METHODE ELECTRONICS INC Q3 FY2025 earnings call

• Methode's transformation journey for long-term value creation is well underway, with 20 new programs launched year-to-date and 33 more to launch over the next five quarters.
• Extensively rebuilt the executive management team, including five new leaders from outside the organization.
• Improved operational execution led to lower scrap and freight costs, resulting in higher gross profit despite lower sales volume. Returned to positive free cash flow of $20 million in the quarter.
• EV sales were 24% of consolidated total, though softer start than expected due to customer demand. Data center sales were strong, expected to be record-breaking this year.
• Focus on non-transportation power solutions, industrial lighting, and industrial user interface areas as part of strategy development.

In the third quarter, EV activity was 24% of consolidated total sales, a sequential increase from 20% in the second quarter, though EV sales on a dollar basis decreased slightly. Data center applications saw very strong sales, expected to result in record sales for those products this year. Legacy programs like GMT1 integrated center console and EV lighting went end of life, creating sales headwinds, while new EV programs for Stellantis and a busbar program for GM are launching. Adjusted pretax loss was $7.3 million, an improvement of $3.1 million from fiscal '24.

• Fourth quarter sales expected to be in the range of $240 million to $255 million, pretax income in the range of negative $1 million to positive $3 million.
• Reaffirmed guidance for fiscal '26 with net sales greater than fiscal '25 and positive pretax income notably greater than fiscal '25.
• Fourth quarter guidance assumes depreciation and amortization of $14M-$16M, CapEx of $8M-$10M, and tax benefit of $1.5M to tax expense of $0.5M.
• Full year sales guidance decreased by $77 million at midpoint, but adjusted pretax income decreased by only $9 million, indicating operational improvements.

• Volatility in key end markets, especially automotive markets in North America and Europe. Delays in ramp-ups of new program launches with customers. Impact of legacy program roll-offs on sales. Recent U.S. tariff policy changes not included in guidance which could impact results.

Q: 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?

A: 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. 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.

Q: Good morning. Thanks for taking questions. Jon, 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 in the first half of the year. Now they're kind of back where they were in the back half of '24, roughly speaking. I understand there's a lot of moving pieces, and that there's not direct comparability there, 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 sunsetted, any kind of overhead considerations related to that as well? Thank you.

A: Yes. So Luke, by the way, good morning and thanks for your question. I would look at it, I would maybe characterize it 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 EV delays that we talked about. So on a revenue of $239 million for the quarter, and I won't break out the specific regions, if you think about the performance from an adjusted op income basis, versus a comparable quarter last year. So on $20 million less, $19.6 million less in sales, we're actually up from an adjusted operating income basis by $1.6 million. 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 conversions. 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 in how they run. 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.

Q: Thanks. Good morning all. Hi Jon, I'm looking at this bridge here, and I was looking at some historical charts from prior bridges, and way back when, at the beginning of the year or whatever, were you anticipating about $84 million Stellantis program launch sales, for this year. And then something like $125 million in fiscal '26, is that correct?

A: Yes, that's correct, Gary. 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 '25, '26 and into '27, as these programs ramp up. 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.