and '27 and '28 deliveries, has also negatively impacted our EBITDA margins. So it's going to be a journey as we go through this to stair-step our margins back to where they might have been a couple of years ago. But it's a journey. It is absolutely going to be a journey. And until we get to full launch on a lot of these programs that we've funded upfront, it will take a little bit of time.

Okay. And then I realize you guys have had a lot on your plate over the last couple of months here. And, Ron, congratulations on retiring. I hope you enjoy yourself. Where are you -- I know you just filled the CEO search, but where are you on the CFO search side, and what are some of the qualities you're looking for in a new CFO?

We're interviewing candidates. It's still probably some time before we find the right fit. We're looking for somebody that has experience in this kind of change or this transition. We're going to be going through a lot of cost reductions, a lot of efficiencies, looking at our portfolio, making sure we're getting the most of all the regions around the world that we operate in. So it's going to require special skill set, and we're taking our time to make sure we find the right person.

Okay. Thank you very much. Appreciate it.

There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Kevin Nystrom for any closing remarks.

Thank you. I want to thank everybody for your participation in the call, all of your questions, and most of all, appreciate your support for -- of Methode Electronics. Thank you and have a good day.

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.