Methode Electronics 2027 Q1 Earnings Call

You may begin. Good morning, and welcome to Methode Electronics' fiscal 2027 first quarter earnings conference call.

Our first quarter results, including a press release and presentation, can be found on the Methode investor relations website. I am joined today by Jonathan DeGaynor, President and Chief Executive Officer, and Laura Kowalchik, Chief Financial Officer. Please turn to Slide 2 for our safe harbor statements. 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.

We will also be discussing non-GAAP financial information and performance measures, which we believe are useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures can be found in the conference call materials. 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. Please turn to Slide 3, and I will now turn the call over to Jonathan DeGaynor.

Thank you, Joni, and good morning, everyone. Thank you for joining us for Methode's first quarter fiscal year 2027 earnings conference call. We delivered a strong start to fiscal 2027, with net sales up 10% year-over-year to $265 million, driven by higher volumes across our industrial portfolio, led by data center-related sales. That higher volume drove real profitability benefits, while we also saw genuine gains from our operational improvements. However, several items offset that progress. Some were one time in nature, and others reflected the investments we've made in talent and capabilities to strengthen the company's foundation. Laura will provide more details on this later in the call. On the commercial side, we booked new awards representing $75 million of peak annual revenue or approximately $400 million of lifetime revenue.

These awards were primarily for USMCA-compliant components across power products with either new customers or product lines with existing customers. A good proof point for the commercial momentum we are building. Our operational transformation journey remains on track as we continued to see the impact of cost actions and margin gains across key facilities while we implement our global operating model. We also continued to strengthen our balance sheet. We amended our credit agreement to extend certain maturities by one year and made net repayments on debt of $10 million while maintaining strong liquidity. Given all of this, we are reaffirming our fiscal 2027 guidance. I want to emphasize that the progress of our transformation journey will not always move in a straight line, but despite quarter-to-quarter volatility, we remain confident in our ability to drive sustainable improvement.

Now I will walk through some of these items in greater detail, starting with the actions we have taken over the past two years. Turning to Slide 4. We made significant progress stabilizing and strengthening the foundation of the company. We upgraded talent, rebuilt leadership teams, resolved legacy overhangs, simplified our portfolio, and strengthened manufacturing execution, delivering real margin and cost improvement inside our facilities. That work is translating into better supply chain execution, shorter lead times, and stronger service levels, which is helping us earn the right to win with our customers. Our focus today is building on what we have already accomplished. There is still work to do, but we are actively working to drive top and bottom-line growth across the company. We remain focused on investing in higher growth opportunities such as data centers, and we have been pleased with the opportunities we are seeing in this market.

It is not just about data centers. We are also leveraging our capabilities and footprint to grow in other end markets and applications, including automotive and commercial vehicles. Turning to Slide 5. The awards we booked this quarter were not in data centers. They came from commercial vehicle and automotive power applications totaling $75 million of peak annual revenue or approximately $400 million of estimated lifetime revenue. These wins show the breadth of what our power and lighting capabilities, combined with our USMCA-compliant footprint, bring to both new and existing customers. Customers are rethinking their overall supply chains, looking for localized manufacturing to mitigate tariff exposure, shorten lead times, and ensure quality. Our engineering and manufacturing capabilities and our footprint position us well for that shift. This is what earning the right to win looks like in practice.

It is not a single award in a single market, but a broadening set of customers choosing Methode for our capabilities and because we are executing better than we have in the past. That is the commercial momentum we are building on. Turning to Slide 6. Part of our transformation has been moving from historically decentralized organization to a global operating model with improved alignment and collaboration across the company. We have taken a number of actions to change how our operations work globally, rebuilding the organization from the ground up. We installed a global head of operations who is building a team to drive alignment. This includes new leadership in the areas of manufacturing strategy, quality, process engineering, and supply chain planning. We have also continued to upgrade site leadership in Egypt, Malta, Mexico, and China over the last 18 months. The breadth of these changes is being felt across the entire organization.

Egypt is the strongest example of what these operational improvements can deliver. The business drove more than 700 basis points of margin improvement in fiscal 2026, the product of stronger leadership, tighter operational rigor, and greater process discipline, with additional savings expected in fiscal 2027. In Malta, restructuring and operational improvements are driving approximately $5 million in annualized savings, including lower scrap, better quality, and other efficiencies. We're applying that same global playbook and leadership discipline to our Mexico region. To help understand the challenges in Mexico, this chart shows annual sales generated from the region over the last several years. Revenue dropped more than 50% from fiscal 2023 to fiscal 2026, mainly due to the roll-off of a major OEM user interface program, along with delays and cancellations across North American EV programs.

Those changes left us with significantly underutilized capacity and a fixed cost base that wasn't appropriately sized for the reduced revenue. We've taken foundational action to improve both operational and financial performance of this facility. We brought in new leadership, implemented best practice operating procedures, removed structural cost, and continued to drive alignment between our cost base and current demand. Early results indicate more than 500 basis points of margin improvement year-over-year at the Mexico facilities. Importantly, that improvement came without significant revenue tailwinds. We also saw an opportunity across our industrial portfolio by capitalizing on our customers' needs for localized USMCA-compliant production. Historically, our business operated as siloed units with capacity dedicated to serving one segment alone. Now, our globalized model footprint and manufacturing synergies are helping us meet those requirements.

We've begun transferring a portion of our production from Asia to Mexico, repositioning open capacity across the automotive data center and commercial vehicle markets, enabling us to take share, win new business, and diversify our demand base. This also allows us to spread fixed costs more effectively, benefiting margins in both segments. Altogether, Mexico is becoming one platform serving three markets with strong incremental adjusted EBITDA improvement. This is already built into our current guidance, but it gives you a sense of the transformation underway. Importantly, we are not just focused on these three sites. We continue to drive performance improvement and consolidation across our entire footprint. In China, we will consolidate sites. We will also exit a facility in the U.K. and at least one in Germany. Turning to slide seven. Our power solutions offerings are a fundamental piece of our long-term growth strategy.

We're applying more than 60 years of expertise designing and manufacturing complex high-performance power interconnect solutions, often pushing the limits of thermal and electromagnetic constraints to meet demanding power density, weight, and reliability requirements. We are partnering closely with our customers to understand and address their needs, whether through supply chain or product design solutions. Our product portfolio and our footprint give us the breadth to serve customers across end markets, which is a meaningful competitive advantage as we look ahead. On data centers specifically, the Mexico repositioning I just described is one example which leverages existing capacity that we can begin dedicating to hyperscaler customers who desire shorter lead times and supply chain stability.

We are also rotating engineering and commercial resources toward data centers to support that growth and bring in customers' innovative solutions that address AI-driven demand for power density, helping enable a more efficient future built on safe deployment of 800-volt DC rack architectures. In vehicle electrification, we are leveraging our capabilities to drive growth with other customers in hybridization, including the new business awards I mentioned earlier. We continue to ramp up EV programs in EMEA, and we're expanding our commercial and engineering activity in Asia Pacific. In Mil-Aero, we're restructuring our commercial organization to better align with broader market dynamics and growth opportunities. Our transformation is a multi-year effort. Progress won't always be linear, but I'm confident we have the right strategy and the right team in place to deliver on the commitments we're making to our employees, our customers, and our shareholders.