Methode Electronics, Inc. (MEI) on Q4 2021 Results - Earnings Call Transcript
Operator: Good morning, ladies and gentlemen, and welcome to the Methode Electronics Fourth Quarter Fiscal 2021 Results. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor 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 fourth quarter earnings conference call. For this call, we have prepared a presentation entitled Fiscal 2021 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.
Don Duda: Thank you, Rob, and good morning, everyone. Thank you for joining us today for our fiscal 2021 fourth quarter earnings conference call. I'm joined today by Ron Tsoumas, our Chief Financial Officer. Both, Ron and I will have opening comments and then we will take your questions. Let's begin with the business highlights on Slide 4. Our sales for the quarter were $301 million. Excluding favorable currency translation, our organic growth was up 37% from the prior year. It should be noted, however, that our prior year quarter was significantly impacted by the pandemic. In this year's fourth quarter, our team faced multiple challenges, first with the chip shortages and then with the plastic resin shortages resulting from the freeze in Texas. These issues along with the ongoing port congestion created meaningful headwinds. In response, the Methode team did what it does best, recognize the challenge early, work with the customers and suppliers to develop solutions and then execute. As a result, we were able to meet the high end of our sales guidance for the quarter. However, the supply chain disruptions required remedial actions, such as expedited shipping and premium component pricing that significantly impacted our margins. Moving forward these challenges are lingering into the first quarter and some may continue until the end of this calendar year. However, we have confidence in the situation improving as evidenced by our guidance for the full fiscal year. The growth that we realized in the fourth quarter was due to increased demand across most of our businesses, but was especially focused in auto and commercial vehicle. We also saw growth in our Dabir business as a result of a major hospital system order. Overall, we have strong awards for EV, LED, lighting and e-bikes. Focusing on EV. Last quarter, we reported that sales into EV applications were over 12% of consolidated sales. This quarter, EV sales were over 13% of consolidated sales and we continue to expect the number to be in the mid-teens for fiscal 2022. Methode’s combination of user interface, LED lighting and power distribution solutions, is a winning formula in EV, but we were specially seeing growth in our power offering. This is where Methode leverages over 40 years of auto grade manufacturing operations and power distribution expertise to supply busbars, connectors and battery disconnect units to the EV OEMs.
Ron Tsoumas: Thank you, Don and good morning, everyone. Please turn to Slide 9. Fourth quarter sales were $301 million in fiscal year '21 compared to $210.6 million in fiscal year '20, an increase of $90.4 million or 42.9%. The year-over-year, quarterly comparisons included a favorable foreign currency impact on sales of $11.5 million in the quarter. The increase was mainly due to lower sales in the prior year quarter from the impact of the COVID-19 pandemic and to higher sales of electric and hybrid vehicle products. Fourth quarter net income increased $1 million to $31.1 million or $0.81 per diluted share from $30.1 million or $0.79 per diluted share in the same period last year. Net income benefited from lower income tax expense and favorable foreign currency translation, offset by higher costs from supply chain shortages, higher sales and administrative expenses and lower other income. Please turn to Slide 10. Fourth quarter gross margins were lower in the fiscal year '21 as compared to fiscal year '20, mainly due to higher material costs, higher logistics costs, including freight and supply chain shortages. Fiscal year '21 fourth quarter margins were 25.1% as compared to 28.1% in the fourth quarter of fiscal year '20 as the supply disruption accounted for over 200 basis points of the margin decrease. The higher logistics costs, including freight and supply chain shortages that were experienced in the fourth quarter, are expected to continue into fiscal '22. In addition, we anticipate a degree of cost inflation continuing into fiscal year '22. Fourth quarter selling and administrative expenses as a percentage of sales increased to 12.3% as compared to 8.6% in the fiscal year '20 fourth quarter. The fiscal year '21 fourth quarter percentage increase was attributable to higher stock based and performance based compensation expenses, mainly as a result of compensation accrual reversals in the prior year quarter related to the negative impact of the COVID-19 pandemic on the fiscal 2020 financial performance measures. The fourth quarter fiscal '21 SG&A percentage is more in line with the historical norm, which should still yield an efficient flow through from gross margin to operating income.
Don Duda: Ron, thank you very much. Catherine, we are ready to take questions.
Operator: Your first question is coming from Luke Junk.
Luke Junk: So I wanted to start with a question on electrification. So electrification related sales came in at over 12% of sales this year, that's versus what you had indicated if we look in the first half of the fiscal year of an expectation that that would be in the high single digits. So a relative basis, about a third higher than you're expecting. What I'm wondering is, as we unpack that, are we seeing benefits from the market in that upside, or should we read this higher electrification mix as Methode's specific? And if so, if you could help us understand what's driving that fundamentally?
Don Duda: It's really both. The market is helping us, particularly in Europe and our new launches, which came from our business wins year and half to two years ago. So it's really both. And percentage wise, I don't know that we could give that now. But we have that -- do you want to comment, Ron?
Ron Tsoumas: No, I agree with that, Don. And of the 12%, the split now between automotive and industrial, it's more weighted towards industrial, which means we're getting more activity from the power side of the vehicle electrification, which seems to be strengthening so.
Don Duda: And the power side probably is more weighted towards market growth, because it's in the batteries and more batteries, the more cars the OEM sell, more batteries and more busbars will sell. So I would say that's weighted more towards the market of that.
Luke Junk: Next, a cost related question in terms of the higher material and logistics costs that you're seeing right now. And what I'm wondering is, if we look in the near term, what you're level of visibility is into that? You mentioned that you're expecting a continued impact as we move into the first fiscal quarter, but as we look over the next few quarters, let's say, is there any visibility into those cost headwinds starting to abate as we move through the fiscal year as you've built into the guidance effectively?
Don Duda: That is a tough one to answer. One of the reasons we gave quarterly guidance is just the uncertainty in the quarter on shortages and the effect. And just as a reminder, even if we could supply, if our customer does not have a complete bill of materials to build a vehicle, they're not going to release us. So it is very hard to forecast. And again, that's one of the reasons we gave a quarterly guidance. Most of the reports we've seen and you read the same ones we do, until the end of calendar year '21, there is a concern that maybe that goes on a little bit longer. I think we can say that the resin shortages have, for the most part, abated themselves not completely, but that's moving in the right direction. The chip really we're managing on a day-to-day basis. I wish I could give you more information on that, but you probably have as much as we do. Now do we get a better allocation of chips because of our customers wanting to shift their premium vehicles, trucks and SUVs? Yes, that does help us being in the center consoles in those areas, but it is still relatively unpredictable.
Ron Tsoumas: Yes. Luke, Don said is spot on in certainly the first quarter, we had 200 bps in the fourth quarter. We would expect maybe not to that level but something -- some visibility to this quarter will be a little tough from that perspective. But beyond the first quarter this year, it still remains to be seen.
Luke Junk: I appreciate the difficulty in looking into the future there. So I appreciate the color you're able to provide. And then lastly, I just wanted to touch on capital allocation. So in your prepared remarks covered two spokes of this in terms of the recent announcement with the dividend as well as share repurchase. Just wanted to get your commentary on your interest level in M&A right now and from a, both from a capital allocation standpoint and strategically, whether or not your focus areas have shifted at all, especially as we're seeing this lift in electrification?
Don Duda: I don't know that our focus has shifted. It's been in industrial mainly and maybe to a lesser degree in medical, but mainly it's industrial, along the lines of EV, that would be a nice combination industrial business with some EV content. Again, I won't rule out automotive. I've said that before, we will be optimistic there. But our focus is on industrial. We have a very high focus internally and externally on acquisitions. We've reviewed a number of books that have come in through the quarter, nothing that we thought was actionable but we continue to look at them. Of course, we also have our own ability to look at companies that might not be for sale, and that's a big emphasis for us. So it's very key to our growth plans, our strategic plans, our long term growth plans. So we continue. And we have -- one of the reasons -- and the team did a very good job of paying down debt, we want to have liquidity to look -- and acquisitions as we move forward.
Ron Tsoumas: Luke, we haven't done an acquisition since September of 2018. That should not be construed that we haven't looked or were not engaged, or we're not active in the process. Methode is very smart, we're disciplined, and we bet things in a very strategic and disciplined manner. So the inactivity has nothing to do with our interest or our level of wanting to grow inorganically.
Operator: We have no further questions from the lines at this time. I'd like to turn the floor back to Don for closing remarks.
Don Duda: Yes. So thank you very much, and we'll thank everyone for listening today, and wish everyone a very safe and enjoyable summer.
Operator: Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
