Methode Electronics Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
September 5, 2024

There are 7 speakers on the call.

Operator

Please note this conference is being recorded. I will now turn the conference over to your host, Robert Cherry, Vice President of Investor Relations. Robert, the floor is yours.

Speaker 1

Thank you, operator. Good morning, and welcome to Methode Electronics' fiscal 2025 Q1 earnings conference call. For this call, we have prepared a presentation entitled Fiscal 2025 First Quarter Financial Results, which can be viewed on the webcast of this call or found at metho.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 law.

Speaker 1

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 ks and 10 Q reports. On slide 4, please see an agenda for our call today. We will begin with an introduction of Methode's new CEO, move to our key messages and then provide a business and financial update followed by a Q and A session.

Speaker 1

Please turn to Slide 5. At this time, I'd like to turn the call over to Mr. John DeGaynor, President and Chief Executive Officer.

Speaker 2

Thank you, Rob, and good morning, everyone. Thank you for joining us for our Q1 earnings conference call. I'm joined today by Dave Rodden, our Interim Chief Financial Officer. Before we discuss the quarter, I'd like to take a minute and share why I came to Methode, what I have found so far and what I think are the key messages for you to take away from this call today. First, I'm truly honored to be the new CEO of Methode at this pivotal time for the company.

Speaker 2

I've long admired Methode in my roles at adjacent companies in the industry and I look forward to working alongside the team to deliver for all of our stakeholders. Over the past few weeks, I've had the opportunity to tour several of our facilities around the world and meet many of our regional teams. I've spent time learning about our operations, our products and our people. I've also had a chance to hear about our history, which is filled with moments when our global engineering and manufacturing teams came together to solve complex problems, innovate new products and create value for our customers and our shareholders. I see a company with a strong foundation built on years of operational excellence.

Speaker 2

Some of our plants are world class and I will be proud to show them to a customer. However, with my operations background, I can still see areas for improvement in each of our facilities. I look forward to working with the operations and supply chain leaders to improve each of our plants. If you're not familiar with mine history, my track record includes enhancing businesses that require both operational and strategic improvement. Through a team effort, we drove those organizations to find unique and often latent value creation opportunities within the existing portfolio.

Speaker 2

I believe there are similar potential opportunities at Methode and I look forward to leading the team to capture them. Turning to Slide 6, not many companies can talk about a 78 year history, but Methode can. However, all companies eventually go through periods where the business must evolve to move forward. Changing the solutions it develops for customers, the way in which it produces those solutions and the way in which the organization works as a whole. Methode is at such a point and consequently we are beginning a journey to transform the business to position it for long term value creation.

Speaker 2

To do so, our first priority must be to successfully execute on the large pipeline of new programs that must be launched in the next 2 fiscal years. In fiscal 2025, we have over 30 program launches that our customers are looking forward to. And in fiscal 2026, we have another 20 programs to launch. Any organization that faces this level of launch intensity will have its capabilities tested. At Methode, we are relying on our history of execution and global collaboration to surmount these challenges.

Speaker 2

Simultaneous with the launches, we must focus on immediate actions to address total supply chain costs and efficiency. With the help of outside resources, we are pursuing a multifaceted approach to set a foundation for future success. We are also actively building the executive team including a new CFO and CPO to support these challenges. On that note, I'd like to reiterate the news that we announced last week regarding our CFO transition. Laura Kowalczyk, the current CFO of Communication and Power Industries has been appointed CFO of Methode effective October 1.

Speaker 2

She brings an impressive track record of delivering successful business transformations within our industry. I look forward to partnering with Laura to drive improvement at Methode and welcome her to the Methode team. Lastly, despite some headwinds in our markets, we are in a position to affirm our guidance for flat sales in fiscal 2025 followed by profitable organic sales growth in fiscal 2026. Our plan is to leverage Methode's strong foundation in order to reinvigorate and transform the business. But what does transform mean?

Speaker 2

Please turn to Slide 7 and let me elaborate. To start with, transform means resetting performance. That includes improving operational metrics, cost focus and cost structure. It also means building and growing capabilities that includes utilizing global best practices, improving our tools and systems and driving standardization across the organization. Lastly, it means shifting our culture.

Speaker 2

That includes leveraging our global resources, acting with a sense of urgency and rewarding performance. In short, the organization needs to earn the right to write the next chapter of Methode's history. I am confident that it will do just that. Returning to the quarter, let's begin on Slide 8. Our sales were $259,000,000 and our adjusted pretax loss was $9,000,000 Our sales were down from the prior year mainly due to the roll off of a previously disclosed ED lighting program in our auto segment.

Speaker 2

That program has gone end of life but will impact our prior year sales comparisons for most of fiscal 2025. Overall, our sales in the quarter were on track with our expectations. The lower sales volume along with the continued elevated costs from ongoing program launches drove the pretax loss in the quarter. Customer program delays also contributed to absorption challenges. However, our efforts to improve gross profit contributed to the better than expected result.

Speaker 2

A loss is a loss and we will never celebrate 1, but it was good to see the sequential improvement. Turning to EV activity. Their sales in the quarter were 18% of our consolidated total and a sequential increase from 14% in the 4th quarter. As previously communicated, we had a sizable EV lighting program roll off toward the end of fiscal 2024 and we are now at the beginning of a wave of new program launches for EV power applications. As such, we expect the EV percentage to grow even further and should be over 20% for our fiscal 2025.

Speaker 2

While our sales are currently on track for the year, there are clearly headwinds in several of our key end markets. Those markets include automotive, commercial vehicles, construction and agriculture. In addition to the EV market is clearly awesome steam, particularly in North America and its near term outlook has softened. So while we are affirming our guidance for the year, we are keenly monitoring market conditions. On the order front, we had another solid quarter with over $80,000,000 in annual program awards.

Speaker 2

OEMs are clearly reevaluating the adoption rate for the EV market. As such, the pipeline of potential bookings is subject to reduction and or delay due to customer decisions and or market conditions. Turning to the balance sheet, we are maintaining an acute focus on managing it and generating cash. As evidenced, we reduced working capital by $9,000,000 and improved cash from operations by over $16,000,000 in the quarter. Lastly, our debt covenants were in full compliance at the end of the quarter and have our complete attention.

Speaker 2

In short, it was a stabilizing start to the year with better than expected performance on pre tax income and cash flow. It was also encouraging to see the booking momentum continue. Turning to Slide 9. The awards identified here are some of the key wins in the quarter and represent $77,000,000 in annual sales at full production. This was our 2nd consecutive quarter of solid awards.

Speaker 2

The launch timing of most of these programs could be anywhere in the range from 1 to 3 years from now. All awards were for power distribution products for applications in EV, defense and data centers. After a lull in data center activity, we are now seeing a rebound in orders there. On Slide 10, I want to provide some more color and details on the transition that we are navigating from a few large legacy programs to a multitude of launches of new programs. Methode has had a tremendous run supplying integrated center consoles to General Motors.

Speaker 2

As we have been communicating over the past few years, that program for various platforms and models has been slowly rolling off. It is now expected to go end of life in fiscal 2025. The result is a significant headwind in fiscal 2025 and another lesser one in fiscal 2026. The other major legacy program roll off we have previously communicated is for an EV lighting program. That program for Methode went end of life in fiscal 2024 and is thus a headwind for us in fiscal 2025.

Speaker 2

Conversely, we are launching several EV programs for Stellantis in fiscal 2025. That activity along with the positive net impact from other launches, roll offs and market conditions leads us to expect flat sales in 2025 versus 2024. Looking further out to fiscal 2026, we expect even more launches of VB programs for Stellantis. That activity along with a more positive net impact from other launches, roll offs and market conditions will more than offset the final headwind from the GM roll off as well as a significant headwind from a major appliance program that is going end of life in fiscal 2025. The overall net result is the expectation of organic sales growth in fiscal 2026.

Speaker 2

As we navigate this product transition, we remain subject to market conditions, EV adoption trends and the success of our customers' product launches. However, as of today, this is the line of sight we have based on our projections and the forecast of our customer base. Turning to Slide 11. In summary, for the quarter, our sales were on track while our pretax loss was better than expected. EV activity rebounded and was at 18% of sales.

Speaker 2

Key market headwinds particularly in auto and commercial vehicles are a concern. However, program awards were solid for the 2nd consecutive quarter. Lastly, we maintained an acute focus on the balance sheet and cash flow delivering a $9,000,000 reduction in working capital and generating over $16,000,000 in cash from operations. Going forward, we are beginning a journey to transform the business while positioning it for long term value creation. Meanwhile, we are focusing intensely on executing over 30 program launches while taking immediate actions to address execution and costs.

Speaker 2

We simply need to return to better blocking and tackling and then we can move forward with a discussion on strategy. We are also building the executive team including our new CFO and CPO to support these challenges. Lastly, we are affirming our guidance for flat sales in fiscal 2025 followed by profitable organic sales growth in fiscal 2020 6. To be succinct, our fiscal 2025 will be a year of transforming the business with a goal of returning the company to growth and profitability in fiscal 2020 6. At this point, I'll turn the call over to Dave, who will provide more detail on the Q1 financial results.

Speaker 3

Thank you, John, and good morning, everyone. I'd actually please turn to Slide 13. 1st quarter net sales were $258,500,000 compared to $289,700,000 in fiscal 2024, a decrease of 11%. On a sequential basis, sales decreased 7% from fiscal 2024 Q4. The main impact on sales in the quarter was the previously disclosed roll off of an EV lighting program in Asia.

Speaker 3

That program ended toward the end of last fiscal year and had no sales this quarter. Also impacting this quarter was market weakness for our lighting products in the commercial vehicle, construction and agricultural applications. That weakness was partially offset by growth in our auto sales in Europe. 1st quarter adjusted loss from operations was $4,700,000 down $10,000,000 from fiscal 2024. On a sequential basis, adjusted loss from operations improved $5,100,000 from fiscal 2024 Q4.

Speaker 3

Please see the appendix for a reconciliation of all adjusted measures to GAAP. Income was negatively impacted both year over year and sequentially due to the lower sales volume. In addition, we continue to have high launch costs to support the numerous new program launches that John described. We also had a discrete legal fee in the quarter related to the Head Tronic litigation. Overall, our Q1 sales were on track with the full year expectations.

Speaker 3

Turning to Slide 14. Shifting to EBITDA and non GAAP financial measure. 1st quarter adjusted EBITDA was $9,800,000 down $9,500,000 from the same period last year. On a sequential basis, adjusted EBITDA improved $4,500,000 from the fiscal 2024 Q4. Compared to the prior year, adjusted EBITDA was negatively impacted by the lower sales and gross profit.

Speaker 3

On a sequential basis, adjusted EBITDA improved despite the lower sales as a result of higher gross profit. The higher gross profit was driven in part by price increases and lower warranty costs. Turning to Slide 15. 1st quarter adjusted pre tax loss was $9,100,000 down $11,600,000 from fiscal 2024. On a sequential basis, adjusted pretax loss improved $4,700,000 from the fiscal 2024 Q4.

Speaker 3

Compared to the prior year, adjusted pretax loss was negatively impacted mainly by lower sales. On a sequential basis, adjusted pretax loss improved despite the lower sales as a result of higher gross profit. The loss this quarter exceeded our guidance of similar to the recent 4th quarter performance. 1st quarter adjusted diluted loss per share decreased to a negative $0.31 from a positive $0.06 in the same period last fiscal year. On a sequential basis, the adjusted loss per share declined $0.08 from the fiscal 2024 Q4.

Speaker 3

The adjusted earnings per share was negatively impacted by both lower sales and higher interest expense both year over year and sequentially. This quarter was also negatively impacted compared to the prior year by higher tax expense due to the GILTI tax treatment on foreign earnings. Overall, our Q1 adjusted pre tax loss was on track with our full year expectations. Turning to Slide 16, Debt was down $34,900,000 from prior year end. We ended the quarter with $111,300,000 in cash, down $50,200,000 The primary use of cash was to pay down debt.

Speaker 3

Net debt, a non GAAP financial measure increased by $15,300,000 to $184,700,000 The increase was due to the use of cash for other financing activities that exceeded our cash provided by operating activities. We are in compliance with all of our debt covenants at the end of the Q1. Turning to Slide 17. The Q1's net cash from operating activities was $10,900,000 as compared to a negative $5,600,000 in fiscal 2024. The increase of $16,500,000 was primarily due to improvements in working capital.

Speaker 3

1st quarter capital expenditures were $13,600,000 as compared to $13,800,000 in fiscal 2024, a slight decrease of $200,000 1st quarter free cash flow, a non GAAP financial measure was a negative $2,700,000 as compared to a negative $19,400,000 in fiscal 2024, an improvement of $16,700,000 This increase is primarily due to reduced working capital. On a historical basis, this is a good start to the fiscal year for free cash flow. Turning to Slide 18. 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 this slide. For fiscal 2025, we are affirming expected net sales to be similar to fiscal 2024 and adjusted pre tax income to be approaching breakeven.

Speaker 3

The adjusted pre tax income for the second half of fiscal twenty twenty five is still expected to be significantly stronger than the first half. This fiscal year 2025 guidance assumes depreciation and amortization of $60,000,000 to $65,000,000 CapEx of $50,000,000 to $60,000,000 and a tax expense of $9,000,000 to $11,000,000 The tax expense is mainly a function of the valuation allowance on deferred tax assets of $4,300,000 that we recorded in the Q1 and the expected GILTI tax treatment for the full fiscal year. Looking further ahead to fiscal year 'twenty six, we are affirming expected net sales to be greater than fiscal 'twenty five and pretax income to be positive and notably greater than fiscal 'twenty five. This concludes my comments and we can open up to questions.

Operator

Thank you very much. At this time, we'll be conducting our question and answer Thank you. Your first question is coming from Luke Young of Baird. Luke, your line is live.

Speaker 4

Great. Thank you for taking the question. Good morning, everyone. Hoping I could start, John, with the gross margin, especially within automotive specifically. You mentioned the improvement that we saw sequentially in the quarter.

Speaker 4

Hoping we could just unpack that. Clearly, gross margin, especially in auto, has been under pressure in the last few quarters, launch cost, overhead cost absorption. I know there's a lot going on there. Can you just unpack what went right this quarter in terms of gross margin in auto especially and how we should think about that as being sustainable as we look the next couple of quarters? Thank you.

Speaker 2

Luke, good morning and thanks for your question. I think it's important to understand that the team has been working hard not only on the launches, but on driving operational improvements. So what you're seeing is both the impact of operations improvement, particularly in North America and in our EMEA regions, impact of price increases that have been passed on to the customers, work that's been done on price reductions with our supply base and then some of the impact of some of the cost reductions that we've talked about in previous quarters. So these are ongoing improvements that will continue to gain momentum on a quarter over quarter basis and why we feel confident in the progress that we talked about here.

Speaker 4

Got it. Thank you for that. My second question, a little bigger picture and it's in terms of the Interface business and the appliance roll off that you're looking at. In fiscal 2026, just how does that impact your view of the business? It would seem like sales are going to come down a lot there just in terms of the strategic relevance going forward and then managing that specific earnings headwind from that roll off?

Speaker 4

Thank you.

Speaker 2

Yes. So the Interface business was as I'm coming to learn was critical for us as we launched the GM business and launched some of the other pass Interface business on the automotive side. What you're seeing us starting to look for is how do we find synergies between the different segments and how do we create some synergistic value between our lighting business and our industrial controls business and other areas. So we do have some new appliance programs. So it's not just bad news from an appliance side.

Speaker 2

But when you talk about all of the launches that we have that we mentioned multiple times, 30 this year and over 20 next year, We mentioned this in the last earnings call and we talked again here. The trough that we're seeing from a sales perspective is really being filled by a whole series of exciting new programs that are aligned with what we see as the megatrends in the space. So I'm quite confident about where we're going and the opportunity for us to be aligned with where the different industries in which we play are going as well.

Speaker 4

Got it. And then my last question, John, just good to get your perspective. Some improvement plans were had already been outlined for the organization as you came into the CEO seat as great to understand kind of your focus for the 1st 90 days on the job, just how you're prioritizing your time, some of the structures that you've put in place with your leadership team, obviously some folks still coming on to that team and maybe any other kind of initial focus here is that would be worth highlighting? Thank you.

Speaker 2

Yes. So as we said multiple times during the call, our first priority is making sure that we have these launches right. So it's why I've made it a point to get to the regions and I'll make it to the last major region of China here in a couple of weeks, to make sure that I understand the challenges that the regions are facing and then also to be talking to customers. So the first priority is making sure that we're talking about the regions and our launches. Secondly is in some specific launches, to make sure that we're supporting our customers appropriately and have had those first rounds of customer meetings.

Speaker 2

So that's priorities, if you will, number 1 and number 2. Number 3 is really driving an integrated financial improvement approach. So it's not just what are we doing to cut costs, the headcount reduction, but it's a holistic perspective on how do we use the outside resources that we have working with us as well as the internal teams to be driving scrap reduction and the plants be driving inventory reduction in the facilities, be looking at our total supply chain as well as what do we do with regard to additional pricing opportunities with customers and looking the entire thing holistically. As we add capability like with John Irwin as a CPO and as Dave and Laura transition, I feel really confident that we're building an organization that we'll be thinking more and more numerately every day and in all of the areas that allow us to drive a holistic continuous improvement approach. And then I guess the last priority for me is making sure that we build out that leadership team that sets the stage for the next phase of the Methode, if you will, the next phase of the Methode history.

Speaker 2

So when we say, we need to earn the right in front of our shareholders and in front of our customers and in front of our organization to write the next phase of the history that comes down to leadership. And what do we do to take the 7,000 plus person organization with a 78 year old history and set the stage for the next months, years decades ahead.

Speaker 4

That's all very helpful. I'll go ahead and pass it back. Thank you.

Speaker 2

Thanks, Luke.

Operator

Thank you very much. Your next question is coming from John Franzreb of Sidoti and Company. John, your line is live.

Speaker 5

Good morning. And John, welcome aboard and thanks for taking the questions. Thanks very much, John. I'd like to start with the guidance. Despite lower revenue sequentially and higher operating and pre tax profit sequentially, you kind of maintain the outlook for the year.

Speaker 5

I'm curious if that suggests any change in the past 2 months in market conditions versus what you're looking for at year end?

Speaker 3

Not really. We're taking a look at this. We're actually being cautious on how we forecast things. The year still has to play out. We have a good start to the year.

Speaker 3

I shouldn't say good. As John says, you never want to celebrate a loss, but it was better than what we were hoping or we were expecting. But we're still going to keep the guidance where it is just until we get a little bit better track record of how we go forward in the quarters.

Speaker 2

And John, let me just build on what Dave said is, it's our responsibility to make sure that we're credible. And credibility comes down to doing what we say and achieving above what we say as opposed to some of the back and forth that we've had historically. And so when we look at the headwinds in our different end markets, we look at the challenges with regard to the launches and just some of the exogenous turbulence. We thought it was prudent for us to affirm our revenue guidance and affirm what we said in the last quarter, but not go any further with that until recognizing the fact that I've been here 2 months. And Dave has been in his role for a couple of months as well.

Speaker 2

So making sure that we're prudent in the way in which we lay this out and explain to our investors is why we've approached it this way.

Speaker 5

Fair enough. Just wanted to make sure. Yes. Thank you. I'm actually curious about the price increases that you referenced in your prepared remarks.

Speaker 5

Pricing has been an issue for quite some time. I'm curious on 2 things. 1, how much did price impact the gross margin profile in Q1 versus Q4? And 2, how much do we run rate we have left on getting more price gains on a go forward basis?

Speaker 2

Yes. So we don't typically, John, give the sort of detail on exact impact on a quarter by quarter basis. But what I can say to you is as we have looked a little more rigorously at our some of our programs and some of our longer running programs as well as the new things, it's forced us to go back to customers. And in some situations where you have a even new program delay, it requires us to go back to customers because we have capital and we have inventory that we have put in place in order to support a ramp up. So when I responded earlier about the numeracy and how we think about these things, each of our programs be they long term programs or new programs, we're looking at the financial performance of those programs and going back and saying, what is our responsibility and what is it that is a customer's responsibility and how do we go have very clear, transparent conversations with our customers in all of the businesses.

Speaker 5

Okay. It's certainly a worthy endeavor. Lastly, you mentioned in your comments going after supply chain costs, certainly that's after you handle your launch successful launch of new programs. But what is the opportunity in the better procurement on the supply chain?

Speaker 2

Yes. So we've had both outside help as well as the fresh eyes of John Irwin, our new Chief Procurement Officer, really looking at how we buy, looking at where with how the organization was structured, where there might be the same thing purchased from multiple places, but also how do we schedule and how do we order material. We have you can look at our inventory and say that we are certainly not as optimal as we like to be from an inventory standpoint. So as I think about supply chain costs, it's not just the procurement price, if you will. It's not a price to price comparison solely.

Speaker 2

It's a total supply chain cost. What do we do with regard to how we ship material, how much material, how much inventory is setting on the plant floors. All of those areas allow us to optimize our cost structure. And that's the way John is leading it and the operations team is thinking about it in each of the regions as well as with the outside support to help John on those.

Speaker 5

Okay. Actually, I'll leave it there and let somebody else chime in. Thank you for taking my questions.

Speaker 2

Thank you, John. Appreciate it.

Operator

Thank you very much. Your next question is coming from Gary Prestopino of Barrington Research. Gary, your line is live.

Speaker 6

Thank you. Hi, John. Welcome back. Hey, Gary. And David and Robert, a couple of questions here.

Speaker 6

First of all, let me jump around a little bit here. When you're talking about your guidance where with on pre tax income for this year and next year, is that on an adjusted basis or a GAAP basis?

Speaker 3

That would be on an adjusted basis.

Speaker 6

Okay. Just want to make that clear. Okay. So I'm looking at your balance sheet, okay, and I'm seeing a pretty dramatic increase in inventories. I think I got clocked it at 18% on a sales decline in the quarter, and this is on a sequential basis.

Speaker 6

So could maybe could you explain why those inventories are up as high as with the growth relative to the sales being down? Is that due to these program launches that you're going to undertake?

Speaker 2

Yes. So Gary, I'll take this and I'll let Dave add if he's got any additional color. Okay. We have to particularly for long lead time materials, we have to put things in the pipeline based on a customer based on our best assumption with regard to customer volumes and ramp up. And so when you have a delay in a launch, it's you've got a pipeline that's already started that's already filled or started to be filled at a certain date.

Speaker 2

So when I say to you, some of those inventories are this mismatch between what we plan from a ramp up perspective and what's actually happening. It doesn't mean that we won't use the material. It just means that there is a cost to it of it sitting on our plant floors. And so it goes back to what I said earlier. We're having to go back to customers and talk about holding costs and all those sort of things.

Speaker 2

So there are certainly opportunities for inventory optimization and supply chain optimization and that's one of the key things that John and his team will be working on. But what you're seeing here is not as much about an execution stumble as it is just delays in launches.

Speaker 6

Okay. So that gets me to my next question, John. I don't mean to be nitpicky, but when you're putting out your sales bridge here, you've got Stellantis program launches, you've got $84,000,000 for this year, dollars 125,000,000 for next year. First of all, are you at liberty to discuss the models that you're going to be launching products on? And are they hybrid or just ICE?

Speaker 2

So they're EV programs and we are at liberty and we talked about that, that these are EV programs.

Speaker 6

Okay.

Speaker 2

But we're not up to you to talk about specific program, specific platforms. But it's how you end up going from 14% EV to 18% EV in the quarter until what we talked about it being over 20% going forward in the rest of the fiscal year.

Speaker 6

Okay. So with this number that you have and I'm just trying to get a handle on, how are is this right now what Stellantis has said is going to be their take rate from you guys or is this based on what they are projecting their models to be? Because I'm getting what I'm trying to get around John is that Stellantis is having really difficult problems with inventories on their lots. And I'm just trying to get an idea of how you're sizing this number.

Speaker 2

So certainly we have to be smart about how we think about these things. And Gary, as we talked about in previous lives, we both look at what customer releases are, but also then what do we see from an IHS perspective. And so this is where the confidence waiting against it. But understand also that, we may have some other economic actions that we take depending on how the ramp up goes. So a revenue for us may not be a part to part correlation with their ramp up.

Speaker 2

So we're we watch this in detail. Remember also that we have launches that are around the world. So it's easy to get distracted in North America with regard to news on EVs. But from a penetration perspective of EVs and the more advanced hybrids actually in the rest of the world and we're spread all around the world, China and in Europe, It's a bigger percentage of sales and we're providing power products in those regions as well.

Speaker 6

Okay. Thank you. So then the other thing that I just wanted to touch on John is, I think in your opening comment, you said you've been to some of your plants worldwide. And one of the things you said there's areas of improvement. Sure.

Speaker 6

Without obviously dwelling too much detail, is the areas of improvement dealing with throughput, scrappage? What has in particular, I guess, I'm addressing what has been happening in Mexico too? And can this be rectified with your current personnel at these various plants?

Speaker 2

So let me give a shout out to the guys in Mexico. Not only I mentioned in my remarks that there are plants that are world class and I would be really proud to take a customer too. The Mexican facilities are a couple of those plants. And yes, we had fairly significant scrap and premium freight issues in fiscal 2024. Part of the progress on a year over year basis is actually the operational improvement that has happened in our Mexican facilities.

Speaker 2

It does not mean that we are done. There is a lot of productivity activities to be done there. There's a lot of improvement and Philip Farrugia and the team down there understand very clearly what challenges they have in front of them. But it's a very important portion of the company and I am absolutely confident of that leadership team and their ability to take not only the progress that they've made, the feedback that I've given them, the help that we are giving them from the outside to make those facilities in Mexico much, much better.

Speaker 6

Okay. Thank you. Wish you best of luck.

Speaker 2

Thanks, Gary. I really appreciate it.

Operator

Thank you very much. Your next question is coming from John Franzreb of Sidoti and Company. John, your line is live.

Speaker 5

Yes. Just a quick question on the guidance and this is really the tax expense line that you have $9,000,000 to $11,000,000 Is that a GAAP number compared to the some of the other adjusted numbers that you have as a non GAAP number?

Speaker 3

That would be an estimate of what the GAAP tax would be for the year.

Speaker 5

Right. Okay. All right. So we have to kind of adjust that what happened in the Q1 and make some assumptions on a go forward basis that will balance those 2 out, right? That's how we should think about it?

Speaker 3

I would think about it as we recorded the what we recorded in the Q1 to $5,000,000 and we expect that for the year, it would be about 9 to 10 I'm sorry, 9 to 11.

Speaker 5

And just another thought on as the EV program start to roll out, how should we be thinking about the contribution margin on the new EV programs relative to what you've been getting in the recent automotive side of the business?

Speaker 2

John, I actually based on some programs that I reviewed yesterday, I actually feel really good about where we are from a contribution margin standpoint. We've got a lot of execution challenges and we need to make sure that we're driving our performance appropriately. But based on what I'm seeing from the initial programs and where the financials are, I think it is at a minimum on par if not accretive from a gross margin perspective.

Speaker 5

Great, great. Thanks for taking my follow ups. I appreciate

Speaker 2

it. Thanks, John.

Operator

Thank you very much. Well, we appear to have reached the end of our question and answer session. I will now hand back over to John for any closing remarks.

Speaker 2

Yes. Thank you, operator. And I want to thank all of the people, who joined us today for your time and for your interest in Methode. As a leadership team, we're committed to, if you will, earning your trust and building the capability of this organization. And we look forward to talking to you again in the next quarter.

Speaker 2

Thanks very much.

Operator

Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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Earnings Conference Call
Methode Electronics Q1 2025
00:00 / 00:00