Conference Transcript - MEI 2026-05-04

Patrick, Analyst — Host

Hello, and welcome to the Method presentation. Joining us today from Method is President and CEO John DeGayner and CFO Laura Kolchik, and we also have Joni from the IR team. They're going to be giving us a presentation on the business, and then we'll open it up for some Q&A. John and Laura, feel free to take it away.

Jon DeGaynor, CEO

Great. Thank you, Patrick. Good afternoon, everybody, and good morning, good afternoon, everybody. Johnny, if you'd go to slide two, please. So for those of you that don't know the Method story, let me start by introducing it a little bit, then we'll move into some of the financials. So Method will be 80 years old in July. And this is a business that has gone through a significant number of transformations over its 80 years. But the way to think about it is we're a global supplier of engineered solutions across a various number of end markets. And as you see from our fiscal 2025 sales split across various geographies with automotive industrial and interface as our reporting segments, and really that comes down to user interface, which is interactions with the, regardless of the vehicle, interactions with the user, lighting, and power, primarily being bus bars and power delivery. You go to the next slide. And over the last two years, this leadership team has really sought to, as we refer to it, earn the right with our customers and our shareholders and our employees to write the next chapter of this method story. As we said, it'll soon be 80 years old, and there's a lot of chapters of the method story, and we're working hard in this transformation period to earn the right to write the next chapter. What does that mean? So over the first six months of this time, what it was is fixing our launches, both in North America and in EMEA and to a certain extent in China. primarily revamping our plants in egypt and in mexico and building out an executive team uh what that means from a build out of the executive team is we've changed seven of the ten leaders that are on my staff uh built a very capable organization leadership team to really drive this transformation forward with people that have seen this level of change and this level of challenge and therefore have the capabilities taken forward. As we've installed that team, then we work on diagnosing the operations in the supply chain and moving from a very regional structure where effectively we ran as three companies to a globally organized structure, particularly operations, supply chain, and engineering, and rebuilt the next level down, as I said, we changed 70% of the top leaders. We've also changed over 50% of the top 100. As you bring that new group of people into place, what that has allowed us to do then is work on things like working capital and both from AR, AP, but also addressing our inventory management and some of the weaknesses there, but then also starting to, as we globalized, brought new talent in, globalized the engineering and the product management and the supply engine activities. And then finally, over this last phase, is working to leverage our core competencies for growth, starting to capitalize on the opportunities that we have on the power side, particularly with regard to data centers and vehicle electrification. And when I say that, I mean beyond just EVs, but also with hybrids and bringing electrification into the vehicle, consolidating our footprint, and reviewing our portfolio. The way we've talked about this and the way we think about it is the arrows continue. We'll continue to drive continuous improvement and stabilize our base. We will continue to upgrade the team. We'll continue to make any sort of continuous improvement activity or mediate our practices, but we're really now focused on leveraging synergies and driving growth and bringing in more consistent execution. If you go to the next slide, what that has meant from really our operational priorities is first and foremost, foundational activities. And this is how we earn the right with our customers. Harmonizing operating practices and processes across the businesses. As we looked at the history, there certainly existed that harmony over the last decades, but really had gotten lost in the last 10 years. And then most importantly, driving operational excellence and continuous improvement across our manufacturing sites, and specifically in our Egypt, our Malta, and our Mexico facilities where the largest number of launches were occurring and where the biggest level of financial challenge was. We talked about refining the organization and top-grading the leadership, but more importantly, as we refer to it, working as one method, aligning the leadership around the world and making sure that to our customers, we appear as one company as opposed to multiple companies, and we support our customers the way in which they choose to source and buy. Our automotive, our commercial vehicle, as well as our data center customers are looking for global solutions and a globally optimized solution, not three different regional solutions. We will continue to align our portfolio. We completed the sale of our data mate business in the quarter, and we will continue to align the portfolio with regard to the megatrends and drive a disciplined approach to long-term growth. In many situations in the past, we have put too much capital on the plant floor in areas that maybe wouldn't generate the returns. We have refined the way we quote business. We've refined the way we do our capital allocation. And we're really focused on how do we drive shareholder return with the best segments within our business. And at the same time, we've continued to restructure the business, relocating our corporate headquarters to Southfield, which facilitated the complete reset of our finance organization and our HR organizations as we moved them from Chicago to here and brought new talent into the organization. We finalized the sale of our Harwood Heights facility, and we continue to reduce our footprint. So over the last 22 months, we've driven with a sense of urgency and intensity to get the foundation right so that we can bring operational and financial improvements to our customers and to our shareholders. One of the examples of that, as you go to the next slide, is on our power solutions offerings. And this is an example of how we think about the business going forward, as opposed to separate end markets with separate sets of solutions. What we're really looking at is where are there common engineering and manufacturing core competencies and how do we bring value across those core competencies? And what you see here from a data center EV or vehicle electrification and military and aerospace segments is we've got the opportunity to drive a 25% CAGR, and we believe to be able to drive that going forward, leveraging our power distribution experience going all the way back to Apollo spaceships, not in the near term, but in the last 60 years. That's bringing results from the data center side as you look at the year-over-year growth, particularly since fiscal 24 and fiscal 25 and 26, and we see a great opportunity in 27 beyond. And more importantly, working to bring core competencies from the EV and the vehicle electrification side into the data center side as we talk about 800 volt bus bars and interconnects for the data center side, as well as what we do for the EV side. Probably most importantly, talking to our customers and partnering with them to help speed up the delivery of products and things like our vendor manage inventory and shorten the lead time for the data centers, but also understanding their needs and bringing them solutions in ways that we haven't in the past. So as you get to know the method story, what you should expect is more of these examples where it's a holistic approach, it's a global engineering approach, it's linked to listening to the customer needs of bringing solutions around the world. With that, I'll turn it over to Laura and let her talk about the financials.

Laura Kowalchik, CFO

Great. Thanks, John. So turning to the financial overview slide, third quarter net sales were approximately $234 million compared to $240 million in fiscal 2025. The year-over-year decrease in sales reflected lower sales volumes in the automotive segment related to a reduction in North American electric vehicle volumes and the interface segment related to a previously announced appliance program roll-off. These results were partially offset by higher sales volumes in our industrial segment, particularly for off-road lighting and power products, as well as positive foreign currency translation. This is the same theme year to date throughout FY26. On a third quarter year-to-date basis, net sales were $721 million compared to $791 million last year. Our gross profit in the third quarter was $39 million, down from $41 million in the prior fiscal year quarter, primarily as a result of the lower sales volume and product mix in the automotive segment and interface segment. So on a third quarter FY26 year-to-date basis, gross profit was $130 million versus approximately $144 million last year. Our selling and administrative expenses increased by $1.4 million to $39 million in the third quarter of FY26. On a third quarter year-to-date basis, selling and administrative expenses were $12 million less than the prior year. Income tax expense for the third quarter was $3 million, down from $6 million in the prior fiscal year quarter. In the quarter, we realized a lower valuation allowance for U.S. deferred tax assets of $2 million compared to $6.5 million in the prior fiscal year quarter. Year-to-date, Q3 FY26 tax expense was approximately $2 million lower than the prior year. Third quarter FY26 adjusted EBITDA was $7 million, down from $5 million in the same period of the last fiscal year. The third quarter year to date was approximately $41 million compared to $49 million last year. So third quarter FY26 adjusted net loss was $13 million, almost a $6 million change from the third quarter of fiscal 25, attributable to the decrease in gross profit and the increase in the selling and administrative expenses. And this was partially offset by lower income tax expense. Third quarter adjusted loss per diluted share was 37 cents compared to a loss of 21 cents in the prior fiscal year third quarter. Third quarter year-to-date basis, FY26 adjusted net loss was approximately 28 million compared to 13 million in the prior year. This results in a year-to-date adjusted loss per diluted share of 78 cents in FY26 versus 37 cents in the prior fiscal year. So on the next slide, I will discuss the progress made with our discipline capital allocation strategy. The third quarter of FY26 ended with approximately $134 million in cash, which was up $30 million compared to the end of fiscal 2025. Operating cash generation in the third quarter was $15.4 million. Our third quarter free cash flow was $10 million compared to approximately $20 million in the fiscal third quarter 25. Although down year-over-year, we continue to generate free cash flow amidst a challenging operating environment with free cash flow of $16.5 million year-to-date as we continue to operate with a strong capital discipline. Our net debt was down approximately $17 million at third quarter compared to the same period last year. We remain committed to driving strong cash flow generation to further pursue our capital allocation priorities of net debt reduction, selective high growth investments, business improvements, portfolio alignment, as well as returning value to our shareholders through dividends. And turning to the next slide, just want to go over guidance. Please note that this fiscal year or fiscal year 25 was a 53-week fiscal year and fiscal 26 a 52-week fiscal year. This guidance also does not reflect the sale of our data mate business in the fourth quarter or the Harwood Heights, Illinois facility that closed last week. For fiscal 2026, our net sales guidance is $950 to $1 billion. This reflects the benefit of foreign currency translation, which we anticipate foreign exchange to provide an approximately $30 million benefit. Our adjusted EBITDA outlook is in the range of $58 to $62 million. And for fiscal year 26, we expect positive free cash flow for the full year compared to an outflow of $50 million in the previous fiscal year. So with that, I'll turn it back to John to go through our key takeaways on the next slide.

Jon DeGaynor, CEO

so we continue to make progress on this transformation and as we said that we're 22 months into transformation journey and we look to moving from fix it to grow it in our approach we're excited about the the industrial segment momentum momentum particularly from a data center standpoint and when you think about the automotive business it's easy to get focused on overall automotive, but it really is the North American automotive business that is most pressured, and it's due to the wall off of one very specific program and the change in the take rates of EV programs, particularly on larger vehicles in North America. And as Laura just went through, we're aggressively driving free cash flow and net debt reduction for fiscal 26 and beyond to set the stage for growth going forward. So with that, Patrick, we'll turn it back to you for any questions that the audience might have.

Patrick, Analyst — Host

Great. Thanks, guys. Thanks for that presentation. Yeah, maybe if I could start, I just want to talk about Datamate a little bit. It's your latest step in your portfolio rationalization. How are you thinking about further rationalization and what areas of the business, if any, are being considered for further action?

Jon DeGaynor, CEO

So the data main business was a good business, but it was relatively small, less than $20 million in revenue and right around $3 million in EBITDA. And as we looked at it, it was a business that the return on effort that it would require from us to really make it grow, we didn't see as something, given the other opportunities that we have, as something that made the right sense for putting leadership effort and capital effort and engineering effort into to try to transform it. what it also allowed us to do is that business was in our harwood heights facility so with the sale of that business it allowed us to exit the harwood heights facility so as as you think about where we're trying to go from a method perspective and what you should expect as we look at the portfolio is what are the what are the aligning themes so as we described with regard to power The aligning theme there is not on a specific end market like data centers or EV or military, but the aligning theme of there's common engineering, there's common manufacturing, and we can bring value to the customers in each of those end markets and gain leverage. and that's where you see the 25% CAGR, and we're excited about how we utilize the core competencies in a better way maybe than the way the organization has in the past. We look at that same thing from a lighting perspective, be it our Nordic Lights business, our Graycon business, as how that aligning theme behind lighting, it's what we've done with regard to a standardized global engineering activity to try to drive that value. So what we're looking at in our portfolio is where can we leverage across the world? Where can we bring value to customers and utilize a common engineering approach and a common manufacturing and supply chain approach in those situations? That makes sense because we believe we can create long-term shareholder value in those places. In areas where we maybe don't have the global leverage or the engineering competencies, then we may not be the best owner for specific pieces of that portfolio, and we'll take action. You talked earlier about

Patrick, Analyst — Host

strong momentum in data center power solutions. Can you walk us through at a high level what your remaining products are that sell into AI-driven data center infrastructure, and what progress, if any, on diversifying further into data center applications?

Jon DeGaynor, CEO

So we are primarily providing today bus bars into AI-driven data centers. And our end customer are the hyperscalers where you would know the names. Even if we supply those ultimately through contract manufacturers, you know, the engineering activity and the commercial activity is with the hyperscalers. What we have sought to do is, one, deepen those relationships and move beyond a distant second source supplier into a more preferred position. That's why we made the commitment to move to vendor-managed inventory in fiscal 26. That has been a basis for continued growth and building trust with those hyperscalers. But at the same time, what we've done is we've been working with them as they're trying to bring more power to the racks and go higher voltage all the way to the racks, working with them and bringing some of the 800-volt EV architecture into the data center realm. Now, there are some specific challenges with that, but we've been working on prototypes with the hyperscalers. none of that next technology is in our guidance, is in what we talked about either in 26 or even what we've talked about with regard to fiscal 27 and seeing the move from $80 million a year to $120 million a year. None of the advanced stuff is in that guidance. So that might answer my next

Patrick, Analyst — Host

question. I want to talk about industrial. You talked about momentum there. It's been a bright spot for you guys um you know how sustainable are recent trends in that segment in general

Jon DeGaynor, CEO

well so industrial is a bright spot for us but industrial has actually had some headwinds both from the commercial vehicle space particularly north america where overall commercial vehicle market has been challenged so our gray con business has had headwinds and the ag and industrial space and particularly both with our hetronic business and with our nordic lights business has been challenged. We're seeing some green shoots with regard to growth on the ag and industrial and construction business, both from electronic and from Nordic Lights. And based on what we see with third-party forecasts, particularly in North America, we see some opportunities, particularly into our fiscal 27 with regard to the commercial vehicle and therefore the

Patrick, Analyst — Host

great kind of lighting business. Over to capital allocation, are there any capital requirements for diversifying further into data centers and other power solutions applications?

Jon DeGaynor, CEO

You know, it's fairly limited, Patrick. We believe that there's opportunities to utilize our manufacturing capabilities both in North America as well as the existing capabilities that we have in Asia Pacific. There will be some level of limited required CAPEX to be able to support our customers more fully. As we finish the prototyping on the higher voltage activity, it may require some additional capital, but we're pretty confident in our ability to support that growth without a significant level of capital investment.

Patrick, Analyst — Host

You guys mentioned net debt reduction is top priority. If you guys meet your free cash flow target this year, which it looks like you will, and perhaps outperform, what are the chances that investors might see a dividend increase on the table?

Jon DeGaynor, CEO

At this point, obviously, that's a board decision, not a management decision. We think that the best thing for us to do with regard to creating value for shareholders is to continue to pay down our debt, continue to invest in engineering and in limited capex for the growth that we see both on our power side as well as on the lighting side. But as – so we look at it and say – we look at our – we talk to the board about the dividend every quarter, but from a return on to our shareholders and the best use of capital, the first one is debt paid on, and the second one is driving growth, particularly on the power side.

Patrick, Analyst — Host

You guys have been more than forthcoming with regard to operational struggles at various manufacturing facilities. Egypt was a successful turnaround. Can you have more detail on your progress with the Mexico facility? Are things turning around there?

Jon DeGaynor, CEO

As we said in the last earnings call, we're about six months behind Egypt in Mexico. I've got senior leaders who are spending a significant portion of their time in Mexico. Laura and I are regularly down there looking at progress. I was most recently there two weeks ago. I'm quite confident in the progress that's being made there. The difference between the turnaround in Egypt and the turnaround in Mexico is what you've had is you've had a huge revenue headwind in Mexico that as we've had the roll off of the GMT-1 program and the delays or the cancellations of some of these EV programs that were assumed in our Mexico business plan. Whereas in Egypt, yes, we've taken aggressive actions with regard to cost reductions and from a direct labor perspective, from a scrap improvement or from a premium freight side. But we've also had revenue tailwinds on a year-over-year basis. In Mexico, we've had revenue headwinds. So I'm quite confident in the progress. I really appreciated what I saw down in Mexico two weeks ago. And I'm looking forward to as we lay out guidance for 27 in a couple weeks here as we report our Q4 earnings and we lay out guidance for fiscal 27 to be able to talk in more detail on our progress year over year in both Egypt and in Mexico.

Patrick, Analyst — Host

Speaking of guidance, is there anything baked into EBITDA guidance for this fiscal year on getting Mexico going?

Jon DeGaynor, CEO

Well, I mean, it's a multimillion-dollar improvement year-over-year from 25 to 26. So what's in our guidance in that $60 million midpoint has significant improvement already in it. And what you will see and what we see is being able to continue that trend as we look at fiscal 27 guidance, even though we haven't given that guidance yet.

Patrick, Analyst — Host

Perfect. Thanks. You highlighted significant volatility in the North American EV programs, including some delays and cancellations, which led you to reduce your EPS outlook. Can you walk us through Method's exposure, remaining exposure to EVs?

Jon DeGaynor, CEO

So EVs are, so first, automotive is about 45% of our total. And EVs are 20% of that EV. So it's a relatively small portion. North American EVs are very, very small at this point. We've taken the hit from the standpoint of revenue. What we have talked about with regard to talk to shareholders about is the fact that we have claims in with the two major OEMs where we've had the biggest program cancellations. None of those cancellation claims are in our guidance. or in any of our financials, but we're very confident with regard to the progress on those and hope to have more news quite soon for the shareholders. But so right now, what you have is we've taken the hit from a revenue perspective. We've spent the money from an engineering to be prepared to do it, put the capital in place on the plant floor. And now we're dealing with working through that as part of the transition both in settlements with the customers as well as how do we repurpose that capital to drive growth either with hybrid powertrains or with data center business in North America.

Patrick, Analyst — Host

Would you say your new programs are more focused on internal combustion engines or hybrids or EVs?

Jon DeGaynor, CEO

Certainly, as we are quoting new business, it will be a very special program for us to quote new EV business. It's primarily hybrids and ice.

Patrick, Analyst — Host

You see that as a permanent shift?

Jon DeGaynor, CEO

Well, in North America, for sure. We continue to quote EV activities in our EMEA region and in our Asia-Pacific region, but for North America, yeah, we see it as a permanent shift.

Patrick, Analyst — Host

Excellent. Okay, guys, that's it for me. I appreciate the presentation. I don't know if you have any final thoughts or comments you want to say before we sign off.

Jon DeGaynor, CEO

No, Patrick, we appreciate the opportunity. Thank you very much. And we look forward to talking to your team and to your investor clients at some point in the near future.

Patrick, Analyst — Host

Yeah, I appreciate your presentation and your participation in the conference.

Jon DeGaynor, CEO

Thank you.

Patrick, Analyst — Host

Thanks, guys.