Q4 2024 Methode Electronics Inc Earnings Call
Participants
Robert Cherry; Vice President - Investor Relations; Methode Electronics Inc
Kevin Nystrom; Interim Chief Executive Officer; Methode Electronics Inc
Ronald Tsoumas; Chief Financial Officer; Methode Electronics Inc
Luke Junk; Analyst; Robert W. Baird & Co.
Saree Boroditsky; Analyst; Jefferies
Gary Prestopino; Analyst; Barrington Research Associates, Inc.
Presentation
Operator
Good day and welcome to the Methode Electronics fourth quarter fiscal 2024 results conference Call. (Operator Instructions) I would now like to turn the call over to Robert Cherry, Vice President of Investor Relations. Please go ahead.
Robert Cherry
Thank you, operator. Good morning, and welcome to Methode Electronics fiscal 2024, fourth quarter earnings conference call. For this call, we have prepared a presentation entitled fiscal 2024 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. 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.
At this time, I'd like to turn the call over to Mr. Kevin Nystrom, Interim Chief Executive Officer.
Kevin Nystrom
Thank you, Rob, and good morning to everyone. Thank you for joining us for our fiscal 2024 fourth quarter earnings call. I'm joined here today by Ron Tsoumas, our Chief Financial Officer. Both Ron and I will have some opening comments and then we'll take your questions.
Before we discuss the quarter, I want to reiterate the news that we announced in late June regarding our CEO transition, Jon DeGaynor, former CEO, of Stoneridge has been appointed President and Chief Executive Officer of Methode effective next Monday, July 15. We congratulate Jon and welcome him to the Methode team. Jon has significant industry experience and I think he will be a strong leader for Methode into the future.
Back to the quarter -- turning the corner, let's go to slide 4 of the presentation. Our sales for the quarter were $227 million, which were down $24 million year-over-year. The decline was mostly entirely in our auto segment across all three of our reporting regions. The decrease was primarily due to program roll-offs and continued softness in the e-bike market, along with some EV demand weakness.
The sales declines were offset by the acquisition of Nordic Lights in the industrial segment around the beginning of the year. After adjusting for goodwill impairment, the lower sales volume along with continued operational inefficiencies in our North American auto operations drove the net loss in the quarter.
These are essentially the same operational challenges that we've experienced and communicated through this past fiscal year. They are being driven by increased program launches, labor turnover and higher overall costs. With the company in the midst of a record number of program launches, it is only natural for there to be production inefficiencies that drive higher costs, often simply as a matter of a timing lag between the investments to develop and support the launches and the eventual realization of sales from the launches.
Customer program delays can also contribute to these fixed cost absorption challenges. We are taking numerous actions to mitigate these launch costs, which range from -- looking for customer support to reimburse some of these costs into end internal cost reductions. We have also have our best talent keenly focused on managing the launches to maximize cost efficiency.
Next, I want to move to orders. We had a strong quarter with over $140 million in annual program awards. These programs were spread across our power, lighting, sensor and user interface applications. I can also share that the pipeline of potential awards remains healthy. I would note that the profile of the program awards and the pipeline are both heavily weighted towards EV and are subject to reduction or delay due to customer decisions or market conditions.
Turning back to EV activity. Their sales in the quarter were 14% of our consolidated total or for the year we're at 19%. As previously communicated, we had sizable EV lighting program -- we had a sizable EV lighting program roll off in the fourth quarter, and we are now at the beginning of a wave of several new EV power programs.
As we transition programs, there's a timing gap where we expect a period of lower EV sales before they rebound. All of this is taking place within the backdrop of a softening near term market outlook in EV. However, as we look out several years, EV is still clearly a long-term tailwind for Methode, but the path as we are seeing, it may not be linear.
At year end, our net debt was at the lowest level it has been in the last four quarters. That reduction was aided by our highest free cash flow quarter of the year. Our cash position at the end of the fourth quarter was aided by the sale of certain non-core assets, including the company aircraft. We are maintaining a sharp focus on cash generation. Lastly, we continued our share buyback in the quarter, acquiring $3 million in shares via our automated purchase program.
Let's go to page 5 of the presentation. The awards identified here are some of the key wins in the quarter and represent $141 million in annual sales at full production. The launch timing of most of these programs could be anywhere in the range of one to two years from now.
The awards were mainly for power products associated with the EV skateboard architecture. These awards were also weighted towards the United States in Asia. In other your areas, we were awarded programs for sensors, user interface and solutions for applications in e-bikes, traditional auto and commercial vehicles. It was by far our strongest quarter for the year for awards and was once again driven by EV. As I mentioned earlier, the award pipeline remains healthy but is also very EV centered.
Let's go to page 6 of the presentation. In summary, for the quarter, sales were under pressure from major auto program roll-offs and market headwinds in the e-bike and EV markets. The goodwill impairment, operational inefficiencies of our auto segment and lower sales volume drove a net loss, however, reported the best quarter of the year for free cash flow and new program awards. Lastly, we delivered the lowest quarterly debt level of the fiscal year.
Going forward, we are fully focused on profitability improvement. We are undertaking initiatives to reduce costs, particularly in the areas of sourcing, logistics and sales and administrative costs. We're also focused on monetizing noncritical assets, managing our strong backlog of program launches and prove -- and improving low margin programs.
We will also continue our efforts to reduce working capital, increase cash flow and reduce net debt. These actions are all foundational to our long-term plans and will carry on beyond the company's leadership transition. Simply put, our fiscal 2025 will be a year of repositioning the business with the goal of returning the company to growth and profitability in 2026.
Now, before I turn the call over to Ron, who will provide more detail on fourth quarter financial results, I would like to recognize Ron for his service to Methode. Ron's retiring tomorrow. And this is his last earnings call.
Ron, he's been a valuable contributor to Methode for over 40 years and will long be remembered as a pillar in the history of this company. We thank Ron for his tireless efforts and wish him and his family the best and retire. With that, Ron, I'll hand it over to you.
Ronald Tsoumas
Thank you, Kevin, and good morning, everyone. Please turn to slide 8. Fourth quarter net sales were $277.3 million compared to $301.2 million in fiscal '23, a decrease of 8%. This quarter's in sales included $21.8 million from the Nordic Lights acquisition and $1.1 million of unfavorable foreign currency translation. Excluding Nordic Lights and foreign currency, sales decreased by 15%.
The quarter saw the continuation of two key automotive program roll-offs, one in North America and one in Asia. The one in Asia fully rolled off in the fourth quarter. We also had persistent softness in the e-bike market and some weakness in EV demand. The e-bike market continues to be overstocked.
Fourth quarter loss from operations was $61.5 million, down from $8.5 million of income in fiscal '23. Income was down to the goodwill impairment, the ongoing operational inefficiencies, which were mainly in our North American auto motive business, which drove higher inventory, labor expense, other increased production costs combined with lower sales volume.
Similar to our second quarter of the past fiscal year, at the end of the fourth quarter, we experienced a goodwill impairment triggering events when our market cap was less than our book value. Based on this, we performed a quantitative analysis on our reporting units with goodwill, and we determined that at our North American auto reporting unit, the current value of the reporting unit was less than the carrying value, resulting in a goodwill impairment of $49.4 million.
There is no remaining goodwill at this reporting unit. Adjusting for the goodwill impairment of $49.4 million and restructuring costs of $2.3 million, which were partially driven by headcount reductions. Our non-GAAP adjusted loss from operations was $9.8 million.
Please turn to slide 9. Fourth-quarter diluted earnings per share decreased to a negative $1.63 from a positive $0.22 in the same period last fiscal year. The EPS was negatively impacted by lower operating income, the goodwill impairment and higher net interest expense. A larger tax benefit compared to the prior year was a partial offset.
Adjusting for the goodwill impairment of $1.40 per share, restructuring costs of $0.05 per share and a gain on sale of assets of $0.05 per share, our non-GAAP adjusted diluted EPS decreased to a negative $0.23 per share. The gain on the sale of assets was mainly driven by the sale of the company aircraft.
Shifting to EBITDA, a non-GAAP financial measure, fourth quarter EBITDA was a negative $44 million versus a positive $21.9 million in the same period last fiscal year. EBITDA was negatively impacted by the lower gross profit lower sales, partially offset by lower selling expenses.
Selling and administrative expense was $8.5 million lower primarily due to the acquisition cost of Nordic Lights in the prior year, which accounted for $6.8 million of the decrease. Adjusting for the goodwill impairment of $49.4 million, restructuring costs of $2.3 million and the gain on sale of assets of $2.4 million. Our adjusted EBITDA decreased $26.4 million to $5.3 million.
Please turn to slide 10. Debt was up $24.1 billion from the prior year end, but it was down slightly from the third quarter. The debt increase was mainly due to working capital investments and higher CapEx both to support sales and new program launches. We ended the quarter with $161.5 million in cash, up $4.5 million from the end of last fiscal year and up $38.6 million from the third quarter. The sale of the company aircraft was a notable driver of the sequential increase.
Net debt, a non-GAAP financial measure increased by $19.6 million from the prior year end to $169.4 million, but was down $39 million from the third quarter and was at its lowest level since the end of fiscal '23.
We were in compliance with all of our debt covenants at the end of the fourth quarter. However, at the end of the quarter, we proactively entered into an amendment with our credit facility agreement with our lenders.
The amendment lowered the size of the credit facility from $750 million to $500 million, raise certain covenant ratios and added additional terms. This amendment gives us further confidence that we remain compliant with our debt covenants over the next 12 months. For further information, please see our 10-K filing.
Please turn to slide 11. Fourth quarters net cash from operating activities was $24.9 million as compared to $49 million in fiscal '23. The decrease of $24.1 million was primarily due to lower net income in the quarter.
Fourth quarter capital expenditure was $9.1 million as compared to $11.2 million in fiscal '23, a decrease of $2.1 million. Fourth quarter free cash flow, another non-GAAP financial measure was $15.8 million as compared to $37.8 million in fiscal '23, a decrease of $22 million. This decrease again was primarily due to reduced net income.
After having negative free cash flow, the first two quarters of the year, we returned to positive free cash flow in the third and fourth quarters.
Please turn to slide 12. Moving to the full year results fiscal '24 net sales were $1,114.5 million, a decrease of 6% from fiscal '23. Excluding Nordic Lights and foreign currency sales decreased by 13%. This year was impacted by the roll-off of two key automotive programs and the overall automotive segment regions weakness in all three regions.
Fiscal '24 diluted earnings per share decreased to a negative $3.48 from positive $2.10 in fiscal '23. The EPS was negatively impacted by the goodwill impairments, operational efficiencies, higher interest expense and lower sales value. Adjusting for the goodwill impairments, restructuring costs, acquisition costs, purchase accounting adjustment and gain on that sale of assets, our non-GAAP adjusted diluted EPS decreased to a negative $0.43.
Please turn to slide 13. Shifting to EBITDA, a non-GAAP financial measure, fiscal '24 EBITDA was a negative $53.5 million versus a positive $142.3 million in fiscal '23. EBITDA was negatively impacted by lower gross profit, lower sales and higher SG&A expenses. Adjusting for the goodwill impairments, restructuring costs, acquisition costs, purchase accounting adjustments and gain on net sale of assets, our adjusted EBITDA decreased 64% to $55.3 million.
Please turn to slide 14. Fiscal 2014 net cash from operating activities was $47.5 million as compared to $132.8 million in fiscal '23. A decrease of $85.3 million was primarily due to lower net income. Fiscal year '24 CapEx backs was $50.2 million as compared to $42 million in fiscal '23, an increase of $8.2 million. The increase was driven by investments required to support new program launches.
Fiscal '24 free cash flow, a non-GAAP financial measure was a negative $2.7 million as compared to a positive $90.8 million in fiscal '23, a decrease of $93.5 million. This decrease was primarily due to reduced net income. After having negative free cash flow in the first half of the year, we returned to positive cash flow in the second half.
Please turn to slide 15. 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 the slide. For fiscal '25, we expect net sales to be similar to fiscal '24 and adjusted pretax income to be approaching breakeven.
The adjusted pretax income for the second half of fiscal '25 is expected to be significantly stronger than the first half with the first quarter of fiscal '25 being similarly negative to the fourth quarter of fiscal '24. The fiscal year '25 guidance assumes depreciation and amortization of between $60 million and $65 million.
Looking further ahead to fiscal '26, we expect net sales to be greater than fiscal '25 and pretax income to be positive and notably greater than fiscal '25.
That concludes my comments and we can open it up for questions.
Question and Answer Session
Operator
(Operator Instructions) Luke Junk, Baird.
Luke Junk
Good morning. Thanks for taking the questions. First, maybe just a point of clarification on the fiscal '25 expectation for pretax income to be approaching breakeven, should we be thinking about that for fiscal '25 in aggregate and just basically trying to square the full year review versus the first quarter coming out of the gates kind of similar to where you were in the fourth quarter? Thank you.
Ronald Tsoumas
Yeah, so Luke, we do expect to approach breakeven for the year, but the first quarter will be much like this. This as we experienced in the fourth quarter fiscal '24 with gradual improvement and then stronger in the second half, especially in the fourth quarter where we have launches that are expected to be in full launch at that time.
Luke Junk
Got it. Okay, that's helpful. Thank you. And then -- yeah, just relative to the flat outlook for sales roughly in fiscal '25, that would imply that you're going to be able to get over the top of the remaining product sunsets with launches, like you said is, launches especially stepping up in the fourth quarter. Can you just talk about guardrails that you have in place internally from an operational standpoint to make sure that those launches go smoothly for methods.
And then just what you're hearing from customers in terms of timing, volumes, risk to take rates, or just risk of any push out in that view?
Ronald Tsoumas
So Luke, why don't we start with the roll-offs first. We had -- approximately there are two major programs that we described approximately $90 million rolled off in fiscal '24, and we expect the final roll-offs of those programs in the $100 million range for fiscal '25.
So those -- all these new launches will basically fill the pipeline of the void, and it's important to know that these two largest programs that we have will be pretty much fully rolled off at the end of '25, providing nice passage of fiscal '26 as we did in there. So in terms of the operational perspective --
Kevin Nystrom
Yeah, you're right. We're seeing some slowdown in particular in EV demand, but we're working with our customers to make sure that we can maximize our pricing adjustments to account for those lower end customer volumes.
The other thing I want to add is we're initiating several cost reduction programs, in particular with the sourcing costs and logistic costs. We're doing our leg work now. But those things take time and we probably won't see real meaningful benefits until the second half of the year.
Luke Junk
Got it. If I could ask on just balance sheet related items or I guess, more cash flow, really just any high-level expectations you can share for cash flow in the coming year and CapEx, we saw that come down quite a bit sequentially in the fourth quarter, just guardrails for CapEx in the coming year as well?
Ronald Tsoumas
Yeah. I think we will see fiscal '25 CapEx to be in the same range or higher than in fiscal '24, as we continue to all these awards that we won, we expect to continue to have significant CapEx in fiscal '25. Thereafter is a little bit different.
In terms of the cash flow, as we approach breakeven relative to fiscal '24, we'll get some net income would be -- our reduced loss would be better and then from the -- we have a lot of working capital initiatives that we started on and saw some progress in fiscal '24 that we expect to carry on into fiscal '25, and we have additional items such as we talked about, we had some success in non-core asset sales in the fourth quarter of fiscal '24. We will continue to look at those opportunities as well. So the sum of all of those items, it should impact our cash flow in fiscal '25.
Luke Junk
And then just lastly, if I can ask on capital allocation and near-term priorities beyond the CapEx, obviously that's required for the business. Thinking, especially just prioritization of debt paydown relative to share repurchase, which I guess maybe. It was a little surprising that there is some repurchase in the quarter and then just maintaining the dividend on a go-forward basis as well?
Kevin Nystrom
Well, the share repurchase was part of a pre-existing program and I think we are pretty -- we've run up almost the entirety of that program. With regard to the dividend, that's a decision the Board makes quarter-by-quarter. So it's hard for us to predict the quarterly dividend payments going forward.
Ronald Tsoumas
I mean Luke, as the number one priority as Kevin mentioned, we had a [10b51] type of an arrangement, but will be on of the balance sheet, deleveraging and things of that nature and protecting the balance sheet that will be far more than share repurchases or anything along those lines.
Luke Junk
Got it. Okay. Thank you. I'll leave it there for now.
Operator
Saree Boroditsky, Jefferies.
Saree Boroditsky
Good morning and thanks for taking my questions. So I really appreciate through your guidance. I just want to understand, do you think about returning to growth in 2026? And how are you -- what's the underlying assumption for EV adoption? And how will that be impacted, if we do see a slower curve than expected?
Ronald Tsoumas
So, there's definitely '26 a lot of the projected growth is in EV space. There is certainly some sensitization that is definitely going on in the projections and what the outlooks are going to be. But having said that, we still expect the growth there that we outlined.
Operator
Understood. Obviously, you talked about the guidance implying a step up in the second half of fiscal 2025. Could you just talk about the key drivers underlying this increase and then how much is market related first, what's in your control?
Kevin Nystrom
A lot of that is we talked about some of the new programs being launched and we're -- by the end of the year, we're starting to see some growth from those new programs. Your question of it, is it under our control?
Yes. And we're doing our best to make sure those launches go efficiently. And as Ron implied, we are putting some haircuts or adjustments into our projections for the currently soft EV market into those numbers.
Ronald Tsoumas
The only thing, I'll add to the cadence of the fiscal '25 by quarter is that a lot of the sales-driven and launch driven, but also on the cost reductions that are going on. They take -- some of them take time, when we think about procurement and other opportunities for us, they may not -- what we've initiated those, but sometimes it will go into the third and fourth quarters, it takes time. So the cost savings cadence also is weighted more towards the third and fourth quarter as opposed to the versus second quarter.
Saree Boroditsky
Appreciate that commentary. That's sort of what I was getting at, obviously the focus is on improving profitability and maybe just building on that my last question, what is that opportunity as you can you size that cost savings opportunity as you go into fiscal 2026, maybe sourcing logistics and I assume from sales and administrative perspective.
Kevin Nystrom
We're really just starting these programs. So it's a little bit dangerous to put ranges around it. We do think it will be significant, and we do think that its impact will be more towards the second half of the year.
Saree Boroditsky
Appreciate the question. Thank you guys.
Operator
(Operator Instructions) Gary Prestopino, Barrington Research.
Gary Prestopino
Yeah. Good morning all. Several questions here. First of all, Kevin, in what you're talking about with getting your costs under control and trying to fix the problems that are coming out of North American auto? I mean, are you -- I would assume that you are working in conjunction with Jon DeGaynor at this point in terms of at least some of these initial thrust that what you're trying to do to rectify some of the problems that you're having is that a correct assumption?
Kevin Nystrom
More than correct. I'm working shoulder to shoulder with Jon on these initiatives.
Gary Prestopino
Okay. All right. So maybe for all of us because I still have a hard time understanding this. You're having the problems in Mexico, correct? That's where your problems are with North America and you have rolled out programs before in the past. What has changed so much that you're getting a lot of these operational efficiencies in Mexico at this point, that is causing the decline in the operating income generated by the automotive segment?
Kevin Nystrom
I think I can say that we've made significant improvements in the discipline around launches in Mexico and some of the launches that are in process right now that are just beginning to deliver products. They've gone much better than launches in the past. I think it's just, experiencing what we experiencing early this past year and learning from our experience and improving our launch process.
Ronald Tsoumas
The only thing I will add to that Gary -- there's only I can answer that, Gary, is we are also at the same time experiencing the roll-off of our largest program which we have been running in various iterations for over a decade, and we're really, really good at it and really efficient and all of that and replacing that as we've demonstrated with all these booking awards with launches that a lot more launches that are significant, but nowhere near the value of that.
So when you combine that with the expansion of capacity and getting ready for these launches and all of those things going in at one time. It is a fertile ground for us experiencing temporarily some of the things that we're experiencing.
Gary Prestopino
Okay. And I was just going through some of the past slides, but in aggregate, do you have what the business awards were in fiscal '24 in total and what -- how much of that dealt with electric vehicles.
Ronald Tsoumas
I believe in the last 40 years, we have been in the $800 million, -- $750 million range and most of it is in -- a lot of those products or in the electric vehicle. For fiscal '24, it's in the $200 million to $250 million range for bookings, which the bulk of that is in the EV space.
Gary Prestopino
Okay. And what you're doing with EVs, are you doing any programs for European manufacturers at this point, that for manufacturers that are producing in Europe and selling in Europe?
Ronald Tsoumas
Yeah, to absolutely. And that's one thing we really like as we spread our seat amongst a lot of the OEMs on three continents so we're getting diversified from customers and programs, which is really good. And we're in a good position with a lot of -- and we're done somewhat the start-ups in that as well. So from a portfolio diversification and geographic diversification, we're sitting in a good spot with our EV opportunities.
Gary Prestopino
What about the Chinese manufacturers?
Ronald Tsoumas
We do -- not as much, we're certainly, we do more in Europe and now with these launches in North America, we have a presence in China, but it is not as significant on a go forward basis unless it's the challenging market for sure.
Gary Prestopino
Okay. And then just last question. I'm just looking at some historical numbers here. I mean, your adjusted EBITDA margin was in the high teens in 2019, 2020 start to see drip in '21, '22. I mean, given the composition of the company now, do you think that once all of these issues are rectified that this becomes a mid to high teens EBITDA margin -- adjusted EBITDA margin business?
Or is there something that has structurally changed here, that is causing the adjusted EBITDA margin to step down from where you were four or five years ago?
Ronald Tsoumas
I think so -- let me start with this four or five years ago, the business is definitely changed, especially the automotive side with the [problem] roll-offs and a couple of thing else have impacted our EBITDA margins over the last couple of years, especially last two years.
And first of all, is this -- in the e-bike market that is better than (technical difficulty) torque sensing technology that we have. And arguably best in the world that is one of our most highly differentiated products and that business is basically been cut in half. So that clearly has a margin drag on the business.
The roll-off of these programs and then all of the upfront cost and capital that we're expending for '26 and '27 and '28 deliveries has also negatively affected our EBITDA margins. So it's going to be a journey as we go through this to stairs step our margins back to where they might have been a couple of years ago, but it's a journey. It is absolutely going to be a journey. And until we get to full launch on a lot of these programs that we've funded upfront, it will take a little bit of time.
Gary Prestopino
Okay. And then I realize you guys have had a lot on your plate over the last couple of months here and Ron, congratulations on retiring, I hope you enjoy yourself. Where are you -- I know you just filled the CEO search, but where are you on the CFO search side and what are some of the qualities you're looking for in a new CFO?
Kevin Nystrom
We're interviewing candidates, it's still probably sometime before we find the right fit. We're looking for somebody -- it is experiencing in this kind of changes, this transition, we're going to be going through a lot of cost reductions, a lot of efficiencies, looking at our portfolio, making sure we're getting the most of all of the regions around the world that we operate in. So it's going to require a special skill set and we're taking our time to make sure we find the right person.
Gary Prestopino
Okay. Thank you very much. Appreciate it.
Operator
There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Kevin Nystrom, for any closing remarks.
Kevin Nystrom
Thank you. I want to thank everybody for your participation in the call, all of your questions and most of all, appreciate your support for of Methode Electronics. Thank you and have a good day.
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.