Greetings and welcome to the Methode Electronics Second Quarter Fiscal 2024 Results Call. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Robert Cherry, Vice President of Investor Relations. Sir, you may begin.

Thank you, operator. Good morning and welcome to Methode Electronics’ fiscal 2024 second quarter earnings conference call. For this call, we have prepared a presentation entitled fiscal 2024 second 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. At this time, I’d like to turn the call over to Mr. Don Duda, President and Chief Executive Officer.

Thank you, Rob, and good morning everyone. Thank you for joining us for fiscal 2024 second quarter earnings conference call. I am 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 on Slide 4. Our sales for the quarter were a solid $288 million. Sales were down year-over-year primarily due to program roll-offs, a tough comparison to the prior year in Asia due to COVID-delayed sales in China, continued softness in the e-bike market, and of course, the impact from the UAW strike. All of these headwinds hit our auto segment. Sales in the quarter were helped by the acquisition of Nordic Lights in the industrial segment. Turning back to the auto segment, in the quarter, we were required to take a non-cash goodwill impairment totaling $57 million related to the North American auto and European auto reporting units. Ron will go through the financial mechanics later in the call, but the summary of the situation is with the recent operating profit weakness in our North American auto reporting unit, the accounting rules required us to review our goodwill, which in turn led to the impairment. Also in the quarter, we continued to experience operational inefficiencies in our North American auto operations that manifested in the first quarter. As you may recall, they were caused primarily by salaried personnel turnover, poor operational decisions, and vendor issues, which led to subsequent production planning deficiencies. This, in turn, had a domino effect leading to inventory shortages, unreimbursed spa purchases, and premium freight and labor. In our lean manufacturing environment, disruptions like this can ultimately generate significant costs to address material shortages and maintain customer delivery integrity. In auto delivery, in addition to quality, is absolutely paramount to both maintaining current and obtaining new business. I want to stress that we have not let our internal inefficiencies negatively affect our customers. We also continue to see increased expenses related to our numerous new program launches, some of which are now also being delayed. I am confident that these operational challenges have now been largely identified and corrective action plans are actively being executed. However, the residual effects are now expected to linger longer than we previously communicated and will impact the remainder of our fiscal year. In fact, they are the cause of approximately half of our reduction to adjusted earnings guidance for the full year. It is not lost on me that last quarter we were overly optimistic with the time required to remedy this situation. On a more positive note, we are pleased with the Nordic Lights acquisition, which is now fully under Methode’s control. The business is performing as expected and integration efforts are underway. Moving to orders, we had a modest quarter with over $20 million in annual program awards. These programs are once again led by electric vehicle programs. As we often communicate, our order trend is rarely linear and often ebbs and flows. I can share that the pipeline of potential awards remains strong. In fact, we have near-term opportunities to win business due to smaller busbar competitors who are not performing to the OEMs expectations. Turning back to EV activity. Sales in the quarter were 19% of our consolidated total. Regarding awards, we won over $50 million in annual EV program awards in the quarter. For fiscal 2024, sales activities will be strong, but we’ll still be very dependent on OEM take rates as well as the timing of EV program launches. In the quarter, we had an increase in debt, driven by an investment in working capital to support our sales and launches. While our debt and consequently, our leverage has increased, it is still at a reasonable level. As such, we are very comfortable with our flexibility for capital deployment, whether it’s for internal investments or share buybacks. With the Nordic Lights acquisition behind us, we resumed our share buyback in the quarter, acquiring just under $8 million in shares. Given the low net income in the quarter, we consequently had negative cash flow. With the expected lower net income for the full year, we now expect free cash flow to be neutral for fiscal 2024 but positive in fiscal 2025. Turning to Slide 5, in summary for the quarter, sales were solid despite several headwinds. The Nordic Lights acquisition is complete and the business is performing well. We continue to have a heavy focus on improving operational efficiency and executing new program launches. Lastly, we resumed our share repurchase program. Looking at the remainder of fiscal 2024 and into fiscal 2025, we have a definitive path forward and would like to clearly articulate it. Our fiscal 2024 has been challenged by auto program roll-offs and market headwinds in commercial vehicles, data centers, and e-bikes. The year has also been hindered by unacceptable but fixable operational shortcomings, which are taking longer to resolve than originally anticipated. Lastly, we have experienced substantial price cost pressure during the year, which we are addressing via pricing and increased cost improvement initiatives such as vendor price reduction and value engineering. As such, fiscal 2024 is a pivotal year of investment and transition with the objective of a clean start to fiscal 2025. As mentioned, we are launching over 20 new programs this year, which requires significant investment and resources. That ongoing investment is in items like facility preparation, product qualification staffing, and training expenses, along with the additional costs required to ensure that our operational issues this year have required us to lower fiscal 2024 guidance. For our third quarter, we now expect a modest improvement over the second quarter. We then expect further improvement in the fourth quarter. Turning to fiscal 2025, our outlook continues to be positive, supported by multiple years of strong awards. However, the year will be very dependent on a number of items, including but not limited to EV OEM launch schedules and take rates, a rebound in the e-bike, commercial vehicle, and data center markets, and further market inroads with our lighting franchise. While we have confidence in our ability to execute in that environment, some factors will simply be out of our control. Of particular concern is the EV market. Our outlook for EVs remains very positive long-term, but in the near-term, it is tempered by program delays and moving take rate projections. However, we have no doubt that this market will fuel our growth over the next three years. As such, we have reduced our guidance for fiscal 2025 mainly due to the EV market trends. To illustrate, we have had one major EV program get partially delayed from fiscal 2025 to fiscal 2026. To summarize, we are decisively making good investments in fiscal 2024 to ensure profitable growth in fiscal 2025. We firmly believe that our business model is healthy and is positioned to prosper from the strategic direction that we have taken into lighting and power solutions to grow the business. Turning to Slide 6, in order to give you a more granular picture of our sales guidance, we have updated the bridge that we provided last fourth quarter for our guidance walk from fiscal 2023 to 2025. Our program roll-offs, while still sizable, have been less this year than expected, probably now more for next year. However, the most notable change is that new program launches in fiscal 2025 have been reduced by approximately $70 million due to customer delays into fiscal 2026. Together, these drivers have caused us to lower our fiscal 2025 guidance by $100 million at the midpoint. And at this point, I will turn the call over to Ron, who will provide more details on our second quarter financial results as well as more details on our outlook.

Thank you, Don, and good morning everyone. Please turn to Slide 8. Second quarter net sales were $288 million compared to $315.9 million in fiscal 2023, a decrease of 9%. This quarter's sales included $20.9 million from the Nordic Lights acquisition and $3.5 million from favorable foreign currency translation. Excluding Nordic Lights, foreign currency sales decreased by 16.6%. The quarter saw the continuation of two key automotive program roll-offs, one in North America and one in Asia. We also had a difficult comparison in Asia as in the prior year, Asia benefited from sales that were delayed from the first quarter to the second quarter as a result of the COVID shutdowns in China. The quarter also saw lower sales for e-bike sensors as that market continues to be overstocked. That inventory headwind is expected to last at least through the end of this fiscal year and potentially into next fiscal year. Second quarter loss from operations was $51.3 million, down from $32.8 million of income in fiscal 2023. The major factor in the decrease was a goodwill impairment charge of $56.5 million. At the end of the second quarter, we experienced a goodwill impairment triggering event when our market cap was less than our book value. Based on the triggering event, we performed a quantitative analysis of our two reporting units and determined that the current fair value of the goodwill was less than the carrying value, resulting in an impairment at two of our automotive reporting units. Income was also down due to lower sales volume and the ongoing operational inefficiencies, which drove higher premium freight and labor expenses. Adjusted for the goodwill impairment of $56.5 million, restructuring costs mainly related to the exit from Dabir of $0.6 million, and costs related to the Nordic Lights acquisition of $0.2 million, our non-GAAP adjusted income from operations was $6 million. Please turn to Slide 9. Second quarter diluted earnings per share decreased to a negative $1.55 from a positive $0.75 in the same period last fiscal year. The EPS was negatively impacted by the goodwill impairment, lower operating income and higher net interest expense. A tax benefit in the quarter as compared to a tax expense in the prior fiscal year was a partial offset. Adjusting for the goodwill impairment of $1.58, restructuring cost of $0.01, a loss on sale of assets of $0.01, and purchase accounting adjustments related to inventory of $0.01, our non-GAAP adjusted diluted EPS decreased to $0.06 per share. Shifting to EBITDA, a non-GAAP financial measure, second quarter EBITDA was a negative $36.7 million versus a positive $46.1 million in the same period last fiscal year. EBITDA was negatively impacted by the goodwill impairment, lower operating income, and higher selling and administrative expenses. The contribution from Nordic Lights helped partially offset the decrease. Adjusting for the goodwill impairment, restructuring cost of $0.6 million, loss on sale of assets of $0.6 million, and purchase accounting adjustments related to inventory of $0.2 million, our adjusted EBITDA decreased 55% to $21.2 million. Please turn to Slide 10. We increased gross debt by $25.2 million in the quarter, mainly due to working capital investments and higher CapEx, both to support sales and new program launches. We ended the quarter with $122.5 million in cash, down $34.5 million from the end of the last fiscal year. Net debt, a non-GAAP financial measure, increased by $59.7 million to $209.5 million for the quarter, up from $148.9 million at the end of fiscal 2023. Again, the main drivers of the increase were an increase in working capital and higher CapEx. Please turn to Slide 11. Second quarter net cash from operating activities was an outflow of $0.6 million as compared to an inflow of $15.4 million in fiscal 2023. The decrease of $16 million was primarily due to lower net income in the quarter. Second quarter capital expenditure was $10.7 million as compared to $8.4 million in fiscal 2023, an increase of $2.3 million. The increase was mainly a function of investments to support new program launches and was keeping in line with our guidance. Second quarter free cash flow, a non-GAAP financial measure, was a negative $11.3 million as compared to a positive $7 million in fiscal 2023, a decrease of $18.3 million. This decrease again was primarily due to reduced net income and increased CapEx. Please turn to Slide 12. 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 in the bottom of the slide. Net sales for our third quarter should be similar to our second quarter. However, the operational efficiencies experienced in the second quarter will carry over to the third quarter and likely into the fourth quarter. This is longer than we had previously estimated. As a result, the expected adjusted diluted earnings per share in the third quarter will only be modestly higher than the second quarter. Turning to the full year, the expected net sales range for fiscal 2024 is still $1.140 billion to $1.180 billion, unchanged from the previous guidance. The expected diluted earnings per share range is now a negative $1.40 to a negative $1.14, down from a previous range of a positive $0.80 to $1 per share. The drop is predominantly related to the goodwill impairment and continued operational efficiencies at North American automotive. Adjusting for the $1.58 goodwill impairment, $0.04 of costs related to the Dabir exit, and $0.02 related to the Nordic Lights acquisition, the expected adjusted diluted earnings per share range is $0.24 to $0.50, down from $0.88 to $1.08. This fiscal 2024 guidance assumes an income tax rate of 14% to 16% in the second half of the year, with no discrete tax benefits or expenses. It assumes CapEx of $60 million to $70 million for the full fiscal year and assumes depreciation and amortization of $55 million to $60 million. There have been no changes to any of those three items. Looking further ahead at fiscal 2025, the expected net sales range is now $1.150 billion to $1.250 billion, down from $1.250 billion to $1.350 billion. The midpoint of the new range is lower by $100 million primarily due to the EV customer program delays into fiscal 2026. The expected range of income from operations as a percentage of net sales in fiscal 2025 is now 6% to 8%, down from 11% to 12%. This reduction is mainly due to the $100 million net sales reduction and its impact on overhead absorption. It still represents a significant improvement over fiscal 2024 and is on par with what Methode delivered for operating margin in fiscal 2023. The fiscal 2025 income tax rate is expected to be between 20% and 22%, with no discrete tax benefits or expenses. The increase in the tax rate from the current fiscal year is largely due to the estimated impact from the anticipated adoption of the Pillar Two minimum global tax initiative. Don, that concludes my comments.

Thank you very much. Ali, we are ready to take questions.

Thank you, sir. Our first question is coming from Luke Junk with Baird. Your line is live.

Good morning. Thanks for taking the questions.

Good morning, Junk.

Good morning. Don, hoping to start with the ongoing inefficiencies in North America. Of course, they came to the surface last quarter, you put corrective actions in place and the prior guidance had implied we should be seeing some lift in the second half of your fiscal year. With guidance now moving lower today, just hoping to put a finer point on what changed in the expectations or the actions not having the desired effect? Are you seeing additional headwinds in the back half? Just anything to help us understand the bridge from the old expectation to the new, especially where maybe you were overly optimistic previously? Thanks.

Sure. As I said, I was overly optimistic. It is taking us longer to go through the various routings and part numbers and make corrective actions. To give you more color on that, these issues probably existed prior to this fiscal year, but they were masked by very high inventory in certain areas. And we took, as normally we do when we try to lean out our operations, we brought inventory down. One of the analogies that lean experts sometimes use is that when you lower the ponds, you find rocks, but we found boulders. It has taken us much longer to correct. They are all, as I have said, fixable. But it’s a mismatch between our various systems. We do manufacture products in Dongguan, China, and that’s shipped to Monterrey. Engineering changes weren’t recorded properly, and we have said a lot of that was due to salaried personnel turnover, which resulted in a certain amount of knowledge being lost at the end of COVID. So, it’s really dealing with routings, MRP, and lead time. We had some lead times in the system at two weeks, when it probably should have been closed in two months. Also there, we saw changing, and I don’t know if this is a COVID leftover, but we are seeing tremendous changes in schedule, something that we have not seen much in the past. That also puts a stress on the system. So, Ron, is there anything that...

From an operational perspective, I think you...

There was probably a lag on some of the invoicing. You don’t get invoiced next week for premium shipments. There is probably some of that that occurred in the first quarter, the carryover into the second quarter. Again, all fixable; it’s just that we underestimated the amount of time needed.

And then just maybe put a finer point on that Don. What I am hearing is it’s more that these actions are continuing. But in terms of the corrective actions, it doesn’t sound like you are necessarily leaning to put new actions into place or it’s more a scope issue, not that there are kind of new problems that you found, is that right?

Yes, that’s correct. It’s really a time factor. We uncovered nothing new that would have caused us to change any of our actions.

Got it. That’s helpful. And then for my follow-up, just hoping to understand how you incorporated updated expectations for EV volumes. Specifically, what I am hoping to tease out is how much of this is a timing delay in terms of the new fiscal ‘25 guidance? You mentioned the program that had slipped partially from ‘25 into ‘26, versus just absolute reductions in your expectation for take rates. I don’t know if there is any anecdotes on that latter piece in terms of take rates that you can share. Just help us understand the level of conservatism that’s in this new fiscal ‘25 guidance. Thank you.

We had two of our long-term Vice Presidents do a deep dive into our forecasting. An overlay of that with various expectations that we are hearing from our customers, along with LMC and IHS forecasts, and what program delays we knew about really contributed to the change. We are four months plus out from fiscal 2025, and I am sure there will be additional revisions as we get closer to giving guidance. Some of that could go up. One of the reasons where we still have 12-15 as the upside is there are some opportunities that are surfacing and some of the smaller competitors that are having difficulties, which present us with some opportunities. So in general, it’s just we did a deep dive into the forecast and adjusted the guidance accordingly. From my standpoint, I do not see the EV market collapsing, nor is there a major problem at present. I don’t know if I want to use the word over or over-exuberance, but there is probably some of that in the market’s forecasting. However, I fully believe that fiscal 2025 will be a good year for us, and fiscal 2026 will be even better. But we are going to see some fluctuations in forecasts until the industry really sorts out the true adoption level.

Got it. I will leave it there. Thanks, Don.

Thank you.

Our next question comes from Gary Prestopino with Barrington Research. Your line is live.

Hi. Good morning all.

Hi Gary.

Could you refresh my memory? Are your EV programs – what is the split there between commercial vehicles, like last-mile delivery vehicles, and regular passenger cars?

Our largest program, I want to say, it’s probably 80-20, with 20 being last mile, maybe slightly higher than that. I don’t know when we revised that two. But it’s still probably in that range. I have said before, I like the last-mile vehicle as they are definitely cost effective for the Amazons of the world. So, we will place emphasis on that, and our largest program, part of that is last-mile.

But you say it’s about 80-20 passenger to last mile.

Yes.

Okay. That’s fine. Thank you. And then just getting into this write-down again, could you briefly explain what happened? Your actual book value or your market value fell below book, and by accounting convention, you had to test your goodwill, and that was the write-down. Is that very simply how to phrase it?

That’s correct, Gary. And on the last day of the quarter, the closing stock price, our market cap was less than our book value of the company. That was the trigger. We go back to the business units that have goodwill, reran the projections, and all of that valuation was performed. We came up with the impairment amounts on two of those reporting units. We do test for this annually, and when there are triggering events between the annual impairment tests, we do test in between. This is what happened in this particular quarter.

So, the trigger wasn’t anything about the performance of the divisions; it was really just a trigger by accounting conventions, your market value went below your book?

Correct. That was the triggering value, the triggering event. And then we recast all of the projections as part of this. We recast all of the projections for the current fiscal year and going forward, running discounted cash flows to establish present value, and then assess whether the carrying value is higher than or not than the fair value. The impairment was taken for two businesses, totaling in excess of $56 million.

Doing an impairment like this on a longer-term basis, does this really change your outlook for what your capital spending would be, particularly in the businesses that had the impairment hit?

Go ahead.

First of all, it’s more about the impairment resulting from acquisitions that occurred in the past and performance of those cash flows. That doesn’t necessarily mean that you are not going to reinvest in the business. Obviously, in North American auto, we are doing a lot of investment to support our new programs. So, that part of it is forward-looking. The impairment and the goodwill that was created were backward-looking.

Thank you very much. I appreciate it.

Thank you. As we currently have no further questions on the line at this time, I would like to hand it back over to Mr. Duda for any closing comments you may have.

Thank you very much. I would like to thank everyone for listening and for their questions, and wish everyone a very safe and enjoyable holiday season. Good day.

Thank you, ladies and gentlemen. This concludes today’s conference, and you may disconnect your lines at this time. We thank you for your participation.