Methode Electronics, Inc. (MEI) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning and welcome to the Methode Electronics Third Quarter Fiscal 2021 Results. At this time, all participants are in a listen-only mode. It is now my pleasure to turn the conference over to your host, Rob Cherry, Vice President of Investor Relations. Sir, the floor is yours.
Rob Cherry: Thank you operator, good morning and welcome to Methode Electronics fiscal 2021 third quarter earnings conference call. For this call, we have prepared a presentation entitled Fiscal 2021 Third 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.
Don Duda: Thank you, Rob, and good morning, everyone and thank you for joining us today for our fiscal 2021 third quarter earnings conference call. I'm joined today by Ron Tsoumas, our Chief Financial Officer. Both, Ron and I have opening comments and then we will take your questions. Let's begin with the business highlights on Slide 4. Our sales for the quarter were $295 million. As noted in our release this morning, the company’s accounting period for this quarter included 13-weeks as compared to 14-weeks for the third quarter of 2020. Our discussions on year-over-year comparative results should be viewed in this context. For illustration, our sales on a weekly run rate basis and excluding favorable currency translation were up 8% from the prior year. We share this to give investors insight on how we view the underlying strength of our business which clearly improved year-over-year. While the topline was strong, we do have some headwins to gross margin in the quarter. Supply chain disruptions led to additional cost such as premium freight as well as to factor inefficiencies. Moving forward these challenges will linger and be joined by demand disruptions caused by on-going semiconductor and potentially order material shortages some of which are related to the recent extreme weather events in the U.S. This is driving a level of near term uncertainty that can be seen in our wide guidance range for the fourth quarter. However, none of these issues are systemic and we expect most to be resolved by the middle of this calendar year. Our confidence in this situation improving is evidenced by a decision to give an early indication of our anticipated sales for fiscal 2022 of over 10% organic growth. In addition as the commercial vehicle market continues to rebound, our sales mix is expected to further improve gross margin. Turning to our automotive business, we continue to see strength and demand. Our sales and EV grew and we had a strong word for Power, Lighting & User Interface programs in the quarter. Focusing on EV, last quarter we reported that sales into EV applications were over 9% of consolidated sales, and were expected to be in the high single digits for fiscal 2021. This quarter, EV sales were over 12% of consolidated sales and we now expect that number to be over 10% for fiscal 2021. Furthermore, our healthy pipeline of EV programs now gives us visibility to project that this percentage will be in the mid-teens in fiscal 2022. Methode’s combination of User Interface, LED Lighting & Power Distribution Solutions is a winning formula in EV and positions as well for continued growth in this exciting market.
Ron Tsoumas: Thank you Don, and good morning everyone. Please turn to slide nine. Please note that the third quarter of fiscal year 2021 contains 13 work weeks, whereas the third quarter of fiscal year 20 get 14 workweeks. Third quarter sales were $295.3 million in fiscal year 2021 compared to $285.9 million in fiscal year 2020, an increase of $9.4 million or 3.3%.
Don Duda: Ron, thank you very much, Catherine, we are ready to take questions.
Operator: And our first question is from Luke Junk. Your line is live.
Luke Junk: Yes, good morning. Don wondering for the first question, if you could just talk about your current view of the chip shortage and what your customers are telling you at this point in here in early March. And curious within that if you think you're waiting to trucks and SUVs in the auto business should help to cushion the company to some extent the margin as we go to…
Don Duda: I’ll answer the last part first. I don't want to speak for the customer. But we do know that across the board customers are reallocating to the models that are selling for them. So we do benefit from that. No, but it's very difficult to project. How that will work out. We said we said in our third quarter that it was minimal, but we are seeing the effect of it and in our fourth quarter and our guidance clearly reflects that. So when we're being told it'll mitigate. It runs the gamut. The latest we heard is maybe the middle of the year. But we've also heard longer, as well. So it's very difficult from where we said to predict that and again, that's why we gave a wide guidance range.
Luke Junk: Okay, understood. Second question I had is by my count, you show about a dozen or so EV product applications on slide six and seven. There are a couple of maybe two or three that you'd highlight as an emerging opportunity for the company beyond what you already know is your strengths in terms of Busbars and LED lighting is two key products for example.
Don Duda: Sure, one of the ones we like I mentioned in my prepared remarks are the charging ports. They've fairly complicated. There's actuators them and so there's coils in them, there's connectors, there's Class A surfaces. So we're we don't have any awards at the moment that I can announce but that is an area that we are pursuing. The other area where we take sensors and cameras and we do for one of the major EV company that has a camera in it, but we're also looking at putting cameras on class eight trucks as well. Not so much from electric standpoint, I guess but as you go into some of the other vehicles putting smaller delivery vehicles, putting external cameras on is another area that we are we're working on. From a Skateboard standpoint, the battery disconnect unit, we have some business with that. Now, those are fairly complicated. And then there's a power distribution unit as well, those are areas that those are high dollar content for the vehicles, and again, we're uniquely qualified to produce those. I think those will be the key areas.
Luke Junk: Okay, great. Thank you for that. And then last question I had is if you could just remind us of your overall commercial vehicle exposure and industrial and more importantly, what your outlook for that businesses right now, based on the increase in order rates that we've seen, and as those rates start to recover.
Don Duda: We, we follow ACT. And we look at somewhat flat. I shouldn't say that, because it is increasing in our third and fourth quarter. But we see it mid next year, continuing to go up into 2023. I'm not sure if I would call it the peak. But I think that's where ACT has it. We tend to outpace ACT roll does have to see how strong the recovery is. And I would also point out that some of that is just catching up with demand.
Ron Tsoumas: Yes, we think to, that this, this trend going forward to will provide opportunity, for margin expansion into the next year. The whole segment, as we get into more vehicle electrification and the uptick in commercial vehicles, that's our highest margin segment. So to have more activity there should lift all boats so to speak. So that's a good thing that we watch very closely.
Luke Junk: Great, thank you for that. I'll go ahead and leave it there.
Don Duda: Thank you.
Operator: Your next question is coming from Ryan Sigdahl. Your line is live.
Ryan Sigdahl: Good morning, guys. Thanks for taking our questions.
Don Duda: Good morning, Ryan.
Ryan Sigdahl: Just want to dive in. You mentioned margin expansion next fiscal year, which is helpful directional commentary. This year, there's a lot of headwinds challenges, obviously, this year. But as we looking back maybe to fiscal 2020 EBITDA margins, were close to 20%. I guess, is that a reasonable baseline? You mentioned more content, higher margins, I guess directionally is that a good baseline for next year where you think you can do better than that? Or the reasons think it'll be worse?
Don Duda: That requires us to get into guidance next year. Let me see what we can say there. We've talked about margin expansion and too, because of class aids, and so if I were to look at the industrial margins, I would I would say we would benefit from that increase. Also, we have a better margin mix in some of the new products. Keep in mind, those won't launch in Q1 of fiscal 22. But the BDUs and the PDUs do carry much, much higher margins a little. I would expect from an industrial standpoint, we would see margin and expansion from that. Auto, that's that’s a tougher one. It really depends on chip shortages and what the flow of the flow through but what the actual demand is from the consumer. Right now we're benefiting from both consumer demands, which has been very good for trucks and SUVs. But there's also inventory replenishment of if you look at what the OEMs have in inventory there. They're the lowest I think I've seen in my time and in auto, so we're getting a double benefit from that. That'll take quite some time to probably with the shortages for the inventory to get back up to 90 days or 100 days old. Could that benefit us throughout our fiscal 2022? Yes, I just I don't want to sit here and say that for sure, we really need to see what happens with these with these shortages. And I know, you've got shortages, not just in semiconductors, but and we've and we have faced shortages, really, since the beginning of the pandemic. For the most part, we've been able to alleviate them, but they're, they're very real right now. And we're seeing them affect everybody's results around….
Ron Tsoumas: I agree with what Don saying and clearly all the headwinds from the shortages, and in that are the top line. And as you could see, through the results, they also have a double whammy effect and that they affect our operations as well, too. So a lot of what we're looking at next year will depend on that being satisfied and getting to a more normal run rate, and then I think we'd probably be in a better position to, to fine tune that answer.
Don Duda: And the other thing I would say, Ryan is, obviously we're very excited about our position in EVs. But we need to see how the programs materialized. Do they stay on track? Are they -- if the units are x? Is it you know, x plus? Or is it x negative, in the end, and no one has enough history on that to say for sure, so we're a little guarded, on what those volumes will be, you get on a get on a truck program for Ford or GM, you pretty much know what the volume is going to be. It's much more difficult in EV. Now, we're going to get some volume, because we're on the on the program, but we'll have to wait and see how that materializes.
Ryan Sigdahl: And then, just on the chip shortage, and maybe I missed it earlier, did you quantify or could you quantify how much that impacted your Q4 guide? And then do you expect that to be resolved this quarter? Or do you think that'll linger into this next fiscal year?
Don Duda: I think it's going to linger into Q1 of next year. We have been told that perhaps by the mid calendar year that it may alleviate itself, but we've also had the caution that it may go on, we did not quantify it. There's a lot of moving pieces in the quarter. That's why we gave a large range. But I can tell you that. Let's go four or six weeks ago that our forecast for the fourth quarter was it was in excess of 300 million, which would have been a record quarter. So we're clearly being impacted in the fourth quarter, not so much the third quarter by chips, but we haven't. We haven't quantified exactly.
Ryan Sigdahl: Last one for me. I've asked this previously, but a little more directly, maybe your net cash position, almost a net cash at this point based debt repayment, but from a capital allocation standpoint, your stock valuation relative to earnings it’s lagged peers for years, I guess you guys have focused on acquisitions, which have come at a fairly sizable premium to MEIs valuation. Have you reconsidered a meaningful share buyback program versus more focused on acquisitions?
Don Duda: A very appropriate question. That is something that we are considering. We're now going to have over 200 million in cash, not likely to pay down much more data, very inexpensive debt, there's some debt in Europe, we may we may repay. So now, let me back up. We thought it was very, very important after doing the break on acquisition that we proved to the street that Methode has a discipline to achieve its synergies and more importantly, pay down debt. And we've accomplished that. And that for the last since the break on acquisition, that was priority one. Now where we are sitting today we're ahead of where we thought we would be largely because our teams that have very good job of taking classes out of the factories and dealing with tariffs and so on. So now we will turn our attention to where do we put that cast to use, do we do a stock buyback? That is that is certainly on our list. I won't, I won't give you a priority on it, but it is certainly something that we are we are considering. Now, having said that we will -- we always look at acquisitions. Grakon was I think at first, there was some concern about it. But it clearly has put us in good stead in the commercial vehicle market and the EV market. And some of the EV wins we had, or what will be commercial trucks, and particularly when you get into BDU and PDU. So, I'm not going to say that we're not going to do an acquisition. So I'm not going to give you the order, but I can tell you that a stock buyback is something that we would certainly consider.
Ryan Sigdahl: Great, helpful color. Thanks. Good luck, guys.
Don Duda: Thank you.
Operator: There are no further questions from the lines at this time. I would now like to turn the call back to Don for closing remarks.
Don Duda: Yes, thank you very much. And we'll thank everyone for listening to us today and have a good, good rest of the day.
Operator: Thank you ladies and gentlemen. 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.
