Greetings, and welcome to the Methode Electronics Second Quarter Fiscal 2025 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] And 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, the floor is yours.

Thank you, operator. Good morning, and welcome to Methode Electronics Fiscal 2025 Second Quarter Earnings Conference Call. For this call, we have prepared a presentation entitled Fiscal 2025 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-Q and 10-K reports. On Slide 4, please see an agenda for our call today. We will begin with the business update, then a financial update, followed by a Q&A session. At this time, I'd like to turn the call over to Mr. Jon DeGaynor, President and Chief Executive Officer.

Thanks, Rob, and good morning, everyone. Thank you for joining us for our second quarter earnings conference call. I'm joined today by Laura Kowalchik, our Chief Financial Officer. We are pleased to have Laura join the Methode team given her background and experience. She has an impressive track record of delivering successful business transformations within our industry and has gotten off to a fast start at Methode. Turning to Slide 5 and our results for the quarter. Our sales were $293 million, and our adjusted pretax income was $9 million. As noted in our earnings release, the quarter benefited from an extra week. Our fiscal 2025 is a 53-week year, and that extra week fell into this quarter. Aside from the impact of the extra week, sales benefited from higher demand from our Power Products in data centers and electric vehicles. We also had growth in Europe from automotive program launches. Offsetting these strengths were program roll-offs that we discussed before and demand weakness in the commercial vehicle market impacting our lighting business. Overall, our sales in the quarter were on track with our expectations. The solid sales volume, along with progress on our cost reduction efforts, drove the pretax income improvement in the quarter. In particular, we had a notable reduction in freight costs, particularly premium freight, which is a direct reflection of our overall improved operational execution. Better-than-expected result was also driven by improved fixed overhead absorption, another sign of execution improvement. Turning to EV activity. Sales in the quarter were 20% of our consolidated total, a sequential increase from 18% in the first quarter. We are experiencing the beginning of a wave of new program launches for EV power applications. As such, we continue to expect the EV percentage to grow further, and it should be over…

Thank you, Jon, and good morning, everyone. I am very excited to join the Methode team, and thanks to Jon for his kind remarks. Please turn to Slide 10. The second quarter net sales were $292.6 million compared to $288 million in fiscal 2024, an increase of 2%. On a sequential basis, sales increased 13% from the fiscal 2025 first quarter. As Jon referenced, the company's typical fiscal year is 52 weeks, but occasionally requires an additional week in order for the fiscal year to end on the Saturday closest to April 30. The current fiscal year ending May 3, 2025, is a 53-week fiscal year with the additional week being included in this fiscal quarter, making it a 14-week period. The prior year second quarter as well as this year's first quarter were 13-week periods. As a result, the extra week contributed to our financial comparisons. In this quarter, sales of Power Products into data center applications grew both year-over-year and sequentially. We also saw some modest growth in EV sales sequentially. The quarter also benefited from our launch activity in Europe. Offsetting those strengths was the impact of the previously disclosed roll-off of an EV lighting program in Asia. That program ended toward the end of the last fiscal year and has had no sales this year. Also creating a headwind was the market weakness for our lighting products in commercial vehicle and off-road applications. First quarter adjusted income from operations was $14.3 million, up $8.3 million from fiscal 2024. On a sequential basis, adjusted income from operations improved $19 million from the fiscal 2025 first quarter. Please see the appendix for a reconciliation of all adjusted measures to GAAP. The increase in adjusted operating income, both year-over-year and sequentially, was driven by the higher sales volume. In…

Thank you. At this time we will be conduction a question-and-answer session. [Operator Instructions] Our first question is coming from John Franzreb with Sidoti & Company. Your line is live.

Good morning, everyone and thanks for taking the questions. I was wondering if you could quantify the impact of the extra week, not only on the top line, but perhaps on operating results.

So John, from a -- what we look at with the extra week is it's approximately $20 million worth of revenue. And then it would have that -- it would have the follow-on operating results that go along with that.

Okay. Those drops down. Got it. And what cost control measures impacted the second quarter results beyond the reduction in freight costs? Was there anything else that had a positive impact on operating income?

Yes. And as we said, we're seeing thinning of overheads. We're also seeing improvement in our scrap activities. So it is execution-driven activities that really are driving the performance -- execution-focused activities that are driving the performance.

Okay. Fair enough. And of the $50 million in new orders, how much was that directly related to new programs in the EV market versus other markets?

Well, the majority of our launches are all in on EV programs or on power programs, as we've talked about. So the -- all of the awards are in those areas, as we said.

Fair enough. And one last question, and I'll get back into queue. In regards to the improvement in the data center market, can you kind of quantify what kind of impact that is up year-over-year or any other way that kind of puts it all in context?

So data centers are roughly 3% to 5% of our total sales. And what we're seeing is that we're about 50% year-over-year improvement. It's above-average margin for us, and we're really excited about the opportunities that we see in that space going forward and trying to expand that business beyond the 3% to 5%.

Okay. Fair enough. I’ll get back into queue. Thanks for taking the questions.

Thanks for your questions, John.

Thank you. Our next question is coming from Luke Junk with Baird. Your line is live.

Great. Thank you for taking the questions, and good morning. I wanted to circle back just to the pretax income walk into the third quarter. I appreciate, Laura, the things that you shared. I'm just wondering if there's anything else that we should be accounting for in terms of things that may have been temporary in the current quarter beyond the inventory reserve. Any impacts that we should think about from the extra week that have an outsized bottom line impact either, Jon?

Hey, Luke, it's Jon. I'll take the first piece. And if Laura wants to add color to it, she can. There were not -- other than the extra week, there were not one-off positive performance things in Q2. So as we think about Q3 and as we talk about the perspectives with regard to Q3, it really comes down to -- it's our lightest revenue quarter. So we feel confident about the base performance of the business, where we are and the progress that we're making, but we need to be transparent with our investors that Q3 is a challenging quarter just because of the holiday periods around the world, not because of something else one-off or something else special within Methode.

Okay. Then switching gears here. Wondering if you'd be able to comment just where we stand from a launch standpoint right now? In other words, you're anticipating 30-plus launches this year. Just how many of those are already in motion versus what remains to execute? And maybe if you could just remind us of the weighting to Europe and risk of any launches slipping to the right geographically specifically?

So I mean, from a launch standpoint, many of them are -- capital is on the floor. We're in final development phase or in ramp-up phase. The -- these launches are mainly between North America and EMEA, and they're split relatively equally. The -- what we do see is we do see certain customers, particularly on EV programs, where they may delay the start of their programs. It's not program cancellations, but it is exactly when they start those ramp-ups. So we're working with our customers from the standpoint of making sure that we've got transparency on when exactly they start and how do we manage our pipeline of inventory and some of what we talked about here with regard to the uses of cash, but also what do we do to support our customers there.

I don't know if you're able to make any specific comments relative to Stellantis, but obviously, a really important launch customer this year. Any color there would be great as well, if possible.

So Stellantis, as we've talked about, is a very important customer for us. And as we get the programs ramped up, they'll be one of our largest customers, an over $200 million revenue customer for us. The -- we do see some -- if you will, some timing shifts, and that's been publicized by them that they're taking their time with regard to their EV launches. So it's not new news. But what we see is we're not -- one, EV programs are at 20% of total Methode. So we're not overly exposed to EV programs, and we're not overly exposed to Stellantis. We're pretty comfortable with our balance on the different OEs. So Stellantis is an important customer to us. We stay in very close contact with them, and we feel good about where that business is going, but we do watch it closely.

Got it. And then lastly, just on data center, a couple of maybe clarifying items. One, can you just help us understand within the 3% to 5% overall exposure, Industrial segment versus Interface? And then in terms of the really strong year-over-year growth, are you seeing any AI-related impacts in that business? Or would you say this is more core data center that's driving the improvement? Thank you.

So as we said, it is a relatively small portion of the total. It is a fairly significant year-over-year growth, and we do see both AI and just overall data center growth. And what we're exploring right now, and we're going to spend quite a bit of time on, is what are additional opportunities where we can use our capabilities more fully to actually expand this space.

Got it. I’ll go ahead and leave it there. Thank you.

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

Thank you. Good morning all and welcome, Laura.

Good morning, Gary.

A couple of questions, initially a little nitpicky. Interest expense looked like it was up sequentially, almost $1.4 million. Was there any onetime expenses in that interest expense number? Or is that going to be the run rate at $6.2 million per quarter for the remainder of the year?

Gary, that should be the run rate. But as debt does decrease, obviously, it will go down some.

Okay. And then could you -- if it was a -- you mentioned something about an inventory reversal -- reserve reversal in Interface. Could you quantify that for us?

Yes. The inventory reserve reduction in the Interface segment was approximately $0.5 million.

Okay. So $500,000. Great. Thank you. So you mentioned one of the positive aspects of the quarter was premium freight costs are down substantially, which is great news. Have you reached a point here where you feel that your premium freight costs are now more normalized? Or is there still room to improve that metric? And if you could, could you maybe share how much premium freight was down?

So the answer, Gary, is no, we're not at a normalized period. Both from a premium freight and from a scrap perspective, we're continuing to drive additional improvement there. The -- in the quarter, we had $7 million worth of premium freight, and we're working to move that down sequentially. And as we've said in the past, the team, particularly in Mexico -- I'm sorry, I misspoke. It's a $7 million reduction quarter-over-quarter. I apologize. The -- but the teams, both around the world, but particularly the team in Mexico has done a very good job of getting their business stabilized from where we were in fiscal 2024. And from a scrap and premium freight perspective, I would expect to see continued improvement both in EMEA and in North America with regard to how we execute. There we've got some additional work going on with regard to some pretty in-depth workshops to try to drive improvement in both Egypt and in Mexico that will drive scrap down and will continue to drive premium freight down.

Okay. That's all good news. I just want to talk about some of these program launches, particularly with Stellantis. But first of all, beyond Stellantis, could you maybe talk about where some of this new business is coming from? What OEMs?

So we -- Gary, as you know, until a program is in production, we're not allowed to name customer names. But it's balanced between, if you will, European OEMs, North American OEMs as well as Japanese OEMs. That's as much detail as I'm able to give you at this point from stuff that hasn't started production yet. The -- and it's -- the launches are primarily split between the European market and the North American market, again, with the different nameplates that I mentioned to you or the different regional companies that I mentioned to you. But the teams around the world are working to try to make sure that those launches go well.

Okay. So let me ask a question. Let me put the question to you this way, Jon. I follow other companies that are dealing with the EV market. They put together their projections on what -- at least some of the companies on what they can do to that particular OEM based on what the OEM is telling them they think their production levels are going to be. And then we're starting to see a slippage in the EV market. And obviously, those projections come down as we go through the year. So could you maybe -- are you -- could you maybe go through a sequence of how you're determining what your potential sales are going to be? I mean are you taking the raw numbers from the OEM on what they think their production levels are? Or just give us some insight into that because it just appears to me that there's so many EVs coming out in the market, but they're not really getting purchased as quickly as they had been in the past.

Yes. So as we've said in the past, so let me talk about how we think about this first. It's easy to get focused because the press is so focused on just North American EV penetration while recognizing that we are selling into customers in the U.S., in Europe and in China. So when you think about electric vehicle market penetration in the U.S., it's about 9%. In Europe, it's 21%, 22%. And in China, it's 27%. So those take rates are -- and the market penetration changes depending on the region. So as we talk about launches both in Europe and in North America, we're not as -- we're not solely exposed to the North American market. That's part number one. Secondly, we don't just take the customer volumes as they give them to us. Certainly, we use that as a consideration, but we look at the sources of expert data, if you will, whether it's Global Insights or IHS or others to try to sense check what is the OE telling us, what do we read in the press as well as what are the global experts are saying. And we sensitize then the ramp-up, the timing, the overall volumes and therefore, what do -- conversations do we need to have with customers and what do we have to do with regard to our inventory plans as well as to our CapEx plans. So that's how the approach that we're taking, Gary, is we validate or we sensitize the customer data with third-party data as well as our own subject matter expertise and try to then work with customers to make sure that we're covering our inventories and that we're scaling the capital appropriately.

Okay. That’s very helpful. Thank you.

Thank you. We have a question from John Franzreb with Sidoti & Company. Your line is live.

Yes. I'm just curious, is there any changes in your commercial vehicle assumptions in the coming year versus three months ago?

John, thanks for the question. Like we just said with regard to the EV is we rely on external forecasters like ACT for commercial vehicle. And 2024 is a decline year-over-year, and 2025 is still down. And what we're seeing is we're seeing some positivity toward -- if you will, toward the end of calendar year 2025, which would be the middle of our fiscal year. The -- what we have done -- so it hasn't changed materially over the last quarter. But what we are doing is we're spending a lot of time trying to reinvigorate, deepen our relationships with the customers, and I'm headed out to the West Coast to visit a couple of customers before the holidays here. And we're really seeking to make sure that all of the relationships that we have on the commercial vehicle side are as robust as possible. We had customers visiting us in Europe to our facilities in Europe a couple of weeks ago. I had the chance to be there at the same time, and we'll be seeing customers in a couple of weeks on the CV side. So the CV business is cyclical and it's got a little different cycle than the pass car space. Their cycles are more dramatic, peak to trough, than what we see in the pass car space, but they're a very important customer base for us, and we look forward to growing with our CV customers over time.

Okay. And you touched on Mexico a few seconds ago. Where are we in that process of fixing operations in Monterrey? Is that behind us? So how much more is there to go? Can you kind of talk through what's going on there?

So I guess what I would say to you is there's a difference between fix and improve. Fix would imply that a relatively uncontrolled set of activities where improve is more of a controlled set of activities. The team in Mexico, I've been -- it's the one place I've been to twice in my tenure. And the majority -- I said to you that we had premium freight reduction on a quarter-over-quarter basis of $7 million. The majority of that premium freight reduction was in Mexico. The team there has done a very good job of getting from fix into improve. There's a long way to go from an improvement standpoint. But the leadership team down there and our -- the global organization with some specific outside help is really continuing to drive progress there. So it's less about, if you will, an uncontrolled set of problems and more about controlled opportunities down there. Does that make sense to you, John?

Yes, it's a start. I get it. Fair enough. And one other question. Your reduction in the CapEx spending, does that represent just lower required spending or a change in the timing of that spending from this year to next year?

Some of both, as I said to you, as we look at customer -- as we look at EV programs or we look at customer needs. So part of my background-- and you and I haven't had a lot of chance to talk about this, but part of my background is operations. And what we do with all these programs is we look at what was the initial capital assumption and where our opportunities for capital efficiency. And we've done a lot -- we've driven a lot of productivity in a couple of areas, SMT being one of them, where we haven't needed to make investments that were originally planned. So some of it is actually capital reduction -- capital spend reduction and other is -- others of it are timing change based on where customer programs go.

All right. And I guess one last question to bother everybody here. The cash outflow was kind of sizable in the quarter. Will we be able to recapture that with cash inflows by the end of the fiscal year? Or will it be a net cash outflow year?

Yes. We are certainly looking to reverse some of that cash outflow in the next two quarters, and we certainly expect to be approaching neutral.

Fair enough. Perfect. Thank you very much.

Thank you. As we have no further questions on the lines at this time, I would like to hand the call back over to Mr. DeGaynor for any closing comments.

Yes. Thank you, operator, and thank you to everybody who joined us on the call today. Thanks for your interest and for your questions. We look forward to updating you on our Q3 call. And once again, we appreciate all your interest in the company.

Thank you. Ladies and gentlemen, this does conclude today's call, and you may disconnect your lines at this time, and we thank you for your participation.