Let's go ahead and kick it off here. Great to have everyone. Good morning. Thank you for joining us. My name is Luke Janka. I cover vehicle tech and mobility for Baird. My pleasure to introduce you today to Method Electronics. As you know, they're a major player in power bus bars for auto and data centers, auto and truck LED lighting, user interface, and more. We're really happy to have John DeGayner, CEO, and Laura Kowalczyk, CFO, for our discussion today. But before we do that, why don't we start with some introductory remarks?

Sure. And Luke, thank you. And to the Baird team, thanks for the invitation. We'll just spend just a couple of minutes on a quick introduction on Method, and then we'll go into Q&A. So Method is quickly approaching being an 80-year-old company. We've been around a long time, been a public company since 1965. Last year, sales, just over a billion dollars. There's, and as we think about the company, a leading global supplier of custom-engineered solutions, and whether that's on the power side, whether it's on the lighting side, or on the user interface side, and trying to bring solutions for a wide range of customer end markets. We're pretty evenly spread between North America, Europe, and Asia, and then split between the the unit interface lighting and power with a couple of smaller segments like sensors. The thing that attracted me to Method and that I see as an opportunity for us is not only our product portfolio but our footprint and our ability to support our customers around the world and ultimately bring low-cost regional capabilities to bear. this this has become more and more important as we see some of the challenges that have been put out in the space from with tariff regimes and different political activities our ability to support our customers around the world and utilize our vertical integration and our in our capabilities in China our capabilities in Egypt and our capabilities in Mexico to bring solutions to customers actually we see as a competitive advantage going forward We've had to fix a few things in our plants, but we see it as a competitive advantage going forward. Luke talked about the power side. This business actually goes back to our roots of more than 60 years ago, starting with things like being on the Apollo space missions and some of the first IBM computers and using our power history as bringing solutions on the EV side, on the data center side, and also on the mill aero side. The one that gets the most attention is the data center activity. And as you see here in the medium blue, it's a business that in fiscal 2024 was just over $40 million, and last year over $80 million, and we see a tremendous level of growth. But I think the important aspect for this is it's a $250 million portion of the company. There are core competencies that we can spread, that we can pull from the work that we do in different end markets and bring them to bear with regard to some of the megatrends in the data center space, as well as where the opportunities from an EV and ultimately in the future from a mill arrow side. So I'm sure we'll talk more about that as we go forward. But this is an important segment of the company. It's not the only growth segment, but it certainly is an important segment as we think about the future of the company. Twelve months ago when we sat on this stage, I was a couple months in, and Laura was a couple days into the organization. As you think about the transformation of Method, it really has been a, if you will, it's an 18-month journey. and the starting point for that 18-month journey was first and foremost to stabilize the base a company with almost 80 years worth of history but a company where we had disappointed investors we had disappointed a lot of customers and honestly we had disappointed a lot of employees and so what we were working to do is get that stabilized and that starts by fixing launch execution, 58 launches between fiscal 2025 and fiscal 26, and with customers in multiple regions who were not happy with our launch execution, so we needed to fix that first. Revamp a couple of very critical plants, both from a leadership and from an execution standpoint in Mexico and Egypt, and build an executive team. In the last 12 months, we have changed all but two of the senior leaders and many of the staffs below those leaders. So setting up a new team and driving much more of a global approach and really diagnosing where our weaknesses are in moving things forward. As we've gotten through that and brought the capability in and gotten our customers stabilized a little bit, that's then given us the ability to start remediating the root causes, remediating the practices that allowed some of the bad launches to happen. Things like our globalizing our engineering activity, fixing our operations management and our supply chain activities, but then also starting to work on some basic execution, things like inventory management and working capital. And you see that in what we've talked about from a financial standpoint and where we see from a guidance standpoint so now 15 months in now what we're talking about is what's that next phase and how do we start as we get the foundation correct have a leadership team in place now we can start talking about leveraging synergies with credibility because if you don't fix the execution there's no credibility in front of customers there's no credibility in front of investors and now we can start talking about how do we utilize our core competencies to drive growth. That goes back to the power discussion that we just had. Capitalizing on the megatrends from a data center and from an EV side. And while EVs in North America get a lot of negative press and you see cancellations of programs, EV penetration around the world is continuing to expand, particularly in China, but also in Europe. And our EV business is pretty equally split between the three regions. So while North America is impactful, it's not the only place that we do EV work. Consolidating our footprint and making sure that we have the right footprint for the future. And then one of the things that we've talked about and we will continue to work on is reviewing our portfolio and trying to simplify where we're at from that standpoint. So that's the basis of the company. The opportunities and the challenges are what attracted me to come here and I think what attracted Laura and some of the other leaders to come. And I look forward to taking your questions and answering your questions.

Well, yeah, if you'd like to jump into the discussion, just a reminder, you can email questions to session7 at rwbair.com. Maybe if we could start with the automotive operations. If we look at the company, it's really a tale of two segments. The industrial segment, maybe you'd like to see some growth in margin there, but it's a 20% margin business sitting here today. automotive you know even gross margin is near break-even as you mentioned there have been foundational actions that you've taken what I'm wondering is kind of as we look forward the factors you see most within your control that continue that improvement trend within automotive margins yeah so I think I think it's there's an important clarification and that's the fact that automotive is even really a tale of multiple tale of two regions the the automotive business in China, and so automotive is 40 plus percent of total method.

North American auto is 15 percent. So the place where we're talking about the challenges are really in North American auto where we've seen a significant roll off in some programs that we've talked about multiple times that did not get a chance to get backfilled with some of the EV programs that were delayed. So you have a global automotive activity that is growing and challenged from a launch perspective, as we talked about. But really, the North American auto business had the launch challenges, but it had a plant in Mexico that a couple of years ago was over $400 million in revenue. And right now is closer to a $200 million revenue run rate. And so you've got structural challenges. You've got execution challenges. And then we had a whole series of launches, particularly with Stellantis that we've talked about, that did not come to be. So we're negotiating with Stellantis on those topics. We are restructuring our facility in Mexico to drop the break-even and drive the improvement in performance there. And Laura and I were there last week and we're there every six weeks with supporting a Tiger team that's down there making that business better. But the automotive business within Method is not in generally challenged. It's a very specific challenge.

What about the, just the business model? Maybe this is more of a Mexico specific consideration as well, but it just strikes me that the business model is evolving here in terms of smaller production runs? Just, you know, how has the organization evolved and how are you kind of meeting that need of that new model?

So what I would say to you, and it goes to what we talked about with regard to the transformation, the way in which the organization ran in the past was very much customer following. We waited for an order and then we responded rapidly and it was also very regionally focused as opposed to looking at how do we leverage global engineering how do we leverage global supply chains how do we leverage global operations and global capacities it was very regional that works when as you said when it's stable long-term programs when you have a bit more turbulence and more launches you don't get the chance to utilize the capabilities that we need to that we need to drive all those launches So what we've done is one of the first hires that I made was a head of global supply chain. We've changed the operations organization. And then most recently, or very recently, we've changed the total engineering organization where we've gone to three global chief engineers, one for power, one for lighting, and one for user interface to be able to drive some of that leverage. What we're also doing is we're utilizing, as we fix the plants, it gives us the ability with regard to our footprint and commonality of our processes and some of the vertical integration to utilize our engineering around the world or process engineering, but to support customers that are rethinking their supply chain due to some of the tariff regimes and gives us a chance to utilize our facility in Mexico to support new customers and create new opportunities that didn't exist 12 months ago.

Well, let's talk about, yeah, more of the new opportunities side of the house. Maybe, you know, as you mentioned, you know, Big Bet had been made on EV. Those programs have certainly underperformed excitations. And now I think it's about rebuilding the funnel of what can more reliably drive growth. Maybe the first thing to touch on here would be just your lighting franchise, just leaning into that at the margin. And maybe we could just talk about the health of the core auto and truck franchise and market share related elements as well.

So the lighting franchise is split in a couple of different brands, one being the Graycon brand, Nordic Lights and then Pacific Insights. um nordic lights was an acquisition that was done a couple years ago really is uh lighting for ag and industrial that has been a very good acquisition and done exactly what we expected it to do that that hasn't seen it's seen a little bit of of uh downward pressure based on the ag and and construction and markets, but really has continued to perform at a very high level. Graycon was a challenge certainly 12 months ago. Some management decisions with regard to integration meant that we didn't focus on our knitting with regard to customer relationships, particularly on the commercial vehicle side. And some of our OEM customers expressed their displeasure very clearly early in my tenure. We've been able to turn that around. And so that gray con business is um is now stable it's we're winning we're winning new business and got ourselves off from new business hold uh the commercial vehicle space particularly in north america but both in north america and in europe is challenged based on just overall economic challenges so we have some if you will some headwinds that are uh exogenous that are economics driven, not our own execution driven. We have not lost market share, but we are working to position ourselves much more strongly with those customers and be prepared to grow with them as the market comes back.

What about just, you know, EV still is an important business. If you look at that power product slide, EV is the biggest chunk there. It's been growing still. Just how do you think about balancing you know growth given risks to maybe volume expectations even if the trend is up relative to your investment intensity and you know most obviously what's growing still is China and EVs maybe if we could touch on your China franchise as well.

So Laura maybe you want to talk a little bit about how we change how we think about quoting and some of the capital applications from a from a power standpoint then I'll talk about China a more?

Yeah. So as a company, we have implemented quoting filters into the company. So that is driving the organization to be data-driven, very systematic, and numerate on how we address our investments through the company. We are very measured and thoughtful on what capital we're putting on the factory floor. So that's what we need to do from the capital side to be able to understand our exposure there.

And what I would say, Luke, to answer your question, the China business is a good business. It has been the leader with regard to much of our EV product development. It actually allows us to demonstrate to customers around the world. Many of the global OEMs are searching for if you will China speed development and our ability to demonstrate that hey we're doing that and we're winning business in China with Chinese OEMs actually becomes a selling tool if we demonstrate that we can execute in the other regions which is where we needed to fix some of the past stuff what we what we think about beyond that is how do we utilize some of our engineering capabilities as well as the installed manufacturing capabilities to support whether it's hybrids and some other customer programs or actually expansion on the data center side.

Maybe if we could just touch on the macro backdrop quickly. So you mentioned certainly from a lighting standpoint with Graycon, we're well versed in what's going on in North America truck right now. Supply chain just more generally a topical area right now. To what extent you can comment on some of those impacts, be it chips or aluminum or what have you?

So aluminum, so the good news is, as we said, automotive is less than 40 or around 40 percent of the total company. North American Auto is 15 percent of the total company. So exposure to aluminum you know our our revenue doesn't float with SAR in the way many transportation suppliers revenue does the the chip challenge particularly with regard to an Xperia is has certainly been one that has has I wouldn't say impacted us but forced us to focus a little bit differently. Now, the change that we made with regard to our supply chain organization and hiring Lars Ulrich, who his previous role was at Infineon. So Lars and I worked together when I was at Stone Ridge and he was at Infineon during the chip crisis of 2021. And we have a lot of built-in reflexes on what has to happen in order to respond to customers, and what I would say is the team has done a very, very good job of understanding where the exposure to Nexperia chips are, getting in front of it with the customers, having conversations with them, working with them on how they are procuring chips and what has to happen in order to protect their production, and also making sure that there is no economic impact for us.

What about just policy-related impacts? I mean, obviously, there's a lot going on right now with tariffs, the one big beautiful bill, USMCA renegotiation next year rates, what do you think is most important to Method into next year?

I think for us, our ability to respond to customers and demonstrate that we have capability around the world and that we can flex our manufacturing to support them. We're using that with current customers from a lighting standpoint where we're taking, they want to shorten their, they want to reduce their risk and they want to shorten their lead times. We're actually taking product out of Asia and putting it into Mexico. It allows us to deepen a relationship with a customer in ways that we hadn't in the past. Secondly, is taking advantage of a USMCA certified facility with available capacity and talking to OEMs that may be rethinking about their supply chain and we weren't in their supply book in the past. It's creating opportunities for us from a future revenue perspective to expand our customer base and using Mexico to do that. So we're actually using the tariff regime as a way to drive growth for us with our footprint.

Let's talk about another growth driver here, Bus Bar. I'm going to put the auto piece on this side, but Data Center, Mill Arrow. Maybe starting with Data Center, just your approach to that business, You know, the big uptick we've seen certainly seems like there's some strategic pivot that's underpinning that, John.

Yeah, it's a, as I said to you, some of the philosophy in the past has been respond to customers. And that was true with regard to the data center as well. We were a second source in many situations. And rather than anticipating customer needs, we waited until there was a PO. that meant that lead times were extended as you got materials and you got product delivered we have sought to be more proactive with regard to the customers we've changed the organization structure to effectively create a stronger commercial global commercial activity with regard to data centers and a global engineering activity with regard to data centers so the first piece is how do we address our needs to shorten our lead times how do we support them better That's led to us putting in place a vendor-managed inventory in Mexico, which moves their lead time from 12 to 14 weeks to two to four days. That then has moved us from a distant second source to, in some situations, a first source where we're getting 52 weeks' worth of EDI releases and we're able to plan our manufacturing and plan our supply chain. And it's also deepened our relationship with them, which gives us then the opportunity, and we talk about earning the right with customers. Here's one where we earn the right with the customer on how we're meeting their near-term needs, which allows us to have some of the advanced development in the future product needs and bringing some of our EV high-voltage power capabilities into conversations with their engineering organization. That all is a change in approach from the way it was done in the past.

With high voltage, I mean, clearly that's coming closer to the rack. I mean, is there a content opportunity here as well? And just how do you think about spooling resources into that business?

So one, we do believe it's an opportunity. We are working on prototypes and advanced development with many of the hyperscalers on this topic. We are taking some of our EV resources, our engineering resources, and adjusting those over onto the power side. We are also, as I said, expanding some of our commercial and strategic resources. Brad Karody, the chief strategy officer, is spending the majority of his time in our power business and spending a lot of time out on the West Coast working with customers there. So we are adjusting our capacity and using some of our EV capacities around the world where we're putting more engineering activity onto the data center and the higher energy side. And honestly, we're using some of our prototype capability back from the mill arrow and some of the past work as tools to make those prototypes and make the samples and work with speed in ways that we haven't in the recent past.

Maybe touch on just kind of the legacy here, both from, you mentioned, I think it was a space shuttle in terms of the mill arrow side of this portfolio. All the way back to Apollo. Yeah, and data center. I think that's been a long exposure, but maybe not just a focus area for the company.

So the reason why we laid out the timeline that we did and the transformation timeline is there are more opportunities for us to pursue that in many situations we just haven't had, we know are out there, but haven't been able to be taken to the forefront. So as we get these launches stabilized and as we get our execution and as we continue to build the team and do the work that leaders like Laura and others are doing to build their teams, that's going to give us the ability then to go beyond just focusing on data centers but saying where are the other end markets that we can put more energy into than we have in the recent past. So, yes, it's an opportunity that's out there. It's just not something that we've been able to pursue in the first 15 months.

Would Mill Arrow be a good guess of where you might go first, just given the legacy? Yeah. Pulling question, AI, is that part of your journey in terms of using maybe some of these tools selectively, or is that something that's maybe into the future?

You know, we had a discussion last night about how do we use AI from some of our planning activities. We certainly have used AI selectively with regard to, as we think about Nexperia chips and in our supply chain and thinking through where are the shortages and how do we do a better job of evaluating our data set to bring to solutions. But I would tell you that we're at a very immature level at very early stages of bringing technology to bear to make our organization more enumerate and more efficient very early.

I mean, I don't think I would have envisioned myself asking this question two or three years ago, but certainly there's been a combustion renaissance. You know, you certainly have combustion exposure within the portfolio. Is that an opportunity as you click into the next couple of years, John?

As Laura talked about, as we think about our quote process and our quote filtering process, what we look through is how do we give ourselves a bit more, shall we say, motive force flexibility, whether it's EVs, whether it's hybrids, or whether it's internal combustion. I don't see us putting strong additional engineering resources into internal combustion-only activities. It's really not where our core competencies today are. But as we think about, as we trade one program off versus the other, we would prioritize ones that have powertrain flexibility, where, okay, there's multiple hybrids in their sales forecast, and we're supporting multiple end motive force powertrains as opposed to just one.

Lauren, the time we got left, maybe if we could just touch on the balance sheet in terms of near-term priorities and how you think about kind of where you want to be. I don't know if it's a leverage target or a net deck level or something of that nature. Yeah.

So first of all, we've been laser focused on free cash flow. So good things start with cash. So we've seen progression on our working capital reductions that we've done, both on AR, inventory, AP. So all three areas we've had focus on, and that's setting the company up for, so Method will see, we're looking at positive free cash flow for FY26 for that. As far as the leverage ratio, I think in the near term, I'm looking at, you know, low threes, but in the longer term, under three.

John, a couple of minutes left here. Just be curious, you know, as you started the conversation, you outlined this transformation journey the company's been on. You're now to the, what you call the leverage synergies part of that journey.

If we look, you know, three to five years out and we're sitting on this stage again, what are some of the key achievements that you'd hope to be able to tout at that point, well I think that I think the first thing would be growth both from a top line and from a bottom line perspective and a consistency of that growth method created a lot of value for shareholders in the past and and embarrassingly destroyed a lot of value in the last few years and we acknowledge that and we humbly acknowledge that so art our job first is to make sure that we are delivering on our commitments to our shareholders we do that by delivering on our commitments to our customers so being that customer being that supplier of choice whether it's on the with the hyperscalers whether it's with the commercial vehicle guys on the lighting side or whether it's with the passenger car people around the world on the power or on the user interface or on the lighting side I think having the talent having the balance sheet as Laura talked about. So financial performance, a balance sheet that allows us to do accretive acquisitions at some point in the future, and then having the talent to be able to do those things. We've had to change so many people in the first 12 months here, and that is an indictment on how the organization ran over the last few years. So when we talk about earning the right with shareholders and earning the right with customers and earning the right with employees. Having an organization that's robust and growing and delivering shareholder value and delivering value to the customers also should be delivering opportunities for employees where it's a place that people want to work. We have the talent to drive the growth. That's hopefully what we're talking about a couple of years from now.

Well, I think that's a great place to end. Please join me in thanking John and Laura today for the presentation.