Methode Electronics Q3 2025 Earnings Call Transcript

Quartr
Provided by Quartr
March 6, 2025
Skip to Participants
Operator

Good day, everyone. Welcome to the Methode Electronics Third Quarter Fiscal twenty twenty five Results Conference Call. At this time, participants are on 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 the Vice President of Investor Relations, Robert Cherry.

Operator

The floor is yours.

Robert Cherry
Robert Cherry
VP of IR at Methode Electronics

Thank you, operator. Good morning, and welcome to Mezzled Electronics' fiscal twenty twenty five third quarter earnings conference call. For this call, we have prepared a presentation entitled Fiscal twenty twenty five Third Quarter Financial Results, which can be viewed on the webcast of this call or found at metho.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.

Robert Cherry
Robert Cherry
VP of IR at Methode Electronics

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. On Slide four, please see an agenda for our call today. We will begin with a business update, then a financial update, followed by a Q and A session.

Robert Cherry
Robert Cherry
VP of IR at Methode Electronics

At this time, I'd like to turn the call over to Mr. John DeGaynor, President and Chief Executive Officer.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Thanks, Rob, and good morning, everyone. Thank you for joining us for our third quarter earnings conference call. I'm also joined today by Laura Kwalczyk, our Chief Financial Officer. Before we discuss the quarter, please turn to Slide five, as I take a minute to reflect upon and provide an update on the key messages that I shared with you on my first Methode's Earnings Call six months ago. As I said then, all companies eventually go through periods where the business must evolve to move forward, changing the solutions it develops for customers, the way in which it produces those solutions and the way in which the organization works as a whole.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Methode was at such a point. Today, only two quarters later, I can report that Methode's journey to transform the business for long term value creation is well underway. In that first quarter call, I said that our first priority was to execute on the large pipeline of new programs to be launched over a two year period. Today, I can report that we have successfully launched 20 of those programs year to date and we are working on launching another 33 programs over the next five quarters. Simultaneous with the launches, we committed to focus on immediate actions to address operational execution, costs and efficiency.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Since then, numerous actions have been taken. I will share some of the initial results of those actions later in the presentation, but keep in mind that these are long term initiatives that will continue to bear fruit over the coming quarters and years. Back in the first quarter call, we committed to building an executive team that was up to both tackling the challenges we faced and moving the company forward. I'm proud to share that we have extensively rebuilt the executive management team, including five new leaders from outside the organization. Again, I'll share more details on this in a few minutes.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Lastly, two quarters ago, we committed to profitable organic sales growth in fiscal twenty twenty six. Today, based on all the information available to us, we're able to reaffirm that guidance. Simply put, Methode is firmly on track to reinvigorate and transform the business for long term value creation. Turning to Slide six and our results for the quarter. Our sales were $240,000,000 and our adjusted pre tax loss was $7,000,000 Sales were lower than the prior year as we experienced the first quarter where the impact of two large auto program roll offs was fully felt.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

That impact of course was anticipated. Our sales were then driven even lower than our expectations by the softening in EV demand as well as the overall weakness in the auto market. Despite the lower sales volume, we were able to deliver $4,000,000 in higher gross profit than last year due to product mix and improved operational execution, including lower scrap and freight costs. Furthermore, at the operating line, despite the notable drop in sales, our loss improved from the prior year. Taking a step back, these results clearly demonstrate that the actions we have taken to improve operational execution have lower the breakeven sales point for the company.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

This is a key achievement that will enable Methode to drive margin leverage on future sales growth. Improved execution also helped us return to positive free cash flow, which was $20,000,000 in the quarter. The fact that we generated the same amount of cash from operating activities as the prior year, despite $20,000,000 less in sales is a clear indication of an organization whose operating efficiency has improved. Turning to EV activity, sales in the quarter were 24% of our consolidated total, a sequential increase from 20% in the second quarter. While this percentage increased, our EV sales on a dollar basis actually decreased slightly.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

We remain at the beginning of a wave of new EV program launches, but it's been a softer start than expected due to customer demand that impacted the quarter. There's clearly volatility in several of our key end markets. The weakness in automotive markets, especially in North America and Europe was a headwind. Conversely, a tailwind was the growth in data centers. We enjoyed very strong sales in the data center applications in the quarter.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Our success in that market is expected to result in record sales for those products this year. If you're watching the industry closely, you'll know that the technology in this space is rapidly evolving and will undoubtedly lead to some unevenness in near term sales. However, that very technology disruption is also expected to lead to even more growth opportunities for Methos products. This will be a specific focus area for our new Chief Strategy Officer, Brad Perotti, who will bring both leadership and technical expertise to our mission to expand our power solutions enterprise. As that strategy develops, we will share more in coming quarters.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Turning to the balance sheet, we have maintained an acute focus on managing it, particularly accounts receivable and inventory. At the end of the quarter, we were comfortably in full compliance with the leverage and interest coverage ratios per our covenants. Both improved from the second quarter and were more than a full turn better than requirements. Lastly, our primary focus continues to be on improving operational execution and successfully launching the large pipeline of new programs. In the quarter, we made clear progress on our operational metrics, various cost reductions and improved organizational structure.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

As I alluded to earlier, we are in the heart of our record two year new program launch window. Year to date, we have successfully launched 20 new programs. We have six more in the fourth quarter to launch and then we expect to launch another 27 new programs in fiscal twenty twenty six. Our customers continue to count on us and we plan to continue to deliver. On Slide seven, I want to spend some more time giving you an update on our transformation.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

At a high level, this slide maps out where we are at and where we are going. You will recognize the top of this slide from what we communicated back in the first quarter that the building blocks of our transformation are to reset performance, build and grow capabilities and shift our culture. To reset our performance, we have improved the organization's focus on fundamental metrics and levers. Some balance sheet examples include our improved focus on accounts receivable, which dropped $36,000,000 from the second quarter and inventory, which was down $9,000,000 from the second quarter. Turning to the income statement, we reduced scrap and freight costs a total of $5,000,000 from the prior year.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

On a longer term basis, we have executed a number of actions that will bear fruit over time such as price increases, supplier price reductions and raw material sourcing consolidations. To build and grow our capabilities, we have also extensively refreshed our executive team and I'll share more on this in a minute. To accelerate our improvements such as in our efforts to reduce inventory, we've also selectively utilized outside expert resources to help drive initiatives. Lastly, we have systematically improved rigor and discipline in our day to day business in the areas of program launches, procurement, engineering and finance. One of my key learnings since taking the CEO role is that the company's path to success relies on refreshing history and returning to a one method mindset, where all our global teams are moving in the same direction.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

This mindset existed within Methode and needed to be reinvigorated. In doing so, we can now leverage global best practices, drive better numeracy and cost consciousness and instill a sense of urgency at all levels across the business. While we have focused primarily on execution in the last quarters, we have not ignored strategy. We are in fact in the early stages of its development. We've been actively planning and formulating the basic building blocks and of course strong execution is fundamental to good strategy.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

We intend to deploy a proactive product portfolio management and customer approach. We will not sit back and wait for business to come to us. As we build our strategy, we'll focus on megatrends, applying our core competencies in unique ways to develop high value solutions for both current and adjacent markets. We don't plan to solely be shaped by market forces and swings of our current product portfolio. Our initial focus will be to explore opportunities in non transportation power solutions, industrial lighting and industrial user interface areas.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

These are all areas where we can use our capabilities and drive organic growth in the near term. As I said, we are transforming the business to earn the right with customers, employees and shareholders in order to write the next chapter of Methode's history. Turning to Slide eight, I want to give a clear illustration of the refreshed executive management team that I referred to previously. Each of these positions and individuals have been publicly announced, but seen here collectively clearly illustrate that Methode is now being run by seasoned highly experienced leadership team with both long and short tenures that has the capability to face and overcome challenges. This team has been assembled over just the last seven months, but is already driving the Methode transformation and delivering results.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Talent management will be a core competency of Methode going forward. On Slide nine, I want to provide an update on the transition that we are navigating from a few large legacy programs to a stream of launches of new ones. The GMT1 integrated center console program has now gone end of life. The result is a significant sales headwind in fiscal twenty twenty five and another lesser one in fiscal twenty twenty six. The other major legacy program roll off we previously communicated was for EV lighting.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

That program went end of life in fiscal twenty twenty four and is thus a headwind for us in fiscal twenty twenty five. Conversely, we are launching several EV programs for Stellantis in fiscal twenty twenty five. The ramp up of those programs as well as other launches has been slower than expected and impacted the quarter and our outlook, although pricing actions did provide some offset. Consequently, we now expect sales for our fiscal twenty twenty five to be lower than fiscal twenty twenty four rather than flat. Looking further out to fiscal twenty twenty six, we still expect more launches of EV programs for Stellantis, albeit at lower volumes.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

In addition, we will be launching a sizable busbar program for GM. This GM program was a takeover award that we disclosed in the first quarter, but we did not identify the customer. This Fast Track program demonstrates the trust that GM has in Methode. It also further adds to the diversity of the OEMs that we are supplying for EV programs. That activity is expected to be to more than offset the final headwind from the GMT one roll off as well as a major appliance program that's going end of life in fiscal twenty twenty five.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

The overall net result is the continued expectation of organic sales growth in fiscal twenty twenty six. On a more granular basis, excluding the appliance business, which is non cordless, we could potentially see high single digit organic growth in fiscal twenty twenty six within an environment of flat end markets. As we navigate this product transition, we remain subject to market conditions, EV adoption trends and the success of our customers program launches. However, as of today, this is the line of sight we have based on our projections, the forecast of our customer base and third party data sources. Turning to Slide 10.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

In summary, for the quarter sales were lower, but gross profit higher than the prior year, while we returned a positive free cash flow. EV activity was steady and was 24% of sales. The data center market drove strong power product sales and is expected to lead to a record year for those products. We were comfortably in full compliance with all debt covenants and our focus is on driving fundamental operational metric improvement helped which helped to lower both AR and inventory levels. Lastly, since the first quarter, we have extensively rebuilt the executive management team, including five new leaders hired from the outside.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Going forward, our focus this fiscal year continues to be on transforming the business while positioning it to return to profitable growth next fiscal year. Meanwhile, we are focusing intensely on executing six more program launches this year, while preparing to launch another 27 next year. Our decisive actions to reset performance are expected to continue to improve our operational metrics and reduce costs. As I laid out in our transformation roadmap, we are continuing to build and grow our capabilities, shift our culture and we are planning the next steps of developing our strategy. Lastly, for fiscal twenty twenty six, we are reaffirming guidance for profitable organic sales growth.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

I firmly believe that our business is headed in the right direction. At this point, I'll turn the call over to Laura, who will provide more detail on our third quarter financial results.

Laura Kowalchik
Laura Kowalchik
Chief Financial Officer at Methode Electronics

Thank you, John, and good morning, everyone. Please turn to Slide 12. The third quarter net sales were $239,900,000 compared to $259,500,000 in fiscal twenty twenty four, a decrease of 8%. On a sequential basis, sales decreased 18% from the fiscal twenty twenty five second quarter. For all the sequential comparisons to the second quarter of this fiscal year, please note that the second quarter had one extra week as we explained last quarter.

Laura Kowalchik
Laura Kowalchik
Chief Financial Officer at Methode Electronics

In addition to the third quarter having one less week in comparison to the second, the third quarter is historically our weakest quarter for sales as it covers the year end holidays and customer plant shutdowns. As a result, these two factors tend to be a primary driver for most of our sequential financial comparisons. This quarter was the first quarter where the full impact of the GM Center Council and major EV lighting program roll offs were felt with negligible total sales in the quarter from both. That headwind outpaced the sales contribution that we received from new program launches. We also experienced sales weakness in the commercial vehicle and off road lighting applications.

Laura Kowalchik
Laura Kowalchik
Chief Financial Officer at Methode Electronics

A bright spot in the quarter was strong sales of power products into data center applications. As John mentioned, we are on pace for a record year in sales for those data center products. Third quarter adjusted loss from operations was $1,300,000 an improvement of $1,600,000 from fiscal twenty twenty four. On a sequential basis, adjusted income from operations declined $15,600,000 from the fiscal twenty twenty five second quarter. Please see the appendix for a reconciliation of all adjusted measures to GAAP.

Laura Kowalchik
Laura Kowalchik
Chief Financial Officer at Methode Electronics

The improvement in adjusted operating loss year over year was driven by higher gross profit. That improvement in gross profit was driven by lower scrap and premium freight as well as other operational execution improvements. On a sequential basis from the second quarter, the lower sales drove more than 100 of the decline as a $4,900,000 improvement in SG and A was a partial offset. That improvement in SG and A was mainly driven by lower professional fees and by a reduction of variable management compensation related to financial performance objectives. Overall, the third quarter was transitional in nature as new program sales are starting to replace the legacy program roll offs.

Laura Kowalchik
Laura Kowalchik
Chief Financial Officer at Methode Electronics

Please turn to Slide 13. Shifting to EBITDA, a non GAAP financial measure, third quarter adjusted EBITDA was $12,300,000 up $2,800,000 from the same period last year. On a sequential basis, adjusted EBITDA declined $14,400,000 from the fiscal twenty twenty five second quarter. The adjusted EBITDA benefited year over year from higher gross profit. The sequential decline was driven by the lower net sales.

Laura Kowalchik
Laura Kowalchik
Chief Financial Officer at Methode Electronics

Please turn to Slide 14. Third quarter adjusted pretax loss was $7,300,000 an improvement of $3,100,000 from fiscal twenty twenty four. On a sequential basis, adjusted pretax income declined $13,500,000 from the fiscal twenty twenty five second quarter. The higher gross profit drove the improvement from the prior year, while the sequential decline was driven by the lower net sales. Third quarter adjusted diluted loss per share improved $0.12 from a loss of $0.33 in the same period last fiscal year.

Laura Kowalchik
Laura Kowalchik
Chief Financial Officer at Methode Electronics

This $0.12 improvement was achieved despite the $19,600,000 decrease in sales. On a sequential basis, the adjusted earnings per share decreased $0.35 from the fiscal twenty twenty five second quarter. The third quarter adjusted EPS excluded a valuation allowance of $6,500,000 for U. S. Deferred tax assets.

Laura Kowalchik
Laura Kowalchik
Chief Financial Officer at Methode Electronics

The adjusted tax for the quarter was a benefit of $300,000 dollars Overall, while operational improvements helped minimize the impact, our third quarter profitability was primarily driven by the lower sales. Please turn to Slide 15. Debt was down $12,700,000 from the second quarter, mainly driven by FX. We ended the quarter with $103,800,000 in cash, up $6,800,000 driven by improved cash from operations. This improvement was achieved despite a $52,700,000 sequential decline in sales.

Laura Kowalchik
Laura Kowalchik
Chief Financial Officer at Methode Electronics

Net debt, a non GAAP financial measure, decreased by $19,500,000 to $224,100,000 As John mentioned, we are comfortably in compliance with all of our debt covenants at the end of the third quarter. Please turn to Slide 16. The third quarter's net cash from operating activities was $28,100,000 as compared to $28,800,000,000 in fiscal twenty twenty four. Third quarter capital expenditure was $8,500,000 as compared to $16,600,000 in fiscal twenty twenty four, a decrease of $8,100,000 The decrease was driven by proactive delays in the purchases of property, plant and equipment to better match program launch schedules. Third quarter free cash flow, a non GAAP financial measure, was 19,600,000 as compared to $12,200,000 in fiscal twenty twenty four, an increase of $7,400,000 This increase was mainly due to the lower CapEx spending that I just described.

Laura Kowalchik
Laura Kowalchik
Chief Financial Officer at Methode Electronics

Please turn to Slide 17. Regarding forward looking guidance, it is based on management's best estimates and is subject to change due to a variety of factors as noted at the bottom of this slide. For the fourth quarter, we expect sales to be in a range of $240,000,000 to $255,000,000 We expect pretax income to be in a range of negative $1,000,000 to positive $3,000,000 While our transformation efforts have clearly delivered operational improvements, we continue to work through the residual effects from past operating inefficiencies that still have the potential to negatively impact our near term results. Implied in this first quarter guidance is a reduction to our prior guidance for full year sales and pre tax income as shown on the slide. While our full year sales guidance has come down $77,000,000 at the midpoint, the adjusted pretax income has come down only $9,000,000 a deleveraging of only 12%.

Laura Kowalchik
Laura Kowalchik
Chief Financial Officer at Methode Electronics

This is yet another indication of our operational improvements. The fourth quarter guidance assumes depreciation and amortization of $14,000,000 to $16,000,000 CapEx of $8,000,000 to $10,000,000 and a tax benefit of $1,500,000 to tax expense of $500,000 Looking further ahead to fiscal year twenty twenty six, we are reaffirming expected net sales to be greater than fiscal twenty twenty five and pretax income to be positively positive and notably greater than fiscal twenty twenty five. Lastly, we have not included any of the very recent changes to U. S. Tariff policy in our guidance.

Laura Kowalchik
Laura Kowalchik
Chief Financial Officer at Methode Electronics

That concludes my comments and we can open it up to questions.

Operator

Certainly. The floor is now open for questions. Your first question is coming from John Fentzreb with Sidoti. Please proceed with your question. Your line is live.

John Franzreb
Senior Equity Analyst at Sidoti & Company

Good morning, everyone, and thanks for taking the questions. I guess I'd like to start with the quarter in and of itself. When you look at the drop in the revenue profile, especially in light of what maybe some of the anticipation in the lower volume in the EV and hybrid sector, what surprised you really the most about the drop in volumes?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

So John, probably we're most disappointed with the some of the delays and ramp ups from our new program launches with our customers. We've been working on this with our customers and we talked about all the launches and we expected those ramp ups to occur much more aggressively and that's what we had talked about during our last earnings call. So that would be the biggest surprise. And

John Franzreb
Senior Equity Analyst at Sidoti & Company

how does that program rollout look today in light of those changes and the confidence level you have that they will continue to roll out at the pace you anticipate over the coming say six months?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Yes. As you look at the sales bridge that we laid out, particularly both for fiscal twenty twenty five and fiscal twenty twenty six, you can see that we have lowered go back to previous ones. We have lowered our expectations for a couple of those programs, particularly the Stellantis programs. We are actively working with the customer to deal with that from a commercial perspective. We'll keep you and all of our investors up to date as that comes to fruition.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

But we're still optimistic with regard to the programs. We've seen no cancellations. It's just delays and ramp ups or change in overall volume expectations and we're dealing with our customers that way. The other thing that I think is important to note is the GM program is something that we hadn't talked about before and is a signal that of how our customers view us and our opportunity to be a recipient of takeover programs. That is a statement on our customer view of our health.

John Franzreb
Senior Equity Analyst at Sidoti & Company

Understood. And I guess you talked about you've executed some pricing actions. I'm curious how that stands. Are there still other repricing opportunities or is that program completed?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

No. I mean, we as I said with regard to Solentis or conversations we have ongoing as we look at these volumes, but with all of our customers, we're in regular conversations with them with regard to economics, with regard to whether there's design changes or whether there's other things. So it's not just one customer, it is a continual activity. We look at the program profitability and we look at what our performance should be. We take our responsibility for our things, but we're talking with customers around the globe on an ongoing basis.

John Franzreb
Senior Equity Analyst at Sidoti & Company

Okay. And you mentioned data center, data centers is a bright spot. How much is data center as a percentage of revenue at this point?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

So in the quarter, it was 7% and for the fiscal year, it should be closer to 9%. And historically, we've talked about it being 3% to 5% of our sales. There's been many questions in the first two of our earnings calls with regard to data centers. And the more I get into the organization, the more I get a chance to study it, the more optimistic I am about our ability to bring core competencies to bear to grow this space. So as part of the reason why we announced what we did with regard to Bragg and Rohde.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

And while this 79% respectively aren't representative of new strategic direction, it is representative of where the opportunity is and how we think we can grow upon that. Okay. And one last question, I'll

John Franzreb
Senior Equity Analyst at Sidoti & Company

get back into queue. Can you give us some updated thoughts on what you're seeing in the Class eight truck market and how that's impacted your thoughts on guidance?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

So the Class eight truck market as we see it in, I'll just talk about North America for right now. We still see fiscal twenty twenty or calendar '20 '20 '5 as down 5%. And that's in in the numbers that we talked to you about our fiscal twenty twenty six, it's and when I mentioned to you both from a pass car and a commercial vehicle standpoint, we're talking about flat to down markets being high single digits up in sales and flat to down markets. That includes what we see with regard to commercial vehicles. We I guess one other thing, John, I'll take the opportunity since you asked the question.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

The team has really done a lot to reinvigorate our relationships with our CV customers. And we're seeing higher RFQ opportunities and really the opportunity to grow that portion of the business more aggressively going forward. I'm optimistic about where we stand with our customers there.

John Franzreb
Senior Equity Analyst at Sidoti & Company

John, could I just on that topic, most people think that's a first half calendar year weighted event as far as the drop in the Class eight market. Is that how you view it or you think it's going to be flatter down? I know I'm going to work towards the end of the year.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

We don't try to be a forecasting house. We use whether it's ACT or S and P Global for our forecasting. And in talking to customers as well as looking at the forecasting houses, I think that's a fairly common theme, but that's what's in our guidance.

John Franzreb
Senior Equity Analyst at Sidoti & Company

Fair enough. Thank you, sir. I'll go back in the queue.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Thanks, John.

Operator

Your next question is coming from Luke Junk with Baird. Please proceed with your question. Your line is live.

Luke Junk
Senior Research Analyst at Robert W. Baird & Co

Good morning. Thanks for taking the questions. John, maybe to start with, can you just help us unpack the sequential margin momentum in Automotive segment margins this quarter? Looking, we saw some improvement first half of the year, now they're kind of back where they were in the back half of twenty twenty four roughly speaking. I mean, I understand there's a lot of moving pieces and that there's not direct comparability there.

Luke Junk
Senior Research Analyst at Robert W. Baird & Co

But can you just help bucket some of the factors there in terms of overall industry volumes, take rates on EV and now with those programs fully sunseted, any kind of overhead considerations related to that as well? Thank you.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Yes. So Luke, by the way, good morning and thanks for your question. I would look at it, I would maybe characterize a little differently than you characterized it. On a for a revenue that we knew that this quarter and we've talked about the fact that this quarter was going to be challenging from a performance standpoint, but also from a revenue standpoint, just from the way our quarters lay out with the holidays plus then you have weather issues and the EV delays that we talked about. So on a revenue of $239,000,000 for the quarter, and I won't break out the specific regions.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

If you think about the performance from an adjusted op income basis versus a comparable quarter last year, so on $20,000,000 less $19,600,000 less in sales, we're actually up from an adjusted operating income basis by $1.6 If you would just look at sort of typical downside conversion with regard to revenue, that performance is actually double digit millions better than between one timers and conversion. So I'm actually pretty pleased with the operational performance from a scrap perspective, from a premium freight perspective, from an overtime perspective, both in North America and in our EMEA facilities. The progress has been made in Egypt, the progress the performance that we see in our Malta facility and our continued performance in China as well as what's happening in Mexico. Our plants are doing a very good job dealing with a lot of turbulence. The EV volumes have really caused our plants to be choppy and how they run.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

So this year over year performance, I think is the best way to evaluate where we are from an operating side. And I'm actually quite optimistic about where we are. I view it as a true drop in our breakeven.

Luke Junk
Senior Research Analyst at Robert W. Baird & Co

Appreciate the color there. Second, typically include some color on awards and the slides weren't in the slides this quarter. Any color on current quarter awards and maybe just the industry backdrop as well relative to auto headwinds, EV moderation, etcetera? Thank you.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Yes. Thanks. So in the quarter, we had $20,000,000 worth of wins. For the year to date, we're at $130,000,000 Would we like it to be higher than that? Yes, we have a large number of big programs in the pipeline and whether they'll get awarded in the fourth quarter or whether there'll be an early twenty fiscal twenty twenty six awards, I don't know.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

And as we've said multiple times, awards are lumpy. So we kind of have to average it out over time. The fact that we're talking about high single digit growth year over year tells you that our awards in flat underlying markets tells you that our awards are turning into revenue growth for the company. And you combine that with a lower breakeven and it really portends much better performance for the business going into fiscal twenty twenty six, which is what we have been talking about the last couple of quarters.

Luke Junk
Senior Research Analyst at Robert W. Baird & Co

Yes. And just on the high single digit growth expectation, did you say, John, that you're excluding the appliance sunset? Did you say that you're thinking that not for essentially?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Yes. We should give it a true a true like for like comparison. If you look at the bridge that we've provided on Slide nine, you take out that appliance program roll off the $25,000,000 that we show there. And so you would subtract that out of the fiscal $2,025,000,000 dollars guidance and you compare to the fiscal $2,026,000,000 dollars That's all organic growth then in our base business, so that we're talking about base to base.

Luke Junk
Senior Research Analyst at Robert W. Baird & Co

Got it. And then lastly, I know that you're not including tariffs in the guidance, but just given your manufacturing presence in Mexico, anything you can share around preliminary customer discussions and maybe what your approach might be prospectively should those actually come into effect in April?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

So we've been pretty clear with our customers and we believe that the way in which we're approaching it is relatively similar to our peers. And that's that we've been proactive, but we basically said we can't bear the extra cost. And so therefore, our actions have been to communicate with our customers that we will not bear that extra cost. To answer your question, about a third of our sales are impacted a a third of Methode's overall sales are impacted by the tariff discussions between Mexico, Canada and China. A much larger portion of that into The U.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

S. Is coming out of Mexico, obviously. But we are in regular conversations with our customers. We have a war room set up here and the team is talking about it multiple times today, multiple times a day to make sure that our we've got the latest information and our strategies are well defined. It's also giving us an opportunity to make sure that all of our systems are really well refined and we're using this crisis as an opportunity to make the business better.

Luke Junk
Senior Research Analyst at Robert W. Baird & Co

That's all I had for now. Thank you.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Thanks, Luke.

Operator

Your next question is coming from Gary Prestopino with Barrington Research. Please proceed with your question. Your line is live.

Gary Prestopino
Managing Director at Barrington Research Associates

Thanks. Good morning, all. Hey, John. I was I'm looking at this bridge here, and I was looking at some historical charts that from prior bridges and way back when at the beginning of the year or whatever, were you anticipating about $84,000,000 of Stellantis program launch sales for this year and then something like $125,000,000 in fiscal 'twenty six? Is that correct?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Yes. That's correct, Harry. And thanks for raising that. When we talk about the question was asked about some of our disappointments is we've made the investments and we planned these, but we're doing our best to follow our customers and support them. Obviously, we've looked at what based on third party as well as their feedback where we see this going both in fiscal twenty twenty five, '20 '20 '6 and into 2027 as these programs ramp up.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

And so what you're seeing in the new bridge is our current expectations both based on third party as well as customer feedback. And as I said earlier, that does lead us to having to have commercial negotiations and other things.

Gary Prestopino
Managing Director at Barrington Research Associates

So these programs have been delayed. I know Stellantis has canceled some model rollouts. Has anything been canceled on you?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

No, these are not canceled. These are take rates and these are delays, not cancellations. So when we talk about launches and we have launches going on with EV customer with customers around the world and many of them are EV based. And when I talk about these launches, it's unfortunately the Stellantis program is so big that it overwhelms some of our growth. But if you look at it from an EV standpoint, EV penetration, as you think about it in for the market in The U.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

S. Is 10% and Europe is 25% and China it's 40%. We have launches happening in all three regions with new customers for EV programs. So I think this will balance out over time, but it's a pretty turbulent time and obviously with the big Stellantis launches, it puts a spotlight on it.

Gary Prestopino
Managing Director at Barrington Research Associates

Were all your launches with Stellantis EVs or were they spread out on ICE vehicles too?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

It's

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

EVs and a hybrid, I believe.

Gary Prestopino
Managing Director at Barrington Research Associates

A hybrid, okay. All right. So you've channeled those down pretty significantly. Do you think a lot I mean, the market obviously for EVs has been challenging versus where it was a year ago or two years ago. But does some of this impact come from the change of leadership at Stellantis since Tavares is no longer there and you've got some new players in there running the company?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Yes, I don't want to make comments about how our customers run. I just think it with the election and with some of the market dynamics, it's there's a lot of turbulence in the space. Ultimately, do we believe that EVs will be a productive part of the end market in all of our end markets. And again, I'm just going to remind you and our investors that we're selling into multiple end markets, not just in the North America. So yes, the 10% market penetration in North America matters, but in Europe it's 25% and in China it's 40%.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

So we have to be a player in this space. And I think this will stabilize out for our customers and for Stellantis in particular, but you see new program launches and new announcements from General Motors and others there. Our customers are still moving forward with their EV strategies and we're going to support them.

Gary Prestopino
Managing Director at Barrington Research Associates

Okay. Then just two other quick questions. Looking at the slide with transformation update and then talking about initial exploration of non transportation power, industrial lighting, industrial user interface. Do you rely on your segment heads

Gary Prestopino
Managing Director at Barrington Research Associates

to

Gary Prestopino
Managing Director at Barrington Research Associates

be the impetus or the initial, like for lack of a better word, spotter of these opportunities? Or do you have your own in house Corp Fin that's out there actively looking for acquisitions?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Well, so right now, sorry, I want to make sure we've always had a central acquisition M and A team. But as I've said to you and as I've said before, our focus from a capital allocation is on organic growth and using our core competencies to drive that. The announcement that we made with regard to our new Chief Strategy Officer really is in alignment with that change in strategic direction from growth via acquisition to growth via organic growth. And Brad's bringing a focus will help the central team as well as the business heads to focus on where are those opportunities. And as we said in the script, the near term focus right now is on industrial data centers, obviously with all of the AI news in the space, as well as what are we doing on some of our other industrial end markets.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

I believe that between Brad and Lars and some of the other leaders that we've added, it's going to give us we're going to have opportunities to grow on the automotive and the commercial vehicle side, but because of the timing of those programs, it takes longer to see that growth hit. So the near term organic growth focus is on the non automotive side, particularly with data centers and what do we do there. And the fact that we went from a usually 3% to 5% of our sales to 7% and forecasting 9% tells you we've got opportunity that both we're seeing the opportunities now and I believe there's a lot more opportunity in the future.

Gary Prestopino
Managing Director at Barrington Research Associates

Okay. Just one last quick one, real easy answer. Laura, are there any issues

Gary Prestopino
Managing Director at Barrington Research Associates

on

Gary Prestopino
Managing Director at Barrington Research Associates

the covenants of your debt with buying back stock since your stock is down pretty precipitous for the year?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

So I'm going to answer that one. We obviously talk at a board level on a regular basis on our the priorities for utilization of our capital and utilization of our cash. We have a board meeting upcoming in a couple of weeks and certainly those conversations will happen again. Do we like what we see right now with the stock today? No.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Do we think there's opportunities given what we are given the growth of this business? Yes. Can we answer the question with regard to buybacks right now? No, it wouldn't be appropriate for us to answer that. Okay.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Thank you.

Operator

Your next question is a follow-up from John Fentrev with Sidoti. Please proceed with your questions. Your line is live.

John Franzreb
Senior Equity Analyst at Sidoti & Company

Yes. I'm actually just curious. We haven't talked about Nordic Lights in quite some time. And if you could kind of give an update on how that acquisition is performing relative to the expectations when it was acquired over a year ago?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

John, I'm really pleased with the team at Nordic Lights. Obviously, we have some challenges in the industrial in their end markets, but we're seeing some green shoots in the beginning of fiscal twenty twenty, not fiscal, but calendar 2025 with regard to that end market. And that impacts both our Nordic lights business and our Heutronix business. What I mentioned to you or I mentioned in the call with regard to opportunities for continued growth on the industrial lighting side, that is where do we go next with regard to the product portfolio from a Nordic Lights perspective. And Brad has been working with the leadership team in Nordic Lights as well as the leadership team in Headronix to try to drive additional growth there.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

So the team from Nordic Lights is doing a very good job around the world and we see more opportunities for growth in fiscal twenty twenty six and going forward.

John Franzreb
Senior Equity Analyst at Sidoti & Company

Okay. And it's not being weighed down by what we're seeing in Europe more so than you anticipated or just context maybe?

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Yes, I mean the end markets in calendar twenty twenty four were certainly down from an industrial perspective. But that team did a very good job of driving performance in spite of lower end markets. And now we see some of the markets coming back and there is a cyclicality where I'm learning more about that cyclicality versus an automotive or commercial vehicle cyclicality. And the team at Nordic Lights is quite confident as they see the beginning of the year rolling out. That's good news.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Okay.

John Franzreb
Senior Equity Analyst at Sidoti & Company

Thank you very much, John. Appreciate it.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

Thanks for your question, John.

Operator

There are no additional questions in queue at this time. I would now like to turn the floor back over to John DeGaynor for any closing remarks.

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

I want to thank all

Jonathan DeGaynor
Jonathan DeGaynor
President & CEO at Methode Electronics

of you for attending our call and for your questions. We look forward to discussing our continued progress in future calls and we wish you all a great day. Thanks very much.

Operator

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.

Executives
    • Robert Cherry
      Robert Cherry
      VP of IR
    • Jonathan DeGaynor
      Jonathan DeGaynor
      President & CEO
    • Laura Kowalchik
      Laura Kowalchik
      Chief Financial Officer
Analysts
Powered by Quartr
Earnings Conference Call
Methode Electronics Q3 2025
00:00 / 00:00

Transcript Sections