Methode Electronics, Inc. Stock

Greetings. Welcome to the Methode Electronics First Quarter Fiscal 2027 Results. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Joni Konstantelos, Managing Director. 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'm joined today by John 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 John.

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 onetime 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 our product 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 continue 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 1 year and made net repayments on debt of $10 million while maintaining strong liquidity. Given all of this, we're 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'll walk through some of these items in greater detail, starting with the actions we've taken over the past 2 years. Turning to Slide 4. We've 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've 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've been pleased with the opportunities we're seeing in this market. But it's 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's not a single award in a single market, but a broadening set of customers choosing Methode for our capabilities and because we're executing better than we have in the past. That's the commercial momentum we're 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've 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's building a team to drive alignment. This includes new leadership in the areas of manufacturing strategy, quality, process engineering and supply chain planning. We've 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, a 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 are 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 costs and continue 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 opening capacity -- 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 platform serving 3 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 3 sites. We continue to drive performance improvement and consolidation across our entire footprint.

In China, we will consolidate sites. We will also exit the facility in the U.K. and at least one in Germany. Turning to Slide 7. Our Power Solutions offerings are a fundamental piece of our long-term growth strategy. We are 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 center 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 bringing 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 MilAero, we're restructuring our commercial organization to better align with broader market dynamics and growth opportunities.

Our transformation is a multiyear 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. We are proud of what we've accomplished so far, and we know there is more work ahead. Before I turn the call over to Laura to review the financials, I wanted to share that we will be hosting an Investor Day on December 17 at the New York Stock Exchange. This half-day event will include presentations from our Chief Strategy Officer and our Head of Mobility and will also include product demonstrations. We will send out more information soon, but look forward to seeing you there. With that, I'll turn the call over to Laura to review our first quarter financial results in more detail.

Thank you, John, and good morning, everyone. Please turn to Slide 8. As a reminder, unless otherwise noted, all year-over-year comparisons are for the same period in the prior year. First quarter net sales were $265.4 million, up 10.4%. The increase primarily reflected higher volumes and mix in the Industrial segment, partially offset by lower sales in the Interface segment related to portfolio refinements.

First quarter gross profit increased to $47.7 million from $43.5 million. The increase was primarily driven by higher Industrial segment net sales and mix and operational improvements across both segments. This was partially offset by higher material and freight inflation as well as premium freight costs related to the moving of a portion of production from Asia to Mexico. Selling and administrative expenses were $45.9 million in the first quarter compared to $36.6 million. The increase was primarily driven by investments in talent and capabilities and higher professional fees.

Income tax expense was $4.1 million in the first quarter compared to $4.2 million. First quarter adjusted net loss was $7.7 million or $0.22 per diluted share compared to an adjusted net loss of $7.8 million or $0.22 per diluted share. First quarter adjusted EBITDA was $13.7 million compared to $15.7 million. As John mentioned earlier, the underlying profitability was offset by expenses that were onetime in nature, including a $3.8 million impact from portfolio refinements and a $2.3 million of premium freight related to the transfer of production from Asia to Mexico, along with the recovery actions where there is a lag effect before the recovery comes through.

Taken together, these expenses were a $6.7 million headwind on adjusted EBITDA. Importantly, the underlying ongoing drivers of the business, including volume, mix and operational execution, represented a positive $4.7 million impact on a net basis, reflecting genuine underlying progress. Turning to our segment results on Slide 9. First quarter Automotive segment net sales were $105.7 million, a decrease of 0.4%. Lower volumes in EMEA and Asia were mostly offset by higher sales in North America.

Automotive segment operating loss narrowed to $11.7 million, representing a 6% improvement from the prior year, reflecting lower inventory adjustments and lower scrap, partially offset by higher material cost inflation. We expect to see continued improvement, specifically related to Mexico as we transition available capacity and related fixed costs to our industrial business. The Industrial segment continued to deliver strong performance. First quarter 2027 net sales increased 27% to $156.8 million, driven by continued momentum in data center power distribution and strong demand for off-road lighting solutions. Additionally, during the quarter, we recognized $2.2 million in recoveries from commercial vehicle lighting customers.

Industrial segment operating income expanded 19% to $31.6 million, driven by higher volumes and mix, customer recoveries and operational improvements, partially offset by higher material and freight inflation, increased expedited freight expense and investments in talent and capabilities. The Interface segment net sales declined 73% to $2.9 million. Loss from operations was $800,000 compared to income from operations of $3 million. The decline primarily reflected the divestiture of the dataMate business as part of our ongoing portfolio optimization efforts as well as the planned roll-off of a major appliance program. Turning to Slide 10. We ended the quarter with $116.2 million in cash and cash equivalents compared to $139 million at the end of fiscal 2026.

Total debt was $310.5 million at the quarter end, down $14.5 million from the end of fiscal 2026, reflecting $10 million of net repayments and $4.5 million of favorable currency impact. Net debt increased from $185.4 million at the end of fiscal 2026 to $194.3 million in the first quarter due to the decrease in cash and cash equivalents. As you probably saw in our earnings release, subsequent to quarter end, we completed an amendment that extends the maturity date of certain revolving loans by 12 months to October 2028.

As part of that extension, we reduced our revolving credit facility from $400 million to $375 million at closing. Capital expenditures were $3.1 million, down from $7.1 million. Free cash flow was an outflow of $10.9 million in the quarter compared to an inflow of $18 million. The free cash outflow in the quarter was largely driven by higher working capital levels, primarily reflecting a planned inventory build to support the transition of production from Asia to Mexico. This was partially offset by customer recoveries. Turning to Slide 11. Our capital allocation framework continues to guide how we deploy capital with clear priorities, including strengthening our balance sheet, funding core operations, selectively reinvesting in high-return growth opportunities and returning capital to shareholders.

We remain focused on reducing leverage while directing capital towards the highest return opportunities across the business. Turning to fiscal 2027 guidance on Slide 12. We are affirming the fiscal 2027 guidance we provided last quarter, which continues to reflect our current market outlook, including third-party industry forecasts, customer production schedules, current U.S. tariff policies and bank forecast for currency. We continue to expect net sales in the range of $1.025 billion to $1.075 billion and adjusted EBITDA between $72 million and $82 million, representing an adjusted EBITDA margin of approximately 7% to 7.6%. We continue to expect free cash flow comparable to fiscal 2026.

All other elements of our fiscal 2027 guidance remain unchanged. This guidance reflects our expectations for data center growth, ongoing operational improvement in Mexico, improving commercial vehicle demand and further cost savings and operational improvements across the business. We've included the fiscal 2027 guidance bridge we shared last quarter in the appendix section of the slide presentation. This bridges our fiscal 2026 result to the midpoint of our fiscal 2027 guidance for both net sales and adjusted EBITDA, which we are affirming. With that, I will turn the call back to the operator for questions.

[Operator Instructions] Your first question for today is from Luke Junk with Baird.

I wanted to start on the margin progression going through the year, specifically your comment that you expect to see some improvement in auto margins as you transfer capacity and some fixed costs in the Industrial segment, general, can you just put some guardrails around the materiality there? And I would assume that's primarily a gross margin-related consideration.

Luke, thanks for the question.

Yes, Luke. So as we mentioned, we did see in Mexico 500 basis points improvement already year-over-year. We do expect that to continue as we do make more operational improvements and the production transfers to then the fixed costs there.

Would you say -- is the production transfer bigger factor there? Or just -- I'm just trying to size kind of the buckets...

The base performance improvement in Mexico, the production transfers will help, but the biggest thing is performance within the plant reduction premium freight scrap and direct labor.

And then second, just -- just would be great to get your perspective, John, on the investments in talent and capabilities in your EBITDA bridge. I know you've been reinvesting some dollars from an engineering standpoint and flowing it to the highest growth opportunities. Can we just maybe reconcile your interest in those incremental dollars and sort of the underlying support that we maybe can't see from the reallocation?

Yes. So thanks for the question, Luke. I'll give some top-level thoughts, and I'll let Laura give some additional detail. I think it's important and that part of what you're seeing is the sequential impact because we're looking at it on a quarter -- on a quarter-over-quarter basis, first quarter 2026 versus first quarter 2027 fiscal, there's a little bit of a timing impact. So here.

And if you would look at the comparison or run rate comparison of the executive teams, it's actually not a significant change. As a matter of fact, it's a reduction from the structure in the past. But as we've added talent and we have a timing impact, that's why you see this change on a year-over-year basis, although part of it is also variable comp.

Yes. And these costs reflect the leadership changes we've made over the past 12 months to strengthen our foundation and position us to capture the growth ahead. We've upgraded talent. We're building out a global organization. We're bringing in new global leadership across operations, manufacturing, strategy and supply chain.

We also need some of the ongoing external support to help us get through this transformation.

And I think, Luke, another thing to keep in mind is we've talked about rotation of investment to support data centers from some of our existing business. There's also some new talent that has to be brought in there to help us from an engineering perspective. And honestly, there is some spend as we think about it from a global planning and a global strategic activity that we're spending that from an SG&A standpoint, but it's what is allowing us to drive the performance and reduce some of the other costs and better serve our customers. So I'd rather spend it with talent that helps us drive the growth than in premium freight and scrap.

Speaking of data center in the slides, you mentioned that there was, yes, just a bit of a timing benefit in data center sales this quarter. Can you size that? Or maybe more importantly, just explain what's going on there?

Yes. There were some just pull aheads. So we're not expecting the full year to change, but we did have pull-aheads come up into Q1 from later in the year.

We're still reaffirming that -- still reaffirming the number that we gave you from a year-over-year.

At $103.

And then last question for you, John, just curious to get an update on how you're thinking about some of the pillar franchises within the company, especially some of the areas we don't discuss as much such as lighting or Hetronic and just where we are in the life cycle of this transformation journey that you're on? Are we at a stage where you're starting to think about any portfolio actions? Or just, yes, what your thinking is there right now would be helpful.

So thanks for the question, Luke. The Nordic Lights, let's talk first from a lighting standpoint. The Nordic Lights franchise and the Nordic Lights business has been pretty much underappreciated, but an extremely successful acquisition and an extremely successful business.

The team has done a great job of supporting customers around the world, and we continue to grow there, and we're seeing pretty significant growth on the scale of that business on a year-over-year basis. What we've done with regard to our creating the global structures is where actually the stuff that the customer does not see the commonality from a supply chain perspective and commonality from an engineering perspective gives us the opportunity for some of, for example, the leader in engineering who came from Nordic Lights is now the lighting leader around the world. So we're using the -- some of the Nordic Lights capabilities to help drive growth in other pieces within Methode. Grakon, as we have talked to you before, is -- has been challenged twofold, one, with regard to some past strategic decisions and then also with regard to commercial vehicle volumes, particularly in North America. We're seeing those commercial vehicle volumes start to come back.

And we've also got some initial business wins on the Grakon side. And honestly, one of the bookings that we had in the $75 million was a commercial vehicle win on the power side that actually was built upon the relationships that the Grakon team had with our commercial vehicle OEMs. So what you're seeing is the lighting business continues to grow. We continue to build synergies behind the scenes on the back office side, engineering, operations, supply chain while deepening our focus on each of our individual customers, so whether it's Nordic Lights or the Grakon brand.

And I'm really confident in where that's going and how that can continue to grow. With regard to Hetronic, it's a team that's continued to actually drive growth there. We've got some exciting new things from -- with a couple of our customers there also. So both Hetronic and the lighting -- the controls business within Hetronic and the lighting business, we don't talk about it as much, but we see growth on both sides. With regard to the portfolio, we're constantly looking at what can we do to refine the portfolio that fits with our strategic direction and also may give us some opportunities to further accelerate our balance sheet cleanup. Nothing to talk about right now, but that is how we think about it here.

Your next question is from John Franzreb with Sidoti & Company.

I guess I'd like to pick up where you just left off. You talked about the new orders being about $75 million annualized at peak and $400 million over the life duration. It sounds like a lot of that is coming from the commercial vehicle market. I'm curious about a couple of things. Does that peak run rate, is that something you'll probably hit within the next 12 to 18 months? And how much of that reflects the strong order book we've seen in CV? And you kind of just touched on some new market penetration also. I'm kind of curious if you deconstruct that?

Yes. So thanks, John. So primarily, so the $75 million is less than 1/3 is commercial vehicle. The majority of it is new business wins with new automotive customers for electrification, but more for hybridization. So we have talked in previous earnings calls about opportunities that are being presented to us by new customers who are relooking at their overall supply chain and the footprint and the -- if you will, their supplier footprint.

And that's where the majority of those booking wins come. The commercial vehicle award is for a power product, not on the EV side, but using some of our power technology for one of the commercial vehicle OEMs. So the answer is nothing that we talked about in the $75 million is just tied to additional sales. It's not about a rising tide lifting all boats. These are new awards. Now in answer to your second question with regard to when would we start to see the volumes, the majority of these launch late next fiscal year or after.

As you're well aware, in automotive or commercial vehicle programs, there is a lead time between the point when you get an award and when it starts to ramp up. It's the end of next fiscal year where we start to see that. But we're already spending engineering and working with the customers to get those programs developed at this point. So we feel really good about the commercial -- if you will, the commercial momentum we have and what this signals for growth beyond our data center growth that we talked so much about.

Got it. And on the automotive side, I'm getting some mixed messages out there. So I'm curious to hear your thoughts. Are there any changes in your production assumptions for your customer base? I guess, in your case, if we take it by geography, that would be the best way to kind of look at it for me.

Well, so as we talked about in the script, we're seeing some revenue tailwinds in North America, and that comes down to -- and because we don't -- we're not represented across the entire -- as we've said before, John, we're not a SAAR-based. You can't just calculate our progress one way or the other based on SAAR because we're not across all of the end customers.

But with our customer mix in some of our products, we're seeing some tailwinds with regard to SUVs and pickup trucks that are selling more. In EMEA and particularly Asia, are the revenues down a little bit? Yes. And particularly in China with a couple of our customers, we've got some headwinds there. So overall, automotive revenue, North America is up. China is down and EMEA has got a little bit of headwinds as well.

Okay. And one last question. You maintained the CapEx guidance, but you came out of the gate with only $3 million. suggests a big pickup in spending. Can you kind of talk us where the spending is going and the timing of it?

So we spend -- it's roughly half and half between maintenance capital and new business and new capital. And so some of that is just the timing of programs and the timing of when we are adding equipment. As we've said in the calls, we're doing a great deal of reutilizing existing capital as we're supporting transfers, whether it's with the data center transfers or some of the other things. But there will be new investments that are put in place on the plant floor in order to support growth in multiple of our end markets. And yes, we're comfortable with where we are from a CapEx forecast at this point.

Your next question for today is from Ryan Sigdahl with Craig-Hallum Capital Group.

I want to dig into the cost a little bit more. So you had $5.9 million recurring talent and capabilities. I presume that is a recurring cost going forward, but maybe help us level set if that's kind of the right assumption to continue to assume or if that needs to increase. And then I caught it right, $6.7 million of onetime costs. Is that right? Or are those kind of double counting between those buckets?

Yes. Thanks, Ryan. For the investment in the talent and capabilities, yes, we do expect that to continue this fiscal year. Going out into further years, though, we will not need as much support externally. That's included in that number. But throughout the rest of this fiscal year, we do see that continuing. As far as the onetime in nature costs, those were related to the divestiture in Q4. So we're going to continue to have that through this fiscal year, that decrease there.

And then the premium freight, that was related to the production transfer and there were execution issues with that from the Asia to Mexico, and those issues have been resolved. So we do not see that continuing going into the rest of the fiscal year, just seeing probably minimal premium freight going forward.

How much specifically was that premium freight and execution issues?

It's -- if you look at Slide 8, referenced there, it's $2.3 million.

Great. And then just those -- the talent and capabilities, I guess curious if you're willing to comment on how much of that is data centers and then give an update on the design work with your hyperscaler customers, specifically on the 800-volt architecture, where you're at, any incremental detail? Just curious if you're willing and able to share anything more at this point.

So Ryan, thanks for the question. Let's start first with when you look at investment in talent, as I said, it's not -- it's a change in talent at the senior team, but it's not a change in expense at the senior team. Where you see the additional expenses is we've added commercial leadership from a data center standpoint. We're adding additional engineering there.

We added -- we mentioned that we're adding commercial leadership in our MilAero areas. We've done some things with regard to manufacturing strategy, a global head of quality, actually improving our overall strategy team. Those are all investments, shall we say, a couple of layers down from me that really help to build a much more robust both planning and execution structure within the organization that as we've talked together, making sure that when we talk about performance for Methode that there is a level of confidence going forward, we understand what underlies it.

So that's where that investment comes in is it's investment in capabilities across the organization to make us much more sustainable quarter-over-quarter, year-over-year with regard to our performance.

Any comment from a data center specifically?

I mean from a -- are we spending more engineering on -- are we spending more money in engineering for data centers as well as outside help? Yes. Are we breaking that out specifically? We are not.

Fair enough. Automotive, it's been in decline, obviously, for program roll-offs and reasons we've talked about for many years. You mentioned some crosswinds, some headwinds in Asia and Europe, maybe some tailwinds in North America. But maybe level set kind of today, I guess, directionally, do you think that business segment from a revenue standpoint is stable and flat this year? Is it up? And then kind of what gives you that confidence, visibility from a stabilization and potentially return to growth given the new awards you announced today are kind of out 2 years from here?

Yes. So from a revenue perspective, it's why we're able to reaffirm guidance. What we see right now from a SAAR perspective and what we see right now with the equivalent of S&P in EMEA and in Asia gives us a level of confidence that what we say from a revenue perspective, we're flat.

Yes, there's some mix between the regions. The -- from a performance perspective, as we said, we expect Egypt and Malta to continue to improve on a year-over-year basis. We have 500 basis points worth of performance improvement in Mexico. We expect to see that to continue to improve. And we've got business and facility refinement broader in Europe and in Asia that will allow us to continue to drive profitability there. So the performance that we see on a year-over-year basis from an automotive and from an overall Methode standpoint isn't based on revenue tailwinds. It's really based on what we've done to take structural cost out and continue to take structural cost out. And the team around the world is absolutely focused on what do we do to drive that performance in each of the regions. So the answer to the question is we feel confident that we can continue to drive performance.

Will there be some fits and starts as we go here, and it's part of why we've had to make the investment in talent that we've made and why we will still have some external support to help us through this, but we do feel good about where the profitability profile is and how we can drive more performance.

[Operator Instructions] Your next question for today is from Gary Prestopino with Barrington.

John, I wanted to ask you on these new awards, particularly in the hybrid electric vehicle market. Are the bulk of these awards dealing with actual hybrid vehicles? Or how is it split in regard to pure EVs versus hybrids? And where are these new awards coming from? Are they domestic U.S., foreign? Are they -- or are they in Europe?

So they're all hybrid awards. Let me be clear with that. They're not EV awards. Secondly, they are to be manufactured in -- for all of these awards, they are to be manufactured in North America, so manufactured in Mexico.

Other than the commercial vehicle award that we talked about, all of those awards are with new customers to Methode. So Gary, it's directly consistent with what we've said that our footprint and our capabilities with the supply chain -- the global turbulence from a supply chain standpoint and the global turbulence from a tariff standpoint, our capabilities are creating opportunities for us. And these awards are a demonstration that those capabilities are being brought into fruition with tangible awards.

Okay. All right. And then I think this question was asked, but I don't know whether you really answered it, at least to my satisfaction. In the data center area, you're working on this 800-volt capability, right? Is that 800-volt architecture out in the market now? Or is that something that we're going to see in a year or 2?

So it is not out in the market now. And it's why, Gary, we have been very clear to say, yes, we're spending engineering on it. Yes, we are working with our partners on development activities, but none of it is in our guidance because it is not on the market, and we do not have any business awards.

So all of the growth that we talk about from a revenue perspective in fiscal 2027 is with the current architectures. We are spending money on the advanced development and the future activities with regard to 800 volt, but none of that's in our revenue forecast. And we believe that we're in a strong position with the leaders in the space. So no, nothing is out in the market, and we do believe we're well positioned there.

Yes. I guess the question I would have is when does this actually come to market?

Well, the first thing we have to -- the first thing that has to happen is the demonstration that is viable and very importantly, that it's safe. With current architectures, the voltages at the racks are safe for the people around the rack. At 800 volts with the sort of voltage and current that we're talking about, that is no longer the case.

So what we're working on and the solutions that we are working on, we talk about bringing automotive-related safety activities into the data center side is making sure that an 800-volt high current architecture can be done safely. So we have to demonstrate that first. And that's -- and we expect that later this fiscal year, we'll have proof of concept and demonstrate that, and then that should turn into customer awards.

Okay. And then are you concerned at all about some of what's going on with the data center pushback, various states are putting a moratorium on them and all that. I mean, give us your thoughts on that and what's going on in the market.

So there's an interesting in the Wall Street Journal yesterday and a couple of things right on the headlines talking about the fact that, yes, it's a little bit of a political football, but that this is the right thing for the U.S. economy.

So we watch it. We monitor it. We do believe that some of the pushback actually is -- will drive additional efficiency in the architectures. So if the 800-volt architecture will ultimately drive efficiency in the data center. And the way in which these things are done will -- there's a lag in what the world and what the press understands with regard to data centers. What we're working on is the future state. And -- but some of that pushback due to the lag is pushing innovation.

So are we watching it? We're not seeing any softness from a revenue forecast standpoint. And we do see that as we're working on advanced development, we're aligned with where those opportunities should go in the future.

We have reached the end of the question-and-answer session and today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Greetings. Welcome to the Methode Electronics Fourth Quarter and Fiscal Year 2026 Results. [Operator Instructions] Please note, this conference is being recorded. I will now like to turn the conference over to your host, Joni Konstantelos, Managing Director. You may begin.

Good morning, and welcome to Methode Electronics Fiscal 2026 Fourth Quarter and Full Year Earnings conference call. Our fiscal 2026 financial results, including a press release and presentation can be found on the Methode Investor Relations website. I'm joined today by Jon DeGaynor, President and Chief Executive Officer; and Laura Kowalchik, Chief Financial Officer.

Please turn to Slide 2 for our safe harbor statement. 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 statements to conform the statements 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'll also be discussing non-GAAP 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 Jon DeGaynor.

Thank you, Joni, and good morning, everyone. Thank you for joining us for Methode's Fourth Quarter Fiscal 2026 Earnings Call. I'd like to begin by thanking our global team for their dedication, resilience and commitment to serving our customers throughout another dynamic year.

Turning to Slide 3. Fiscal 2026 was an important year for Methode. While we continue to operate in a challenging environment, including EV program delays and cancellations, customer production volatility and commercial vehicle end market softness and ongoing supply chain and tariff-related complexities, we remain focused on the areas within our control. Our priorities were clear: improve operational execution, strengthened financial performance, simplify the portfolio, generate cash, reduce leverage and position the company for sustainable, long-term value creation.

For the full year, net sales were approximately $1 billion, down 3% from the prior year, reflecting North American auto programmable loss, commercial vehicle market softness, portfolio actions and significant customer program delays. To address and react to the customer program delays, our team negotiated approximately $45 million of customer recoveries helping offset the impact of customer-driven program changes and creating both near-term and longer-term financial benefits for the company. These recoveries also helped reimburse a portion of the significant development launch and other program costs incurred by the company over the past several years.

Despite the lower sales environment, adjusted EBITDA increased 60% to $68 million driven by stronger operational performance, customer recoveries, disciplined cost management and the benefits of actions taken across our global manufacturing footprint. We also generated approximately $16 million of free cash flow through improved working capital management and inventory reduction initiatives. While these results do not yet reflect fully the potential of method, they demonstrate meaningful progress. We expanded margins, improved cash generation, continued executing the operational and strategic actions necessary to create a more competitive and profitable company.

Turning to Slide 4. As a reminder, our transformation journey began approximately 2 years ago and is focused on improving performance, strengthening the organization and creating a platform capable of delivering sustained profitable growth. Before discussing our progress more detail, I think it is important to provide context on what the company has accomplished during that period because the headline financial results do not fully reflect the magnitude of the change that has occurred within Methode.

First, we've been operating through a massive revenue headwind. Several mature automotive programs rolled off, while anticipated EV program launches were delayed, resized or canceled by customers. As a result, expected replacement revenue did not materialize on the time line originally anticipated. Despite those headwinds, we improved profitability, generated free cash flow and strengthened our balance sheet invested in future growth opportunities and upgraded significant portions of the organization.

Second, we spent considerable time and resources addressing legacy matters, including the SEC investigation material weakness in internal control deficiencies, inefficient financial processes and gaps within the finance organization. Today, that work is largely behind us. The SEC investigation has concluded with no enforcement action. Our control environment is substantially stronger. We've rebuilt the finance team and management can increasingly focus our intention and resources on growth execution and customer engagement.

Third, we believe the market underestimates the amount of operational work completed across the business. Over the last 24 months, we rebuilt leadership teams, upgraded talent, implemented a more rigorous operating cadence, strengthened manufacturing execution, improved supply chain discipline, reduced inventory, with scrap and freight costs and increased accountability throughout our global footprint. Collectively, these actions have fundamentally improved the quality of the business.

Turning to Slide 5. We are beginning this tangible evidence that our efforts are working. Our progress can be viewed through 3 areas: our people, the strategic actions we've taken and improved operational performance. Starting with our people. We've invested heavily and build a leadership team and operating model needed for the next phase of Methode's evolution. Over the past 2 years, we substantially reshaped the organization, including changes to 8 of our 10 executive leadership positions and nearly half of the top 100 leadership roles globally. The relocation of our headquarters from Chicago to Southfield, Michigan provided an opportunity to rebuild much of our corporate organization, particularly within finance and HR.

We established a stronger team, improved financial rigor and viability and created greater accountability across the business. We also upgraded leadership across engineering, product management, sales, operations and strategy while expanding capabilities that support our growth initiatives, including data centers. At the same time, we've been transitioning from a decentralized structure to a more global aligned and collaborative operating model. This is improving coordination across regions, strengthening the accountability, reducing redundant efforts and driving more consistent execution throughout the company.

Turning to strategic actions. Our focus has been simplifying the portfolio and directing resources towards higher growth opportunities. One of the clearest examples of this redirection is our data center business. I will discuss that in more detail shortly, but we continue to see strong momentum and expected significant growth in fiscal '27. The actions we have taken with customers reflect the more disciplined commercial approach we have implemented across the organization, which has helped improve program economics and offset a portion of the external headwinds affecting the business.

From a portfolio and footprint rationalization perspective, we completed the divestiture of dataMate generating an $11 million gain and further aligning the company around our long-term growth priorities. We also sold our Harwood Heights, Illinois facility, generating approximately $5 million in cash proceeds. Operationally, we continue to make measurable progress across our manufacturing footprint. Egypt remains one of our strongest examples of what improved execution achieve through upgraded leadership, better process discipline and enhanced operational rigor the business delivered more than 700 basis points of margin improvement during fiscal 2026.

We also advanced restructuring initiatives in Malta that are expected to generate approximately $5 million of annual savings. In Mexico, our transformation efforts continue to bring us -- we have strengthened the leadership, improved execution and gained significantly better visibility into our operational challenges. Although Mexico continues to be impacted by EV program delays, customer schedule changes and under absorption we believe the cost reduction and improvement actions underway as well as the new business that is coming into our Mexico facilities, positions the business for improved performance in fiscal 2027.

There is still work to do, particularly in Mexico, but the underlying trends give us confidence that the organization is operating more effectively and is increasingly well positioned to drive sustainable margin expansion and cash generation going forward.

Turning to Slide 6. The benefits are increasingly evident in our customer relationships as well. improved service levels, better supply chain performance, reduced lead times and stronger coordination between engineering and commercial teams are helping us rebuild credibility execution. We look forward to sharing more details on business wins in new business bookings during our first quarter call.

Turning to Slide 7. On the next slide, one area where the benefits of these changes are becoming particularly visible as Power Solutions. Methode has more than 60 years of expertise designing and manufacturing complex high-performance power interconnect solutions, often using -- often pushing the limits of thermal and electromagnetic constraints to achieving demanding power density, weight and reliability requirements. Those capabilities have supported a diverse set of end markets over the years, including automotive, commercial vehicles, aerospace, defense, data center and other industrial applications.

Our technology has not changed. What has changed is our ability to leverage the expertise across the company and end markets. When run as a collection of independent businesses, method was unable to capitalize fully on engineering, manufacturing and commercial synergies. As we have become a more integrated organization, we are increasingly able to creatively apply our common technologies, manufacturing capabilities and customer relationships to deliver unique solutions across multiple end markets. This is particularly important given Methode's investments to support vehicle electrification.

The engineering expertise developed around advanced power distribution and -- bold architectures, combined with available capacity within portions of our manufacturing footprint creates opportunities well beyond traditional automotive applications. The progress we are making reflects not only our technology and manufacturing capabilities, but also the leadership team we have assembled to identify opportunities across end markets and execute on our integrated strategy. These leaders are helping break down historical silos, align resources across businesses and position the company to generate greater returns from investments made over the past several years.

Data centers are emblematic of our change and focus. We have supplied bus bars into data center applications for more than 30 years, including early participation in the open compute project. However, without continued focus and investment, Methode lapsed into a role as a second source, build to print manufacturer. Today, we are engaging directly with hyperscale customers to address their needs for shortened lead times and supply chain stability. Simultaneously, we are bringing creative solutions to them to address AI-driven demand for power density and helping to enable a more efficient future based on automotive grade, safe deployment of 800-volt DC rack architectures.

During fiscal 2026, we generated approximately $80 million of data center-related sales. Based on current visibility, we expect that figure to increase approximately 60% to $130 million in fiscal 2027 with continued growth anticipated beyond that. More broadly, we are directing capital, talent and engineering resources toward markets where we can leverage existing capabilities, deploy our technologies across multiple end markets and create differentiated value for our customers.

As we look ahead to fiscal 2027, we are shifting our focus in this transformation journey from fix it to growth. The operational challenges that demanded so much of our attention in recent years are largely behind us. Today, energy is increasingly directed toward winning new business, investing in strategic growth opportunities and building on the stronger foundation we've established.

With that, I'll turn the call over to Laura to review our fourth quarter and fiscal 2026 results, balance sheet and fiscal 2027 outlook.

Thank you, John, and good morning, everyone. Please turn to Slide 8. I Unless always noted, all year-over-year comparisons are to the prior year period. As a reminder, fiscal '26 consisted of 52 weeks compared to 53 weeks in fiscal '25. Fourth quarter net sales increased 15.9% to $298.1 million. The increase was primarily driven by customer recoveries in the Automotive segment, strength in the industrial segment and favorable foreign exchange, partially offset by the Interface segment program roll-offs and the divestiture of the dataMate business.

Fiscal '26 net sales decreased 2.8% to approximately $1 billion. The decline was driven by program roll-offs in both the Automotive segment and Energy segment and the impact of 1 less week in the fiscal year. These factors were partially offset by customer recoveries in the Automotive segment, strength in the Industrial segment and favorable foreign exchange.

Fourth quarter gross profit increased $72.2 million from $19.6 million, driven by customer recoveries and improved operating performance across our automotive and industrial businesses. For the full year, gross profit increased to $202.2 million from $163.4 million, reflecting stronger operational execution and manufacturing efficiencies.

Selling and administrative expenses were $55.6 million in the fourth quarter compared to $37.4 million. The increase is primarily driven by higher employee compensation costs $2 million of transaction-related and strategic initiative costs and $1 million impairment charge related to the exit of our former corporate office.

For fiscal '26 Selling and administrative expenses were $170.3 million compared to $163.9 million. The increase was driven primarily by foreign currency translation higher employee compensation costs and restructuring charges, partially offset by lower professional fees.

Income tax expense was $12.3 million in the fourth quarter compared to a tax benefit of $2.1 million. For fiscal '26, income tax expense was $25 million compared to $12.5 million. The year-over-year increase for both periods was primarily driven by approximately $4.8 million of additional tax expense related to nondeductible items and $3.4 million of higher foreign taxes. The comparison was also impacted by a nonrecurring tax benefit of $3.9 million recognized in the fourth quarter of fiscal '25 related to expiration of certain statutes of limitations.

Turning to profitability. Fourth quarter adjusted EBITDA was $26.9 million compared to an adjusted EBITDA loss of $7.1 million. For fiscal '26, adjusted EBITDA increased 60% to $68.2 million. The improvement reflects stronger operational execution across the business, customer recoveries disciplined cost management and favorable foreign exchange. As John mentioned, we negotiated approximately $45 million of customer recoveries resolving claims associated with EV program delays and cancellations. Approximately $23 million was recognized as revenue in fiscal '26 and contributed approximately $19 million to earnings. For this portion of the recovery, we expect cash payments of $7 million per year in fiscal '27 through '29.

We expect to realize the remaining $25 million of customer recoveries through future production volumes and tooling-related reimbursements. Fourth quarter adjusted net loss was $10.4 million or $0.30 per diluted share compared to an adjusted net loss of $27.4 million or $0.77 per diluted share. For fiscal '26, adjusted net loss was $37.5 million or $1.07 per diluted share compared to adjusted net loss of $39.7 million or $1.12 per diluted share.

Turning to our segment results on Slide 9. I'll focus primarily on fiscal '26 performance as we believe the full year results best reflect the progress we've made across the business. Fiscal '26 Automotive segment net sales were $467.7 million, down 8.1% compared to the prior year. This decrease was primarily driven by the impact of program roll-offs and EV program delays in North America, partially offset by customary recovery agreements and $18 million of favorable foreign exchange.

Despite these headwinds, automotive operating loss improved by $18 million to $30.1 million, reflecting the benefits of customer recovery agreements, operational improvements and greater commercial discipline across the segment. While North American automotive continues to be impacted by under absorption and customer skill volatility we are increasingly leveraging engineering, manufacturing and commercial capabilities across the company, enabling us to utilize available capacity in Mexico to support new business wins across a broader range of end markets.

Many of these opportunities carry more attractive margin profiles in the programs they replace while improving fixed cost absorption and further diversifying the business. We believe these actions position both the segment and the company for improvement.

The Industrial segment continued to deliver strong performance with fiscal '26 net sales increasing 8% to $524.3 million, and operating income growing 27% to $114.6 million. Approximately half of the sales increase was attributable to favorable foreign exchange. Results were driven by continued momentum in data center power distribution and strong demand for off-road lighting solutions, partially offset by softness in commercial vehicle markets. Our industrial business is a strong example of the benefits of the more integrated operating model John discussed earlier.

By leveraging common engineering expertise, manufacturing capabilities and customer relationships across the organization, we are increasingly able to deploy our power distribution technologies into attractive growth markets such as data centers. This not only supports growth, but also allows us to better leverage our existing manufacturing footprint and demonstrate the value of investments we have made across the business over the last several years.

The Interface segment net sales declined 47% to $27.2 million, while operating income decreased 51% to $5 million. The decline primarily reflected the planned roll-off of a major appliance program and the divestiture of the dataMate business as part of our ongoing portfolio optimization efforts. Overall, the segment results demonstrate the benefits of the operational and strategic actions we have taken over the past 2 years. While sales continue to be impacted by external market factors, we are delivering improved profitability through stronger execution, disciplined cost management and a more focused portfolio.

Turning to Slide 10. We generated free cash flow of $15.6 million in fiscal '26 compared to an outflow of $15.2 million in the prior year, driven by stronger operating performance and disciplined working capital management. Capital expenditures were $22 million, down 46% year-over-year. We ended the year with approximately $140 million of cash and net debt of $185 million, a 13% reduction from fiscal '25.

Turning to Slide 11. Our fiscal '26 results reflect continued progress in cash generation, balance sheet strength and capital allocation discipline. We remain focused on reducing leverage while investing the highest return opportunities across the business.

Turning to fiscal '27 guidance on Slide 12. Based on our current market outlook, including third-party industry forecasts, customer production schedules, current U.S. tariff policies and bank forecast for currency, we expect fiscal '27 net sales to be in the range of $1.025 billion to $1.075 billion and adjusted EBITDA to be between $72 million and $82 million, representing an adjusted EBITDA margin of approximately 7% to 7.6%. We expect capital expenditures of $25 million to $30 million and free cash flow to be comparable to fiscal '26.

We expect interest expense of $20 million to $22 million; income tax expense of $24 million to $26 million and depreciation and amortization expense of $58 million to $62 million.

Turning to Slide 13. The charts provide a bridge from our fiscal '26 results to the midpoint of our fiscal '27 outlook for both net sales and adjusted EBITDA. We expect fiscal '27 net sales to grow approximately 3% compared to fiscal '26. Excluding the impact of portfolio refinement activity, including the major program -- appliance program roll-offs and the dataMate divestiture as well as customer recoveries in fiscal '26. Net sales are expected to grow approximately 8% year-over-year. That growth is expected to be driven by approximately $50 million of incremental sales from data center applications, improving commercial vehicle demand and the net benefit of volume and mix across the portfolio.

We expect sales associated with our data center programs to ramp throughout the year. Adjusted EBITDA is expected to grow 13% compared to fiscal '26 excluding the impact of fiscal '26 portfolio refinement activity and customer recoveries, we expect adjusted EBITDA to grow approximately 82% year-over-year. This improvement is expected to be driven by continued growth in our data center power distribution business, improving demand in commercial vehicles and favorable volume and mix across the portfolio.

In addition, we expect to realize further operational improvements from the actions we have taken across the business, including improved performance in Mexico, benefits from our restructuring initiatives in Europe and continued execution of our cost reduction programs. Together, these actions are expected to drive meaningful margin expansion and earnings growth in fiscal '27. For modeling purposes, as you think about the cadence of the year, we expect a lighter first quarter driven by typical seasonality. From there, we expect sales and earnings to ramp throughout the year, resulting in a stronger second half of fiscal '27 as volume growth and operational improvements continue to build.

In summary, fiscal '26 marked an important year of progress. We improved profitability, positive free cash flow, strengthen the balance sheet and continue to enhance operational performance across the business. As we look ahead to fiscal '27, our focus remains on executing our growth initiatives, expanding margins, generating cash and further reducing leverage. We believe the actions taken over the last 2 years have created a stronger foundation for sustainable value creation.

With that, I will turn the call back to the operator for questions.

[Operator Instructions] Your first question for today is from Gary Prestopino with Barrington.

Congratulations, John and Laura on what you've done with the company so far. A couple of questions here. First of all, in the data center business, can you just remind me what you're actually selling into that business? I believe it's busbars, right?

Gary, as we've talked about both the results of fiscal 2026 and the guide for fiscal '27 are based on our current busbar business into the hyperscaler. When we reference the future technology in the 800-volt architecture, none of that is in our guide. That is opportunity that we're working on, and we're really excited about. But none of that's in the revenue guide for '27.

Okay. So right now, just old bus bars, which is good?

Correct.

And then the other thing, could you maybe just -- as we talk about these recoveries. These recoveries were from the automotive programs that you guys taken on over the last couple of years, correct?

Yes.

Okay. So were these agreements from the -- due to the old management team? Or are these agreements that you guys had put in place and then the market just really turned against you in a sense of that the volumes that you anticipated were not there?

Yes. So Gary, if you go back to some of the bridges that we provided in the past with regard to program ramp-ups, these programs were 1 years ago. And as recently as 1.5 years ago, when we went through the revenue plan as we laid it out in earnings calls, we talked about an opportunity of a couple of hundred million dollars worth of revenue between a couple of these EV program ramp-ups. So when we talk about under absorption and some of the challenges that we mentioned during this call that goes back to things that we anticipated happening and where we had spent the engineering and where we had spent the capital, and we had done all the work in our facilities, particularly in our Mexico facility to be ready for those ramp-ups.

With the changes in the dynamics in the North American EV market that required us to go back to customers. So those were programs that were won years ago, that was revenue that was anticipated. And then over the last months we've been negotiating with the customers to get these recoveries, and it is a team effort to get to the results that we made.

Okay. So -- do you feel that for -- I guess we didn't really talk too much about the automotive, but it seems like the automotive is not going to be really driving too much growth this year. Is this program of going back and getting recoveries? Is that over? Or is that something that we can still anticipate is going to be an impact in fiscal '27 in terms of the auto programs and the expenses, et cetera, things like that. .

So we will see automotive growth on a year-over-year basis. As we've said previously, Gary, we had tremendous headwinds in fiscal '20 and fiscal '26. The recovery activity is largely done. There are a couple of customers that we continue to talk to, but those programs are much smaller and the recovery activities are much smaller. We see growth on a year-over-year basis, particularly in North America from an automotive side, but not to the level of materiality that we envision with regard to some of the other pieces of our business.

So also, Gary, of the $45 million of the customer recoveries that we have already negotiated. We said that $19 million is impacting our earnings in FY '26. We expect to recover the remaining $25 million over time, and that's through future pricing of customer production and tooling recoveries that we collect once our programs go into production. So we expect that to come in the next 3 to 4 years.

Okay. Yes, that's what I thought I heard you say.

Your next question for today is from John Franzreb with Sidoti & Company.

Congratulations everybody. I guess, go back to the recoveries. I'm sorry, $19 million in 2026. How much was in the fourth quarter? And if I heard you correctly, this is revenue being recognized with no associated COGS, I'm guessing. Is that how it's dropping right down into the P&L? .

John, there was 22 -- all of the $22 million of sales was recognized in the fourth quarter. And there is a little amount of COGS. So there's $19 million flowing through down to the earnings to the bottom line.

All right. Got it, Laura. I was wondering why the gross margin jumped up. That was one of my original questions. So can you just maybe walk us through a little bit on the -- what's going on in the tax line? That's for the full year, it's been held over the [indiscernible]. So just maybe just kind of recap and how should we think about modeling that on an adjusted basis going forward? .

Yes. So as I mentioned, we had $12 million in FY '25 and $25 million of tax expense in FY '26. This is primarily due to nonrecoverability of nondeductible assets, so higher tax expense of nondeductible amounts as well as additional foreign tax expense. And then there is a onetime benefit in FY '25. So that is nonrecurring going forward. However, our guidance does have us in the tax expense range that we were in this year. So you can model it appropriately.

Got it. Got it. And now on a go-forward basis, I think I brought this up last conference call, but the commercial vehicle market order book through May is up 112%. I'm curious if, firstly, your order book is similar to that kind of year-over-year growth. And secondly, can you remind us how much in revenue commercial vehicles were in fiscal 2026? .

So John, we base our guidance based on program programs tied to IHS or third-party forecast. So as you see order books going up, that is in our guidance, and it does move that way. The split with regard to commercial vehicle revenue. Give me just a second and I'll -- it's 10% of the total in fiscal 2026.

Got it. And I recall from [ USMCA ], that was a higher contribution margin business than the overall portfolio. .

I'm sorry, that sorry, John say that one more time?

In years past, that was a good contribution margin business. Is that the case?

Yes, it still is the case. And we continue to refine that portfolio and actually grow that business with our customers. And as we've talked about in previous situations, they're looking to shorten their supply chains and strengthen their USMCA presence. And so we are actually moving business between regions to support our customers, and we expect that to be additional create additional opportunities for growth for us.

Just one last question related to this, and I'll get back into queue. From what I recall that this -- some of these products are made in Mexico. So would this be part of the revenue recoveries that helps the Mexico facility. I don't know does it actually move into profitability in fiscal '27?

So the commercial vehicle business has historically not been made in Mexico. There's been a small percentage -- we are actually moving business into our Mexico facility. So John, you're exactly right. The capability that we have within our Mexico facilities it's not just an automotive facility. It is supporting other end markets. It's supporting our data center localization that's supporting our commercial vehicle localization. And yes, you will see that from a gross from a year-over-year standpoint in the Mexico facility activities. Part of it will be a commercial vehicle.

[Operator Instructions] Your next question is from Luke Junk with Baird.

Hoping we could start with auto. I guess if you back out the EV recovery this quarter, margins still mix there. I know that's Mexico mainly in fiscal '26 if you look kind of an underlying basis was relatively similar year-over-year. A lot going under this -- going on under the surface, including the improvement that you set in Egypt, but just hoping you can comment on some of the key actions incrementally into fiscal '27 here to get that business moving back towards breakeven?

Yes. Thanks for your question, Luke. And you're right. And certainly, the customer recoveries do make that -- do change that picture. But what you see is -- on a year-over-year basis, in our guide, operating performance is worth $15 million. The recoveries were $19 million. And then we see volume and mix as a negative on the automotive side of $18 million. So we're driving performance both in Egypt and in Mexico from an operational perspective. .

When you look at -- if you were to look at a historic revenue outlook, that North American automotive business a couple of years back was well north of $300 million in revenue and in fiscal '26, it went as low as $182 million. We see that coming back to close to $200 million in fiscal 2027 and continuing to grow. So -- the way in which we look at this is the automotive business overall, which is 46% of our total is good business. The under-absorption and the challenge that we've had in North America, particularly with regard to these EV program delays is why it was so important for us to get the recoveries from the customers as we did and as we told you we would.

And why we also need to continue to drive performance in our drive cost reduction and drive performance in our plants in Mexico that then become a foundation that allow us to transfer business in for the commercial vehicle business that we talked about to become a USMCA footprint for data centers that we've talked about and also as a USMCA footprint for us to win new business that we have talked a bit about, and I will talk much more on our Q1 call.

That is helpful. I want to switch gears to the data center opportunity and the guidance specifically. I just want to understand some of the girdings to give you the line of sight to that 60% growth in terms of -- it sounds like you've got the orders in hand, Curious if there's any new program ramps in that? And then just in terms of the constitution of the business here in fiscal '27, how many customers you're actually working with right now?

So the business, as we've talked about it is and as we've committed to our shareholders is that as we talk about guidance, it would be based on customer EDI and that was part of the change within the organization, part of the change to go to vendor managed inventory and deepen those relationships. We move from being a spot buy relationship to a 52-week EDI relationship. So we're quite confident with regard to the $130 million versus the $80 million. It is 2 new programs. And so there's -- there are program changes throughout that. And these programs move in an 18- to 24-month cycle.

So the shortening the lead time, improving our engineering capabilities and being able to respond to those cycles means that we get to capture a larger percentage of market share and wallet share than we did in the past versus the spot buy approach. So yes, it is launches. Yes, it is new programs. It is -- at this point, what's in our guide is the current customer base. We are talking to additional customers. We expect to see that expand. But what is in our guide is our current base with the launches that we know right now and the EDI that we have from the customers.

That's helpful. And just to clarify, I think historically, when this was not an area that was in focus, it was mainly a single customer relationship. Are you talking multiple programs with one customer? Or is it multiple programs and more than one customer at this point? .

It's multiple programs and multiple customers.

Your next question for today is a follow-up question from John Franzreb.

Yes. Just a quick question on the bridge. The portfolio refinement portion of it, is that just the businesses that you've sold and exited, or is there something else built in there for exiting maybe unprofitable product lines.

Yes. John, that is the dataMate business that we sold that we divested as well as the appliance program roll off in our Interface segment.

Got it. So where are you in the strategic review of the product line profitability process, especially considering all the new people that you brought in, I would imagine that would be something of a priority. .

John, it is still a priority, and we're looking across all of our businesses. What we're trying to do is make sure not just from a product line profitability but also from a really return on effort side that we are putting resources against the places that can drive the greatest growth. And you will not be surprised that we will continue to make adjustments over the forthcoming quarters. We don't have anything to announce right now. and our current portfolio is what's in our guide. But yes, we will continue to work on that. And that leads to everything to -- from customer negotiations as we look at unprofitable program, also us deciding on certain product lines or segments that we will expand or that we won't continue with.

Got it. And John, maybe you could just update us on what is the plan for the Interface segment on a go-forward basis?

Really that interface business becomes a smaller piece of the company overall. It's de minimis, in fiscal '20 it's less than $5 million than fiscal '27. And we don't see it as a place where when we talk about return on effort, that it is something that we could get to growth. So while it was historically a good business and profitable and we appreciate those customers, it's not a place where we're going to be focusing our time because we have so many opportunities as we grow the commercial vehicle business as we grow the off-highway lighting business as we grow our user interface, both for off-highway and automotive.

And as we've talked so much about as we grow our data center business and the next technologies there, we have more opportunities than we have capability to pursue. So we have to be refined with regard to how we put our capital to work and how we put our engineering and our talent to work. And we're adjusting and we're moving resources to support those highest growth long-term opportunities.

Got it. Got it. And just one last question. You highlighted in the prepared remarks, debt reduction 26% versus 25%, and you said managing the balance sheet would also be a priority in 2027. Could we expect continued debt reduction in 2027?

Yes. That's definitely a focus of our capital allocation.

Great. Congratulations again.

Thank you.

Thanks again, John.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to the Methode Electronics Third Quarter Fiscal 2026 Results Conference Call. And please note, this conference is being recorded. I will now turn the conference over to your host, Joni Konstantelos, Managing Director of Riveron. Ma'am, the floor is yours.

Good morning, and welcome to Methode Electronics Fiscal 2026 Third Quarter Earnings Conference Call. Our fiscal 2026 third quarter financial results, including a press release and presentation can be found on the Methode Investor Relations website. I'm joined today by John DeGaynor, President and Chief Executive Officer; and Laura Kawaltick, 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 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 SEC, such as the 10-K and 10-Q. Please turn to Slide 3, and I will now turn the call over to John DeGayner.

Thanks, Jonny, and good morning. Welcome to Methode's Third Quarter 2026 Earnings Call. I want to begin by recognizing our global team for their continued focus on serving our customers in the face of a challenging and rapidly evolving environment while driving forward our multiyear transformation journey. Across our manufacturing sites and corporate functions, our teams have demonstrated resilience as we work through industry headwinds and advance our transformation initiatives. Your discipline, collaboration and commitment to continuous improvement are strengthening our foundation and positioning us for better long-term performance. Thank you.

Moving to our third quarter results. We generated $234 million in sales and $7.3 million in adjusted EBITDA. While profitability was pressured year-over-year, we delivered positive free cash flow of $10 million in the quarter and approximately $17 million in year-to-date cash flow as we remain on track to achieve our fiscal '26 free cash flow targets. Importantly, our Industrial segment sales increased 9.5% year-over-year, reflecting continued strength in off-road lighting and power distribution solutions supporting data center applications. That performance demonstrates the benefit of our growing exposure to higher-growth industrial power markets and helps offset some of the headwinds we are seeing in North American automotive and in commercial vehicle lighting.

Generating cash while navigating a volatile revenue environment is a clear reflection of the operational discipline we are building into this organization. Please turn to Slide 4. Our transformation journey continues. As I've said before, progress will not be linear and is not something that could be measured in a single quarter or even a few quarters. Our transformation is a multiyear effort focused on strengthening the foundation of the company, utilizing our resources as efficiently as possible and finding new sources of value. Along the way, we must refine our portfolio, align our business structure, optimize our footprint and embed operational discipline into everything we do.

At the same time, there are factors outside of our near-term control, commercial vehicle market softness, EV program delays and macro volatility, particularly in North American automotive that will impact our improvement trajectory. We are addressing those realities directly with our teams and with our customers, but we are not allowing them to distract us from executing our priorities. Let me briefly recap these priorities. First, stabilize and improve our operational execution. When we started this journey, we had 2 facilities that were extremely challenged, Egypt and Mexico. We continue to see positive trends in Egypt as a result of the changes we have made there. The transformation of our Mexico facility is not as far along. We're making progress in upgrading the team and improving execution on both existing programs and new programs.

However, we have not seen the productivity improvements as quickly as we initially expected, which has been exacerbated by commercial vehicle volume reductions and program delays from multiple North American customers. These external factors were the primary driver of our EBITDA guidance revision that Laura will talk about later in the call. We've built an entirely new leadership team in Mexico, and we are supplementing that team with both corporate and specialist external resources.

Our new leadership team is getting fully up to speed and working hard to tackle the challenges in our 2 Mexico facilities, understanding root causes, driving accountability and resetting expectations. Naturally, when you're transforming an operation, there's a cleanup involved. You have to surface issues before you can permanently fix them. This is part of the process. It is not comfortable, but it is necessary. We are taking focused actions to improve execution, efficiency and cost control, and we expect performance to strengthen as those actions take hold. Second, we are refining and simplifying the portfolio. A clear example is the completed sale of the Dataamate business, which I'll talk about more in a minute. Third, align our cost structure and footprint.

We completed the move of our headquarters from Chicago and sublease that facility. We've signed a purchase agreement on our Howard Heights facility in Illinois, a facility that formally housed our Dataamate business. So we are making good progress in reducing our overall footprint. And fourth, position the company to capitalize on secular growth opportunities, particularly in Power Solutions. We are actively capitalizing on the data center and vehicle electrification megatrends, reallocating resources toward the areas where the strongest long-term return potential. These are deliberate, measurable actions, and we are doing what we said we would do. These are not concepts, they are actions.

Turning to Slide 5. For background, Datamate is a supplier of copper transceivers for enterprise and telecom networks. While it was a solid business, it was not aligned with our long-term power solutions strategy. Divesting it allows us to redeploy capital and management toward higher growth, higher return opportunities, particularly in our Industrial Power Solutions business. We are concentrating our capital management -- capital and management attention and engineering resources on the areas that can generate the greatest long-term returns. The proceeds from this sale and the Harvard Heights facility sale will be used primarily to repay debt and further strengthen our balance sheet, consistent with our disciplined capital allocation approach.

Turning to Slide 6. Power Solutions has been part of the Methode DNA for more than 60 years. We are now leveraging that deep expertise to serve today's most demanding applications across EV, industrial and data center markets. We're expanding our customer base. We are adding experienced industry veterans into the industrial power business, and we are rotating engineering and commercial resources toward higher growth opportunities. This is not a short-term pivot. It is a structural reallocation of talent and capital, and we expect this to pay dividends over time, but we are still early in this journey.

Let me spend a minute on data centers. Based on Q4 order patterns, we now have line of sight toward $120 million annualized run rate. This represents a significant increase in run rate year-over-year. Importantly, this run rate reflects current end customers through various contract manufacturers. It does not assume incremental wins from new accounts. Our actions regarding additional commercial and engineering resources and our investment in items like vendor-managed inventory are enabling us to react much more quickly to customers.

We are seeing increasing momentum as a result of these actions. We are expanding our customer base, but our current run rate is supported solely by existing relationships. As momentum builds, the trajectory suggests a 50% increase in run rate year-over-year in the near term. This is a meaningful growth driver for Methode both for today and the future. Turning to Slide 7. Transformation is not linear. There will be turbulence, particularly in North American automotive, and we are seeing that today. But we are building a stronger operational foundation underneath the business. At the same time, we are executing every day. We're shipping product. We're supporting launches, and we are managing working capital. This dual focus of transformation while operating is critical. -- transformation does not happen in isolation.

We remain encouraged by opportunities in our Industrial segment, especially in power distribution solutions supporting data center infrastructure. Those align directly with our core competencies while there is more work ahead, we are making measurable progress, strengthening execution, simplifying the organization, improving the balance sheet and positioning method for performance over time.

I'll now turn it over to Laura to go through the financials.

Thanks, John. And turning to Slide 8. Third quarter net sales were $233.7 million compared to $239.9 million in fiscal 2025, a decrease of 3%. 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. Results were partially offset by a higher sales volumes in the Industrial segment, particularly for off-road lighting and power products as well as positive foreign currency translation which had a favorable impact of approximately $12 million in the quarter.

As a reminder, the third quarter is also historically our weakest quarter for sales as it covers the year-end holidays. Gross profit was $38.8 million, down from $41.3 million in the prior fiscal year quarter, primarily a result of lower sales volume and product mix in the Automotive segment and interface cement. Selling and administrative expenses increased by $1.4 million to $39.1 million in the quarter.

Restructuring and asset impairment charges included within selling and administrative expenses were $400,000. Income tax expense for the quarter was $2.8 million, down from $6.2 million in the prior fiscal year quarter. In the quarter, we realized a lower valuation allowance for U.S. deferred tax assets of $2.4 million compared to $6.5 million in the prior fiscal year quarter. Third quarter adjusted EBITDA was $7.3 million, down $5 million from the same period last fiscal year. Third quarter adjusted net loss was $13.1 million a $5.9 million change from the third quarter of fiscal 2025 attributable to the decrease in gross profit and increase in selling and administrative expenses, partially offset by a lower income tax expense.

Third quarter adjusted loss per diluted share was $0.37 compared to a loss of $0.21 in the prior fiscal year third quarter. Please turn to Slide 9, where I will discuss the progress made with our disciplined capital allocation strategy. We ended the quarter with $133.7 million in cash, which was up $30.1 million compared to the end of fiscal 2025. Operating cash generation in the third quarter was $15.4 million. Third quarter free cash flow was $10.1 million compared to $19.6 million in the fiscal third quarter 2025.

Although down year-over-year, we continue to generate robust free cash flow amidst a challenging operating environment with a free cash flow of $16.5 million year-to-date as we continue to operate with strong capital discipline. Net debt was down $16.9 million compared to the same period last year. Moving forward, 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.

Turning to Slide 10. Again, please note that fiscal 2025 was a 53-week fiscal year in fiscal 2026 is a 52-week fiscal year. Our guidance also does not reflect the sale of Data Mate or our Howard Hites, Illinois facility. For fiscal 2026, we have narrowed our net sales guidance, raising the low end of the range by $50 million to now be $950 million to $1 billion. The increase primarily reflects the benefit of foreign currency translation, which totaled approximately $25 million through the first 9 months of fiscal 2026. For the full year, we anticipate foreign exchange to provide an approximate $30 million benefit relative to our prior assumptions, which is largely driving the increase in our midpoint.

In addition, we have lowered our adjusted EBITDA outlook to be in the range of $58 million to $62 million compared to our prior range of $70 million to $80 million. The reduction is primarily concentrated in North American auto and reflects updated cost assumptions related to multiple customer program delays and higher expenses associated with the transformation of our Mexico facility, including wages and professional fees. For fiscal year 2026, we continue to expect positive free cash flow in the fourth quarter and for the full year compared to an outflow of $15 million in the previous fiscal year.

With that, I will hand it back to Jon for closing remarks.

Thanks, Laura. To close, while the near-term environment remains dynamic and our improvement trajectory is not linear, we are taking deliberate actions to strengthen the company. We are stabilizing operations, refining the portfolio, aligning our footprint and cost structure and reallocating resources towards higher-growth power solutions opportunities. There is more work ahead, particularly in Mexico and within North American automotive. But the foundation we are building is real. At the same time, we are maintaining a sharp focus on cash generation and balance sheet discipline. We believe the actions we are taking today position method for improved performance and more consistent value creation over the long term.

With that, operator, please open the line for questions.

[Operator Instructions] Our first question is coming from John Franzreb with Sidoti & Company.

I would like to start with Mexico. Can you just kind of review what's going on there? And how far along are you on the process and maybe time line when you think it will be completed. .

Yes. So John, a couple of things. Thanks for your question, and Laura will chime in here as well. As we said on previous calls, the transformation in Mexico is probably about 6 months behind where we are with Egypt. And we are making progress there. But one of the challenges that we have is in Egypt, we have year-over-year revenue growth on top of performance improvement whereas in Mexico, we have continued -- we have year-over-year revenue shrinkage. Most of the roll off of our past programs is in Mexico and the primary impact of program delays is also in Mexico.

So the -- what we're spending to prepare and launch new programs as well as the transformation there isn't getting any benefit from tailwinds of increased revenue. We're seeing -- we're spending the money to get the launches ready and we're seeing the delays. The team has been completely rebuilt over the last 6 months, and I'm really pleased with the progress that we're making on our day-to-day execution. But we're 6 months behind where we were with regard to Egypt.

Yes. And as Jon mentioned, the decrease year-over-year in revenue, which results in the bottom line decreases as well as under absorption. We have some additional S&A expenses related to changing out the management team and wages as well as additional resources that we brought in to help with the operational performance. But despite this, we are seeing improvements in scrap and direct material costs as a percent of sales through our supply chain initiatives.

Now we had 3 great months of commercial truck orders. I'm curious, have you seen that flow through your P&L yet or any purchasing orders or anything? And also, does that impact the Mexico facility at all? Can you just maybe talk to that?

So John, it does impact the Mexico facility and it's the impact of -- we're actually still seeing it as a headwind with regard to orders. Both what we've seen from DTA and PACCAR in is more of second half of calendar '26 as to where the volumes start to come back. And what we're seeing the impact, and we talk a little bit about it, is the trade-off between commercial vehicle volumes in our in lighting and some of the North American automotive programs. So we have a mix impact as well as volume impact. We do see some future growth later in this quarter and probably more into early of our fiscal 2027, but we aren't yet seeing it.

And one last question on Data made. How much in revenue or annualized revenue did that business contribute? And was it profitable? Or maybe you can give us maybe the scale profitability? .

So it's roughly $18 million worth of revenue. It was profitable. But what I can say is in roughly $3 million worth of profitability. But what we can say, John, is the ability to pay down debt, the ability to exit an underutilized facility and to continue just our overall rationalization of structural cost, we believe we can largely offset that profitability. So we think overall, it's an accretive decision.

Our next question is coming from Luke Junk with Baird.

I'll jump off there. Jon, can you just remind us of some of the key products and applications for that data made business? And I guess 1 of the obvious questions strategically is just why it wasn't too complementary with the core power business in data center? .

So this is more of a data over copper. -- system. It's a small electronic data over copper product. It's not complementary with our data center activity whatsoever. And really, the judgment for this look was it's a good business. But as you think about the opportunities that we have, and you and I have talked many times about return on effort, what it would take to make that grow materially because it's been relatively flat in the $15 million to $18 million for revenue for a long period of time. As we looked at it, it was a good business -- it is a good business. But in order for us to make it grow versus putting more effort into our base data center business or some of the other areas where we can drive growth and really return for the shareholders, our decision was that probably is a better open for the business than method.

Sticking with data center, if I look at the chart that you guys provided, which is helpful. Just trying to extrapolate the data center piece in fiscal '26 specifically. It seems like it's trending fairly flat this year. Now I understand some of the reasons for that. I know you were implementing the VMI. There's some other things going on in the hood there. But just trying to understand, certainly, there's been a lot of CapEx growth this year. Should we perceive that there's been effectively like a little bit of a growth bubble because I'm just trying to get comfortable then stepping into, I think you said in the $120 million run rate on a go-forward basis given the clarification.

So look, -- what we've said to you is -- and said to the investors is that as we move to an EDI-based sales forecast versus just a, if you will, a contract-by-contract sales forecast that we would give you transparency as soon as we knew it. This run rate that we're talking about is that transparency. This is backed with EDI. So you're right that on a total year basis, it looks like it's relatively flat. Part of that was due to some of the sales gap that we had moving from where we recognize the sale when the parts leave the boat in Shanghai to moving to vendor-managed inventory, which created a 6- to 8-week revenue gap.

So -- the most important thing here is a flat -- relatively flat year-over-year, but Q4 run rate of $120 million with EDI that gives us great confidence in what we see on year-over-year growth and what we see into the future. The other aspect is I think you made a comment about CapEx growth. We have not had significant CapEx growth. It's actually down year-over-year. And there's been no material CapEx that's been invested for the data center business whatsoever. As a matter of fact, we're using some core competencies and some capabilities from other investments as we rotate into Mexico. So we have really use our capabilities. We rotated with this VMI and it is creating the momentum that we said it would and the $120 million run rate reinforces that.

Yes. Our CapEx, just to jump in here. Our CapEx was $42 million for FY '25, and we're at 16.5% right under 17% approximately this year.

Yes. That $120 million, you also mentioned, Jon, that you have a line of sight to 50% kind of growth in the medium term. I think if I try to extrapolate what you're implying in the targets maybe about $85 million of data center this year. Is that -- what kind of base numbers should we use for that 50% opportunity? .

And that's what we have said pretty consistently is $80 million to $85 million as a basis in our guidance. And as we talked about on the last earnings calls, that considered the impact of VMI. But what we're seeing here is a run rate that's actually higher, much of which will be setting us up into 2027 -- fiscal 2027.

And then last question for me, a Mexico, understand some of the challenges there. I think you had some initial improvements, but obviously, things that are cutting against you as well. It feels like maybe there's been some things that have cropped up that you weren't anticipating? I guess, is this some more contagion across launchings and the fact that just -- I know you had whatever is something in the range of 20 launches this year. Just that as you're spending to those that Silensys was pretty visible, but are there more launches that are becoming problematic at the margin? .

Yes. So I think the way to think about this is as you bring new people in with fresh eyes, we do see some things from a performance perspective. But as Laura said, our scrap rates and our premium freight and other items that are really controllable performance-based items are better year-over-year. We -- what we have seen with regard to the new launches is we've spent the money both from a capital standpoint and from an engineering standpoint to prepare for the launches and we've had further delays even from what we said in the last quarter.

So because those launches were primarily EV-based power application launches for North America, and many of our customers have further delayed their programs. That's where the challenge is. So we just don't have the revenue that we would expect as these launches -- as these programs start and ramp up, we're not seeing those. So as we've talked about we're dealing with it from a class standpoint. We're also dealing with it with going back to customers for recoveries on where we have those delays.

Our next question is coming from Gary Prestopino with Barrington Research.

Jon, Laura. I just want to follow up on this EV issue. These are delayed programs. Is there any programs that have been outright canceled? .

Yes, you okay. So as we -- Gary, just to answer that, as we've talked about there, we have talked about some Stellantis program cancellations as well as other programs that are delayed. And we've mentioned what we've done with regard to previously about going back to customers and particularly Stellantis with regard to dealing with cancellation claims. So those are ongoing. None of the customer negotiations are in our -- in this guide. I think it's important to note that neither the data make transaction nor the Hardwood Height transaction nor any customer recoveries are in this guide.

Let me ask the question another way just so I can get an idea. In the programs that you have right now that you're actually producing for and you're actually having take rates, was -- were the take rates less than you had anticipated and that has been causing you to channel down your expectations for the EV market this year? I'm just trying to get a handle on it, how this is all shaping out.

Yes. So here's -- the answer is yes. And it's primarily in North America. So if you think about it, auto is 45% of method. EVs are 41% of auto. So as a total, EVs as a percentage of method through this year, through this fiscal year is 18%, where now take it to the next level, which is exposure to EVs -- of that 41% of auto that is EVs, only 14% of that is North America. If we were going back, and I don't have the number at my fingertips, if we've gone back when we originally set guidance, that number should have been much, much higher based on the assumption of launches from multiple programs. So the -- what we're seeing is expenses launch expenses, CapEx, building inventory, all those sort of things in Mexico, in a place where you have big programs rolling off that we've talked about across multiple quarters and none of the revenue coming from the EV programs.

What about what you're doing outside of North America, how would the take rate spend there?

Those take rates are relatively on track. The growth on a year-over-year basis in Egypt, the top line growth we have bottom line that's driven by performance. We have top line growth that's basically driven by ramp-up of programs, particularly the EV programs that we launched there, and China is stable. So this is -- it's why we refer to it specifically as a North American automotive challenge and as an EV program cancellation or delay challenge.

Are the products that you guys produce the EVs, are they applicable to plug-in hybrids and hybrids. I mean can you bid on those new models that are coming out because it seems that that's the way the market's really rolling now.

Yes. And our pipeline of bids has our quoting and cost estimating team is very busy.

We have another question from John Franzreb with Sidoti.

I stick to the launch topic here. How many programs have you launched on so far in fiscal '26 and how many remain for this year -- and how does that compare to your expectations at the beginning of the year? I'm just trying to contextualize what kind of magnitude we're talking here.

John, I don't I don't have the exact split between what we plan to launch and what we have launched versus cancellations. Our number was programs in this fiscal year. It was 56% over fiscal 2025 and fiscal '26. And because of the timing -- because of the timing of some of these delays, we spent the money on the launches before we ended up with either a delay or cancellation. So the number is still the same. It's just a question of whether we got the revenue from it.

And when looking at the product portfolio, where does that stand? I mean, is Data made the first of many? Or are you still like looking at everything you're trying to decide. I'm pretty sure at 1 point, you said there was some unprofitable businesses that you may want to exit. But can you just kind of give us an update on what -- how that process looks at this point?

What we would say is that data mate was an important first step. It reinforces what we have said to the shareholders that we will continue to refine our portfolio as well as refine our overhead structure. The portfolio review is ongoing, and you can expect more to come in the future.

Thanks, Jon. Thank you, everybody. Thank you, ladies and gentlemen. As we have reached the end of our Q&A session. This will conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.

Good day, and welcome to the Methode Electronics Second Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions]

I will now turn the call over to your host, Mr. Randy Wilson, Vice President of Investor Relations and Treasury. Randy, the floor is yours.

Thank you. Good morning, and welcome to Methode Electronics Fiscal 2026 Second Quarter Earnings Conference Call. Our fiscal 2026 second quarter financial results, including a press release and presentation can be found on the Methode Investor Relations website. I'm joined today by Jon 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 be discussing non-GAAP 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 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'll turn the call over to Jon DeGaynor.

Thanks, Randy, and good morning. I'd like to welcome everyone to our earnings call, and I appreciate your interest in Methode. I want to start by thanking our global team for their continued focus on our customers and on our operational performance while navigating through a very difficult and dynamic operating environment. Your efforts are paying dividends.

The Methode transformation is firmly on track with much more work to do, but the trajectory is positive and is progressing largely according to plan. We are pleased to report that our improvement efforts and disciplined execution against those initiatives have delivered sequential improvement in our financial results.

Our net sales for the quarter were $247 million, up 3% sequentially, with adjusted EBITDA rising 12% sequentially to $18 million. There was a usage of cash in the quarter, driven by a onetime customer initiative. We were able to improve quarterly free cash flow by $47 million year-over-year, and our first half cash flow results were in line with management estimates. Finally, we expect the second half of fiscal 2026 to be stronger, so we are reaffirming our full year sales guidance of $900 million to $1 billion and our adjusted EBITDA of $70 million to $80 million.

Please turn to Slide 4, and I will discuss our operational and strategic accomplishments for the quarter as we have significantly increased the intensity of our improvement actions to drive financial performance.

I've said previously, our Egypt and Mexico facilities needed significant management attention and leadership upgrades. We've had members of my staff dedicating a large portion of their time on the ground in both of these facilities to drive improvement. I'm pleased to say that our actions have resulted in quality, delivery and cost improvements in both sites. The Egypt facility is ahead of Mexico on its transformation journey, but both facilities are making significant progress.

We continue to refine our organization and align our portfolio and business structure working as One Methode by strengthening leadership and the company culture. Very simply, we are moving from a regional siloed organization to one where teams are global and teams work cross-functionally to rapidly drive improvement. The top grading of leadership is now substantially completed across the organization, ensuring that we have the right people in place to execute our strategy.

Our product portfolio is well aligned with key megatrends, including data centers and vehicle electrification, and we are driving a disciplined approach to long-term growth investments.

A major strategic footprint action is also underway with the relocation of our corporate headquarters to Southfield, Michigan, which positions us for future growth and operational efficiency. We look forward to being closer to our automotive customers and to having almost all of our functions under one roof.

Please turn to Slide 5. Methode's Power Solutions offerings actually go back more than 60 years, and we are using this history and our expertise to bring solutions to our customers. Our data center activity was just over $40 million in fiscal 2024 and last year generated over $80 million in annual sales. We continue to expect to see long-term growth in this area.

One of the most exciting aspects for me in this business is the ability to apply core competencies that have been built over decades to current and future products in different end markets. These capabilities can be brought to bear to better address the megatrend fueled opportunities in the EV and data center spaces.

Looking ahead, as we implement more customer-focused solutions like vendor-managed inventory, utilize our global footprint more aggressively and develop solutions for problems like high-voltage in data centers, it provides us with opportunities to differentiate Methode in ways that we have not in the past.

We continue to expect our fiscal 2026 Power sales to be in line with fiscal 2025. we also expect a sales acceleration in the future as our data center growth strategy positions us to take a larger share of customer demand. Our Power solution offerings are clearly a long-term growth engine for Methode.

Please turn to Slide 6. As you think about the transformation of Methode, it has been a journey and the starting point for that 18-month journey was to stabilize the base. It started by fixing launch execution, and we had 50-plus launches between fiscal 2025 and fiscal 2026 to deliver while improving customer satisfaction and product quality in multiple regions, so we needed to address these fundamental challenges first.

A revamp of our most important plants in Mexico and Egypt, both from a leadership and from an execution standpoint was next. We have changed all but 2 of the senior leaders and many of the team members below those leaders in the company. Standing up a new team who are driving a more global approach, diagnosing situations and pinpointing weaknesses has dramatically helped move things forward. We are nearing the end of this foundation building phase of our transformation journey.

And now starting to discuss what the next chapter is as the foundation is corrected. In this next phase, we can start talking about leveraging synergies with credibility. Because without execution as a foundation, we would not have the credibility with customers and shareholders to talk about what's next. Overall, we've been laser-focused on improving execution and making Methode a more reliable and resilient company and is showing up in our results.

I'll now turn it over to Laura for a discussion of our financial results.

Thanks, Jon. And turning to Slide 7. First, let me note that fiscal 2026 is a 52-week year and fiscal 2025 was a 53-week fiscal year. The 3 months ended November 1, 2025, and November 2, 2024, were 13- and 14-week periods, respectively. Second quarter net sales were $246.9 million compared to $292.6 million in fiscal 2025 as a decrease of 16%, while on a sequential basis, sales increased 3%. The year-over-year decrease in sales reflected lower volume across all segments.

Second quarter adjusted net loss was $6.7 million, an $11.9 million change from fiscal 2025 and on a sequential quarter basis, a reduction of adjusted net loss by $1.1 million. Second quarter adjusted EBITDA was $17.6 million, down $9.1 million from the same period last year. And on a sequential quarter basis, adjusted EBITDA increased $1.9 million. Second quarter adjusted diluted loss per share was $0.19, a $0.33 decrease from the prior year second quarter and a $0.03 improvement from Q1 fiscal 2026. Overall, our improvement efforts to drive expanded margins when we return to sales growth are still underway.

Please turn to Slide 8, where I will discuss the progress made with our disciplined capital allocation strategy. Net debt was down $29.6 million compared to the same period last year as we continue to drive cash flow and debt reduction. We ended the quarter with $118.5 million in cash, which was up $21.5 million year-over-year. Operating cash usage in the second quarter was $7.4 million, but we generated $17.7 million in the first half of fiscal 2026. An item to note in the quarter was a $10 million inventory build to support the transition to vendor managed inventory for our data center customers. With that said, our operating cash flow performance in the quarter would have been positive without the vendor managed inventory impact.

Second quarter free cash flow was a usage of $11.6 million compared to a usage of $58.4 million in the fiscal second quarter 2025, reflecting a $46.8 million improvement on a year-over-year basis.

Turning to Slide 9. Again, please note that fiscal 2025 was a 53-week fiscal year and fiscal 2026 is a 52-week fiscal year. For fiscal 2026, we are reaffirming our expectation for sales to be in a range of $900 million to $1 billion and for adjusted EBITDA to be in a range of $70 million to $80 million. We expect our second half results to be higher than the first half as we have previously communicated. Q3 results will reflect traditional seasonality with improvement expected in Q4.

For fiscal year 2026, we expect free cash flow to be positive compared to an outflow of $15 million in the previous fiscal year. Our fiscal 2026 guidance represents a solid foundation for the Methode team to further build on. We are pleased with the results year-to-date, and our team is focused on finishing the second half of fiscal 2026 strongly.

With that, I will hand it back to Jon for closing remarks.

Thanks, Laura. And please turn to Slide 10. The Methode team is not standing still and is working with a high sense of urgency and purpose to drive improved execution. This quarter's results demonstrate that our business is moving decisively in the right direction, yet there is still important work ahead as we rebuild the future of Methode. We are aggressively driving financial improvement to strengthen our balance sheet and deliver our fiscal 2026 guidance. At the same time, we are selectively investing in initiatives such as data centers that will position Methode for long-term growth.

We are transforming Methode into a more reliable and resilient company, one that is poised to generate long-term value for our shareholders. And with that, operator, please open the line for questions.

[Operator Instructions] Our first question is coming from Luke Junk with Baird.

Jon, maybe if we could start with the Power business this quarter. Just hoping to square kind of current trends that you're seeing right now between the big drivers there in terms of EV and data center. And then in terms of that full year expectation, maybe if you could break that out similarly, are you expecting some growth in data center to be offset by EV? Or are those trending more similarly, would you say?

Thanks, Luke. I think it's important to note, as we've talked before, the year-over-year headwind from an EV standpoint, we've already really taken that hit with some of the launches and the things that we've talked about, whether it's delays in certain Stellantis programs or other programs. When you understand overall EV volumes or when you understand our volumes, automotive is on a year-to-date basis, automotive within Methode is 44% of total sales. EVs represent 41% of that and North American EVs is 12% of that. So total revenue year-to-date in North America for EVs is less than $12 million.

So when we talk about EVs and we talk about the headwinds of EVs, I think it's important for everybody to understand, as we've said multiple times that our EV exposure is not just in North America, it's in Europe and it's in Asia, and it's a much greater percentage of our total than in North America. We expected it to be much higher as we've talked about in previous quarters, but those launches did not come to fruition. So we've already taken that hit.

With regard to data centers, as we mentioned to you on the last call and as we talked about at the Baird conference a few weeks ago, we're very optimistic about the opportunity to grow and the move to vendor managed inventory gives us a position -- gives us an opportunity to take share and to get a lot more clarity with regard to the sales forecast. But as we have said, we will not adjust our guidance from a data center standpoint until that EDI is locked in.

So I believe there is tailwind to come in that. It is not something that we can talk about here in Q2, but I'm very confident in the team that Brad Perotti is leading and the work that we're doing to deepen our relationships with the customers. We would not have made this investment in the $10 million of vendor managed inventory were we to not feel confident that this is a source of growth for us.

Yes. I mean I appreciate the investment, Jon. I was just wondering if we could put a finer point on the 2Q trends. Just was the Power business similar to what you're expecting for the full year in terms of just being relatively flat? And within that, did data center show any growth overall in the second quarter versus 2Q last year?

Yes, data centers are exactly on the guidance that we expected and actually maybe a little bit ahead. But when we talked about -- when we've said what we expected for the full year, the data center revenue for Q2 is exactly in line with that. And the EV business as I said to you, EV headwinds are primarily in North America, and they're primarily due to delayed or canceled launches, which we've already taken the hit for that. That's why we had $100 million less in revenue guidance in the first place.

So the -- we're only 44% exposed to automotive. We're only 36% of that 44% in North America. So SAR-based revenue headwinds for us are relatively limited from an automotive standpoint and EV-based headwinds in North America are relatively limited as well. So we're on track with what we expected. We're not getting tailwinds from CVs. We're not getting yet tailwinds from ag and industrial. The data center stuff continues to move forward. We continue to be optimistic about where that will go, but not to the point where I can increase the guidance on that number.

Got it. Just in terms of the guidance, reiterating overall sales and EBITDA and the comment that the second half should be stronger. I mean, certainly appreciate the seasonality in the third quarter from a top line standpoint. Should we think that second half versus first half strength primarily through the lens of EBITDA? Just want to clarify that.

Well, I think what you should think about, and Laura can give you a little more detail on sort of the year-over-year improvements. I think what you should think about is the sequential improvements in our 2 biggest facilities and the progress that we've made in both Egypt and Mexico. And as I said in my prepared remarks, Mexico is behind Egypt with regard to that performance.

But Laura will talk a little bit on just where we are today.

Yes. For Egypt, when looking at Egypt, our gross margins have nearly doubled. So we've made reductions in scrap, freight costs. We have upgraded talent there, too, both at a leadership team meeting -- our leadership team level and a level below. In Mexico, obviously, with the reduction in volume, margins are down. However, we focus on the cost side there in Mexico with reductions in direct labor, indirect labor and salary. Material and freight and scrap are also down in Mexico.

So to answer -- to put a fine point on it, Luke, yes, we -- you should expect to see it as a conversion on sales will be a lot higher because some of the cost of poor quality, the premium freight, some of the other things as we make improvements in the plants, and we get through these launches. So you start seeing run rate impact of launches and you see the improvements that we're making in the plants. That's why we feel very confident about the second half of the year.

Our next question is coming from John Franzreb with Sidoti & Company.

I guess I'm just curious about the guidance. We're more than halfway through with the year. We have a seasonally weak third period coming up. Are you comfortable at the lower end of the guidance or at the upper end based on your current visibility today?

John, we -- because there's so much exogenous volatility, Nexperia is not behind us. We still have -- we still have commercial vehicle sales that are turbulent. We still have a whole series of ranges of economic turbulence. It's why we haven't narrowed either the top or the bottom half of our guidance and why we continue to bracket both the revenue guidance and the EBITDA -- the adjusted EBITDA guidance the way we do.

The performance of the -- the predictability and the performance of the business is much better than where it was 12, 18 months ago. But we spend every day still talking about tariffs and every day still talking about the impact of the next period and what it can mean from a revenue perspective. And it would be, we believe, a disservice to our shareholders to narrow down those numbers right now until we have a little more clarity on just what's happening from the turbulence in the external market.

Okay. Fair enough, Jon. In the quarter, I noticed there was a nice improvement in the industrial operating profit on a sequential basis and a nominal increase in revenue. Is that totally due to data centers? Or can you provide some color what drove that sequentially?

No. It's -- basically, it goes back to our plants are getting better. And the -- we've said before that these plants aren't other than in a very specific situation, and they are shared between our industrial activities and our automotive activities. So the plants getting better flows through the P&Ls of the different segments. Our plants are getting better. And that's why we can feel confident about our guidance without it having to be revenue tailwind that drives it is Mexico, Egypt first, but Mexico as well. Both of them are getting better.

Our plant in Malta is much, much better. The plants in China continue to perform. I want to thank that team. But the 2 places that we're most on fire 18 months ago when I walked in the door are much, much better, and that gives us the predictability when we talk about earning the right with shareholders and the predictability that goes along with it, it starts with our plants are much, much better.

Jon, there's a point where you voiced concerns about new program rollouts and you want to get beyond that. And you just mentioned 50 so far in '25 versus '26. Are we beyond the point given the new personnel that you've hired in multiple levels, where that's no longer a significant worry for you at this point?

The -- what I can say is the trend lines from our launches are also going in the right direction. In many situations, those launches both were happening in Egypt and in Mexico. So where the plant is getting better, some of it was premium freight and other issues with regard to program launches. The ones that were most problematic where we had customers in the building have largely gotten behind us. It doesn't mean that they're all behind us. We still have a couple of challenged launches, a little bit of it, the difference between where I said in Mexico and it's phasing versus Egypt.

But we've -- we've got new people plus some outside help that are working with us to continue to stabilize and drive those launches. And so the answer is largely the launch challenges are behind us, but not completely.

Okay. Fair assessment. I guess one more question. It appears that your past the part of stabilizing the business and moving on to the part in the transition process of addressing revenue and cost-cutting drivers. Can you kind of like walk us through the road map to returning to profitability? What's going to be the biggest drivers here? Is it going to be on the cost cutting, be it part rationalization? Or is it going to be really a top line-driven story here to get you back in [ block ]?

Well, so if you think about our year-over-year improvement from an EBITDA perspective, you just took midpoint of our current EBITDA guidance versus last year, and what that means basically adding from $43 million to midpoint at $75 million, adding $32 million worth of EBITDA on $100 million less in sales. That is getting cost for quality and waste out of the plants. We have taken more than 1,000 people out of our -- out of those 2 big facilities between Mexico and Egypt. The -- we will continue to refine those, but it's -- and the headquarter move is a cost refinement plus a capability increase. We will continue to make cost adjustment activities.

But now it's really okay, let's ramp up these new programs, let's ramp up the data center activity. Now let's really start to drive revenue. Let's get ourselves positioned as we see commercial vehicle volumes come back in calendar 2027, what would be our fiscal -- the latter part of our fiscal 2026 and into our fiscal 2027 as we start seeing some revenue tailwinds just with stuff that we have because there's headwinds in each of our end markets. We believe that the business is very well positioned for profitability at all levels down the income statement.

Our next question is coming from Gary Prestopino with Barrington Research.

A couple of housekeeping questions here. Laura, this was the quarter where it was 12 versus 13 weeks last year. Is that correct?

That's correct.

Okay. So on a like-for-like basis, can you give us some idea of what the sales were down?

Yes. The sales were about roughly $20 million for one week?

$20 million that was incrementally added by that one week?

For last year, yes.

Okay. And then I noticed you didn't report the percentage of your sales to EV and hybrid applications, which you had done in the past. Are you not reporting that anymore? Or can you share that with us?

Well, I don't know that we gave that specific detail, but let me give it to you. So in the first half, so I don't have it by the quarter, but I have it by the half, EV is 41 -- so automotive is 44% of our total sales or $217 million in the first half. EVs are -- EVs are 41% of that. Now for full transparency, that's just not buzz, that's not just Power, that's anything that goes into an EV.

Then you take that 41% of the 44% and split it, 71% of that 41% is in Europe, 18% of the 41% is in Asia and 12% of the 41% is in North America. So in the first half of fiscal 2026 for Methode, our sales on the EV side in North America were $11.5 million. So when we talk about EV penetration in North America and what it means for a headwind, it's not -- it's already been baked into our guidance that the stack charts that we talk about with regard to Stellantis and some of the other programs that we already took to hit.

Right. I understand that. I'm just trying to square with what you guys had reported in the past. And I'll work through that. That includes EV and hybrid, right?

No. This is just based on platform specific, it's EV stuff. As we talk about business wins and where there are opportunities for Power going forward, those would be both in EVs and hybrid vehicles, and we talk about that separately. But these are for EV-based platforms.

Okay. And then in your guidance, the tax expense of $17 million to $21 million, is that all cash taxes, Laura? Could you give us some idea of what the cash taxes will be?

No. Some of that, as is noted on the slide, it does include a $10 million to $15 million valuation allowance on deferred tax assets. So that's...

So if I back that out of your range then to get an idea of what cash taxes could be?

Yes, yes.

Okay. All right. And then, Jon, I wanted to talk about your program launches. Like I went through my reports over the last quarter, 30 program launches you're anticipating this year. You say you've taken all the hits from the reduction in the EV programs. So in the back half of the year, number one is, how many programs are expected to be launched? And are these programs all dealing with ICE applications? Or the -- give us some idea of where those programs are? Is it all auto? Is it across all of the different segments like industrial or whatever?

So I don't have the split by region, but the majority of the programs that are launching are power based. And so there, Gary, it would be either EV or hybrid. And we have a couple of examples where it's both. The ramp -- the new launches are primarily in Mexico right now versus in EMEA, those launches, we went through some of that pain earlier. It's part of the reason why Egypt is ahead of -- Egypt is ahead of Mexico on the transformation. .

And the big hit that we took with regard to programs that were delayed or canceled was primarily in North America. That's part of the reason why North American auto was so challenged because we had particularly Stellantis programs that we expected $100-plus million in annualized revenue that were canceled. So as we have discussed previously, we're in negotiations with Stellantis on this topic, but we are launching multiple programs in Mexico and ramping up programs in Egypt and Malta right now, plus programs in Asia Pacific.

We have another question from John Franzreb with Sidoti & Company.

Yes. Just regarding the cash outflow in the quarter, click back of the envelope suggests that there was a cash outflow in the receivables in the quarter. Is that like seasonal timing? If I did the numbers right, it seems like it was $12 million in the quarter. Or is there something else to that? I'm sorry, $14 million in the quarter.

Yes, that's correct. There was $14 million. It was up from last year and that's due in last quarter due to the sales increase in the quarter compared to last quarter.

Okay. Okay. So there's nothing else unusual about that?

No, there are some receivables that were collected in November after the end of our quarter. So it came down in November.

Excellent, Laura. And I guess in regards to -- since Jon, you brought this up about tariffs, you talk about it every day. But you don't have a new change in the slide presentation from the fourth quarter. So is it fair to assume that the -- not only the bridge that we talked about last quarter, but the tariff slides, everything is status quo since the last presentation we had included? Or is there anything we should be aware of?

There's no new news with -- from an investor standpoint with regard to tariffs. As we've said, we are working with our customers closely to first try to alleviate any tariffs where possible. And our USMCA facility helps us do that. We're moving -- we're rebalancing manufacturing to try to help that. But where there is a tariff that we can't avoid, we are passing that on to customers and are working with customers that way. So there's nothing different, John, with regard to the financial impact for us.

What more was I was saying is the tariff regime and particularly, most recently, the next period chip issue still creates turbulence. And it still creates challenges with regard to our customer plans, stuff that's in many ways outside of our control, and that's why the revenue range for our guidance is difficult to narrow down at this point, yes.

Okay. That's fair. And I guess one last question as we close out the calendar 2025 calendar. I'm kind of curious about how you envision calendar 2026 in some of the, let's call it, problematic end markets. Do you view the overall automotive sector as up or down, same with the ag and the Class 8 truck market. What are your thoughts in aggregate about how calendar 2026 plays out?

So from current, we try to use third-party forecasters to help us with this because I'd love it if we had a great economic staff that was better than S&P, but we don't. And I don't think it's the best place to use our smart people. IHS is saying that fiscal -- or this fiscal year, not calendar year, right? IHS is saying that calendar year would be just a little bit better from an overall volume perspective. That -- also that IHS is talking about 2027 or 2026 being better from a CV standpoint, particularly in the second half of the year, which would be our first part of our fiscal 2027.

So we see -- in the industrial market, as we talk to customers and we see where things are going for our electronics business, our Nordic Lights business as well as some of the activities from Grakon, we see some future tailwinds as opposed to headwinds.

So the thing that gives me the most -- one of the things that gives me the most confidence here is this has been performance improvement in the face of very little good end market news. Our performance improvement is -- yes, we talked about data centers being a tailwind and good end market news. But the rest of our end markets have all been headwinds for us. And commercial vehicle, as those who know that space is a highly cyclical, more cyclical than [ PassCAR ] and we still move freight and there will be trucks that will be sold. And so what we're seeing for calendar year '26 is an improvement, particularly in North America and a small improvement in Europe that will hit us the latter half of our fiscal year and early into fiscal 2027.

Thank you. And that concludes our Q&A session. I will now hand the conference back over to Mr. Randy Wilson for closing remarks. Please go ahead.

Thank you for joining us today and your interest in Methode. Take care, everyone, and have a great rest of the day. And with that, operator, please disconnect the call.

Thank you. Ladies and gentlemen, this concludes today's call. You may disconnect your lines at this time, and have a wonderful day, and we thank you for your participation.

Good day, everyone, and welcome to the Methode Electronics First Quarter Fiscal 2026 Results. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Robert Cherry, Vice President, Investor Relations. Sir, the floor is yours.

Thank you, operator. Good morning, and welcome to Methode Electronics Fiscal 2026 First Quarter Earnings Conference Call. For this call, we have prepared a presentation entitled Fiscal 2026 First Quarter Financial Results, which can be viewed on the webcast of this call or found at methode.com on the Investors page.

This conference call contains certain forward-looking statements, which reflect management's expectations regarding future events and operating performance and speak only as of the date hereof. These forward-looking statements are subject to the safe harbor protection provided under the securities laws. Methode undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in Methode's expectations on a quarterly basis or otherwise. The forward-looking statements in this conference call involve a number of risks and uncertainties. The factors that could cause actual results to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission, such as our 10-K and 10-Q reports.

On Slide 4, please see an agenda for our call today. We will begin with a business update, then a financial update, followed by a Q&A session. At this time, I'd like to turn the call over to Mr. Jon DeGaynor, President and Chief Executive Officer.

Thanks, Rob, and good morning, everyone. Thank you for joining us for our first quarter earnings conference call. I'm also joined today by Laura Kowalchik, our Chief Financial Officer. Let's start with the key messages. Please turn to Slide 5.

I'm happy to report the Methode transformation is firmly on track. There's still much more to do, but the trajectory is according to plan. We had another good quarter for Data Center Power Product sales with growth over the prior year. Our income from operations was up $9 million from the prior year. This was the result of reduction in SG&A costs and operational improvements that we have been sharing with you. This is clear evidence of Methode starting to earn the right as we like to say. Another example of excellent improvement is the third straight quarter of strong free cash flow and net debt reduction. Our management team is maintaining a key focus on both the income statement and the balance sheet.

As we look to the remainder of fiscal '26, we are confidently affirming our guidance. Despite all the various headwinds that we are facing, the company still expects to double its EBITDA for the full year, even with a $100 million decline in sales driven by lower EV demand. The ability to affirm this profit growth is a direct result of the significant and tireless efforts of the Methode team. They put a lot of work into our transformation and the progress is tangible. Turning to Slide 6 and our results for the quarter.

Our sales were $241 million, down $18 million year-over-year as we continue to navigate the transition in programs that we have previously communicated. We remain on track to launch over 30 new programs this year with most of the launches scheduled for the remainder of the year. In addition, the ongoing strength of our Power productivity was able to partially offset the program transition headwind. We recorded $9 million increase in operating income, driven by the SG&A reductions and operational improvements that I previously mentioned. At the adjusted EBITDA level, we delivered $16 million, up $6 million year-over-year. All of this is further evidence of the actions that we have taken to improve our operations, supply chain and product launch capabilities.

In these 3 key areas, our performance in EMEA, particularly in Egypt, has notably improved while we continue to see solid ongoing performance in Asia. Both free cash flow and debt reduction continue to be good stories for us. The business delivered free cash flow of $18 million in the quarter which was the third quarter in a row of strong free cash flow. In turn, we reduced our net debt level also for the third quarter in a row, and we have now reduced it by $41 million over the 3 quarters. These results provide more evidence of an organization whose operating efficiency is improving.

Turning to EV activity. Sales were down slightly year-over-year, but we were up on a percentage basis. For the quarter, they were 19% of our consolidated total, an increase from 18% last year. On a sequential basis, they were down from 20%. We do remain bullish on the long-term mega trend in EVs. However, the near-term outlook remains soft, mostly in North America, which is partially being offset by the strength in Europe and Asia. Based on customer EDI forecast and third-party industry projections, we still expect a significant overall rebound in EV sales in fiscal '27.

Turning to Data Centers. Sales growth was a solid 12% year-over-year. As a reminder, we did have record sales in the fourth quarter of '25. So not surprisingly, our sales were lower sequentially. However, we still expect fiscal '26 sales to be similar to fiscal '25 with some upside potential. As I mentioned last quarter, we are achieving this performance based on our existing product technologies. We also have an opportunity to leverage our Power expertise developed over decades and honed by our EV activity to capture even more growth. The opportunity is being driven by vast increases in power density sought by data center operators for future installations. Again, too early to share any more details on this, but it is very promising for future growth in our Power Solutions enterprise.

Turning to Slide 7. I want to spend a little more time on our Power Solutions enterprise. Power products are in Methode's DNA. Our experience goes back many years, to the time when we supply busbars and sensors on the Apollo Lunar Landers and on the original IBM mainframe computers. Now those years of experience and expertise are being leveraged on today's power distribution needs in electric vehicle, data center and military and aerospace applications.

As you can see from the chart on this slide, those applications have helped drive our Power Solutions sales to a healthy 30% compound annual growth rate over the last 3 years. Going forward, we see even more opportunities for sales growth. For Data Centers, the need for higher voltage busbars is driving further product innovation. In EVs, we are starting to supply interconnect boards for a more efficient power architecture. Lastly, from military and aerospace applications, we are supplying advanced products to meet the growing needs of defense equipment manufacturers. In all these cases, we are bringing our One Methode mindset to bear and drawing on our global creativity to drive innovation [indiscernible] the customers' needs and bringing them solutions like cutting-edge high-voltage power products. Our Power history and DNA are providing Methode with a competitive differentiation in the marketplace.

In regard to our forecast for fiscal '26 Power sales, given our guidance for flat Data Centers and decline in EV, our sales will moderate this year before reaccelerating next year. Power Solutions are clearly a long-term growth engine for method, and we are actively investing in this area.

Turning to Slide 8. I'll give a brief update on where Methode is on its transformation journey. As I have said before, transformations are never easy, and I make a distinction between transformations and turnarounds. Quite simply, the transformation is about fixing a business in a way that enables it to evolve and positions it for future growth. The Methode journey is undoubtedly a transformation. Like any journey, the path is not [indiscernible]. The first order of business was stabilizing mix, which included the significant organizational changes that we made in previous quarters. It meant focusing on executing program launches while simultaneously revamping plants and installing a new team, all in the face of numerous external distractions.

We have worked hard to remediate practices that added atrophy or institute practices where they didn't exist. We now have better visibility into the business and are driving more global collaboration and efficiency, especially around engineering, product management and supply chain. The work is showing in many areas, but is exemplified in our improved working capital. We are now better positioned to leverage synergies and utilize core competencies to align with market megatrends like Data Centers and EVs. Our improvements are creating opportunities in other areas as well. We have seen a notable uptick in RFQs and RFPs, which is being driven by our ability to leverage our global footprint and respond to market changes.

As a result, we're seeing potential future sales growth from takeover business. This takeover business is in both auto and non-auto markets, and it will likely result in even more customer diversity for Methode. While the financial results are not yet where we want them, our team has accomplished much since the beginning of our transformation journey and the foundation has been laid for us to drive consistent and improved execution. At this point, I'll turn the call over to Laura, who will provide more detail on our first quarter financial results and guidance.

Thank you, John, and good morning, everyone. Before I begin, I would like to address the cause of our delay in reporting first quarter earnings. Shortly before our original reporting date, we discovered an inadvertent miscalculation of dividend equivalents. This caused us to exceed our restricted payments basket for the first quarter as per our credit agreement. The amount was not material but was in excess of what the agreement allowed. We subsequently needed time to obtain a waiver from our banks, which we could not disclose until the matter was resolved. The waiver was successfully obtained. Please turn to Slide 10.

The first quarter net sales were $240.5 million compared to $258.5 million in fiscal '25, a decrease of 7%. On a sequential basis, sales decreased 6%. The quarter saw a continued growth in the sale of Power Products, including Data Center applications. In the Automotive segment, sales were weaker in North America as we continued to experience a net negative impact from the transition from legacy programs to new ones. We also experienced continued sales weakness in commercial vehicle lighting applications.

First quarter adjusted income from operations was $2 million, an increase of $6.7 million from fiscal '25. On a sequential basis, adjusted income from operations increased $23.6 million from the fiscal '25 fourth quarter. Please see the appendix for a reconciliation of all adjusted measures to GAAP. On a year-over-year basis, gross profit was relatively flat despite the $18 million in lower sales. The main driver of the improved operating income was a $9.6 million reduction in SG&A related to lower professional fees and compensation expenses. In the sequential comparison, the fourth quarter of fiscal '25 included an excess and obsolete inventory expense and discrete inventory adjustments of $15.2 million.

Overall, despite the $18 million sales headwind, Methode delivered operating income growth both over the prior year and sequentially. Please turn to Slide 11.

Shifting to EBITDA, a non-GAAP financial measure. First quarter adjusted EBITDA was $15.9 million, up $5.9 million from the same period last year. On a sequential basis, adjusted EBITDA increased $22.8 million from the fiscal '25 fourth quarter. As with operating income, EBITDA increased despite the sales headwinds driven mainly by a reduction in S&A and other operational improvements. Please turn to Slide 12.

First quarter adjusted pretax loss was $5.1 million, an improvement of $4 million from fiscal '25. On a sequential basis, adjusted pre-tax loss improved $23.5 million from the fiscal '25 fourth quarter. Again, the pretax loss improved despite a 7% sales headwind year-over-year and was driven mainly by a reduction in S&A and other operational improvements. First quarter adjusted diluted loss per share was $0.22, a $0.09 improvement from the prior year and a $0.55 improvement from the fiscal '25 fourth quarter. Overall, our cost reduction efforts clearly bore fruit this quarter and set Methode up for improved margins when we return to sales growth. Please turn to Slide 13.

The first quarter net cash from operating activities was $25.1 million, up from $10.9 million in fiscal '25. First quarter capital expenditures were $7.1 million down from $13.6 million in fiscal '25. Lower CapEx was according to plan as much of the program launch investments are behind us, and we are becoming more efficient in our spending on the new launches. First quarter free cash flow, a non-GAAP financial measure, was $18 million as compared to negative $2.7 million in fiscal '25, an increase of $20.7 million. This increase was mainly due to the lower working capital and lower capital expenditures. This was our third quarter in a row of strong free cash flow. Please turn to Slide 14.

Just like free cash flow, we had our third quarter in a row of reduced net debt, a key focus of the Methode management team. Total debt was up $5.8 million from the fourth quarter. The increase was mostly driven by foreign exchange as the majority of our debt is based in Euros. We ended the quarter with $121.1 million in cash, up $17.5 million from the fourth quarter. Net debt, a non-GAAP financial measure, decreased by $11.7 million from the fourth quarter, to $202.3 million. We have now reduced net debt by $41 million over the last 3 quarters. Please turn to Slide 15.

Regarding forward-looking guidance, it is based on management's best estimate and is subject to change due to a variety of factors as noted at the bottom of this slide. For fiscal '26, we are affirming our expectation for sales to be in the range of $900 million to $1 billion. Please note that fiscal '25 was a 53-week fiscal year and fiscal '26 will be a typical 52-week fiscal year. So we will have one less week in fiscal '26 compared to the prior year. We are also affirming our expectation for EBITDA to be in the range of $70 million to $80 million, and we expect the second half of the year to be higher than the first half. As you can see from the charts on the right of the slide, we expect fiscal '26 EBITDA to be higher than both fiscal '24 and '25, despite a significant reduction in sales over that same time period. As a percentage of net sales, we expect almost a doubling of EBITDA margin from 4.1% to 7.9%.

In regard to free cash flow, as previously noted, we had a strong start to the year. For the full fiscal year '26, we expect free cash flow to be positive versus the negative $15 million in the previous fiscal year. The fiscal '26 guidance assumes; the current market outlook based on third-party forecast and customer projections; the current U.S. tariff policy; depreciation and amortization of $58 million to $63 million, CapEx of $24 million to $29 million; interest expense of $21 million to $23 million and a tax expense of $17 million to $21 million, of which $10 million to $15 million is for valuation allowance on deferred tax assets. Our practice has been to non-GAAP to valuation allowance for our adjusted earnings calculation.

So to echo Jon, this guidance represents a solid foundation for the Methode team to further build on. That concludes my comments, and we can open that up to questions.

[Operator Instructions] Your first question is coming from Luke Junk from Baird.

Jon, maybe starting with Automotive, clearly most challenging results relative to Methode overall still. I know there's a lot of countervailing factors there. Just hoping to better understand relative to the overall outlook for EBITDA to double this year. How you see the Automotive segment contributing to that incrementally, especially beyond some of the non-repeating items that were in the P&L last year? And then even beyond this year, [indiscernible] out maybe a couple of years? Just kind of what you envision for that business at a high level on the operating side of the house?

I think it's important that we separate out by region. That's why we specifically talked about the performance in EMEA and the transformation in Egypt. We have Automotive business around the world and our business in EMEA has significantly improved on a year-over-year basis. Part of the challenge that we have in North America, as you well know, is the transition of some of the historic programs rolling off that specifically hit us in Mexico. So the Automotive business globally, I would say the performance activities are impacted disproportionately in North America due to just the roll-off of that program and the subsequent delay in the EV programs, particularly with regard to Stellantis as we've mentioned to you.

So we have a bit of a tremendous amount of progress in EMEA. We have stability and good performance in Asia and we have challenges both from an execution standpoint as we talked about in the Q4 call, but also from a revenue headwind perspective in North America. The second part of your question, where do I see it going forward?

As we talked about, we expect to see the volumes start to stabilize and grow in fiscal '27 from an EV standpoint, that will create tailwinds for our Mexican facilities and basically for our North American business. And then you also see some of the Data Center activity that we're putting into Mexico that will help it. So I see leverage from all of our segments in our facilities, and that will help the business going forward.

And maybe a related question, just in terms of. I know there's been program roll off impacting that business in Automotive as well, if we look at the sales base following that roll out fairly limited on a quarterly basis right now. Just maybe at a high level, strategically, how you're thinking about Asia. And clearly, relative to EV is one of the trends that you're most focused on probably the most opportunity-rich region in China, especially.

Yes. For the our Asia team, really, in many ways, is leading our activity from development of new product for EV applications. The battery interconnects and some of the other advanced activities are being led out of -- from a manufacturing perspective out of Asia. So they become our -- in these situations, our launch facility and our first -- and our first product development and product validation location.

So yes, true, we had headwinds for the roll-off of one customer's programs. But I see a lot of progress there. It's a very well-run organization from an operational and from an engineering perspective as well as from a working capital side. And they built -- they give us credibility with customers, both on the Power side and on the -- both on the Data Center and on the EV Power side, and give us a chance to grow around the world.

Got it. And then maybe just a quick one on the interface business. I know that in the bridge you've given us for the current fiscal year, there was an appliance program roll-off reflected in that bridge. Are we seeing that in the first quarter results yet and to what extent there might be any offsets from the transceiver business that we're seeing in the P&L right now?

The reason we did put that bridge in there is the situation is consistent with what we have said in previous quarters. So the roll off, as we talked about in the fiscal year and how they're going to move year-over-year is consistent from 1 quarter to the other. So yes, you're seeing the impact of the roll-offs both from the user interface as well as from the whirlpool business and then we see the ramp-up of some of the new programs as well as the backfill with some of the data center activity.

Your next question is coming from John Franzreb from Sidoti.

I'm curious last quarter, you provided a slide that kind of really took a deep dive into the tariff outlook. Has there been any change in your tariff expectations be it positive or negative?

There has been no change, John. We had, what, $1 million worth of impact. That's more of a timing thing than it is anything else in the quarter. But we have been pretty consistent in our approach with regard to tariffs, we're not going to bear the extra cost. We worked with the customers on this. And so there has been no change different than what we said in the previous quarters, and we feel pretty confident to the greatest extent we can be confident with the changes in Washington.

We feel pretty confident based on what we see right now as to where we're at and the relationships that we have with customers through this. The other thing that I would say is, and I mentioned it a little bit in the additional RFQs. The current tariff regime is actually creating opportunities for us because our facilities -- our ability to -- their USMCA compliant and our ability to deliver in North America with 97-plus percent USMCA compliance. So it's creating opportunities in RFQs that we didn't see 6 or 9 months ago. We have customers that are new to us.

That's good to hear. And in terms of restructuring actions, can you talk a little bit about how far along are you in this process, Jon? You just got the low-hanging fruit at this point? And maybe some more color of what kind of we should expect maybe in fiscal 2026?

Well, I mean, we've talked about the transformation of the leadership team. And in the last quarter, we talked about the move -- the consolidation of the headquarters facility. We're on track with regard to that and believe we'll have everything completed by the middle of this fiscal year, from the headquarters consolidation and facility consolidation. We continue to look at what we can do around the world with regard to reduction of whether it's engineering activities or whether it's warehouse activities or other facilities to take structural cost out. But there isn't anything at this point of a level of materiality. So the -- we reduced head count probably by 500 people, and we continue to refine that. And part of the transformation that -- part of the improvement that underlies the EBITDA growth and the performance growth is just headcount reductions in our different facilities, be it in Mexico or in Egypt in particular.

Got it. And just, I guess, when you look at the end markets, the truck, the ag and construction have been particularly favorable. I'm just curious about your thoughts on how those end markets play out in the year ahead based on what your customers are telling you?

So we continue to get indications from our customers as well as from forecasting services like ACT that the commercial vehicle space is still down by 5%. We do expect it to rebound in '26, and we're starting to see -- we haven't seen that come through in EDI yet. What we are seeing is as we've our Lighting business has worked very hard to improve our relationships with customers. We're seeing additional RFQs. We're also seeing interest on the Power side from a commercial vehicle standpoint. That doesn't have -- that doesn't have near-term revenue impact, but it does have future impact, and it goes to John, what we've talked about with earning the right with customers from the standpoint of us being viewed as a trusted partner beyond just Lighting. So both on the commercial vehicle side and on the Ag and construction side, we still see softness in the end markets. We are gaining business based on the improved execution of the organization.

Your next question is coming from Gary Prestopino from Barrington.

Okay. A couple of questions here. First of all, when you reported Q4, you gave us a sales bridge for sales guidance for this year. Has anything changed dramatically in that bridge? I mean, are we still looking at a $40 million reduction in Stellantis programs and then about $48 million of other program launches positive on the sales side?

And that's the reason why we didn't put the bridge back in again, again, Gary, is there's nothing to change. So as you think about how you model it, just go back and get that as the basis.

And just wanted to make sure there. Couple of questions here surrounding busbars for data centers, okay. Is this mostly a new construction market, what you guys are supplying? Or is there a repair and replace component of this market for these busbars for data centers?

This is primarily new construction and everything that we talked about with regard to our guidance is what we would refer to as sort of current technology. We're working with them on future advanced activities. None of that is in our guidance. We're excited about those opportunities, but it's a little bit too soon to talk about from a revenue perspective. But everything that we're talking about here is sort of current product technology and as new construction with multiple end customers.

Right. Because the gist of my question is that, yes, it's new construction, I mean, who knows how long this is going to go on with growth in data centers. But I guess I'm getting -- what I'm leading to is -- are the plans -- can the business get to be fairly substantial relative to the whole pie. It looks like from the chart on Page 7, it looks like EV is maybe about 60% of the sales data centers maybe about 35% of fiscal '25 sales. I mean, is there a way you can make it bigger? Or are you just range bound by the fact that it's a new construction market?

No, we're not range bound because remember, we have a relatively de minimis share of the total. So what we've done, and we talked about it in previous calls, to be more responsive to our customers and offer them utilizing our global footprint in a more efficient way than what we've done in the past has allowed us to grow share on the current data center product. That's where you see the growth between fiscal '24 and fiscal '25, that also is giving us opportunities with expansion because we weren't on every one of their designs for the current data centers.

But in addition to that, and so that's what we talked about is in our current guidance. In addition to that, then, as they look at putting higher voltages into their data centers and bringing high voltage closer to the rack, we are working to try to help them with that. And that that's growth on top of what you see here. So the chart on Slide 7 is historical and yet it is Power activities, not just for data centers, but for Mil/Aero as well as EV. But what you heard me say earlier is now we're starting to talk about commercial vehicles. We're starting to talk about utilizing those core competencies in other pieces of our end markets and with our existing customers as well as what's the next product families with our existing customers like the data center customers. So we expect this as an opportunity for growth. That's what I mentioned in my script.

Okay. And then I want to also ask about the EV side of the business here. Can you give us an idea of the percentage of your EV sales that our products for EVs, I should say, that are outside the U.S., which will be mainly China and Europe, I suppose.

So the -- we look at fiscal 2025 and that's probably the best way to look at it. So you don't get into 1 quarter versus another quarter. And remember that we sell things beyond just busbars into EVs. In fiscal 2025 for our total, if you will, EV sales split, roughly $220 million of fiscal 2025 revenue went to EV products, as we said, the 20%. 55% of that was in EMEA, 16% of that was in was in Asia and 30% in North America. So when we say to you that our exposure isn't just a North American exposure to EVs, it's -- that's the basis for the data.

Certainly, we had expected and we go back to the sales bridge that was the start of your question. We had expected significant growth in North America EV, particularly with Stellantis and a few other customers. That's where we see some of the headwinds in North America, but the overall split is the balance between the regions.

Okay. So in terms of what you're looking for this year, just particularly with the busbars to the EV market. It's safe to assume the majority of any growth is going to be coming from outside the U.S. just because of the Stellantis program reductions?

Absolutely.

Thank you. That concludes our Q&A session. I will now hand the conference back to CEO, Jon DeGaynor for closing remarks. Please go ahead.

Yes, I want to thank all of you for joining us and for your interest in Methode and for your questions. We look forward to updating you on our progress in future calls. And have a great day.

Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.