Good afternoon, everyone. My name is John Farnsworth. I'm an analyst here at Sidoti & Company. Our next presentation for the day is Methode Electronics, ticker MEI. For those who are not familiar with the name, Methode is a manufacturer of components and systems to the automotive and industrial marketplace. We are fortunate to have with us today CEO Jon DeGaynor, CFO Laura Kowalchik, Treasurer Randy Wilson, and Vice President of Investor Relations Rob Cherry. Following the presentation, there will be time for Q&A. Please utilize the Q&A icon at the bottom of the page to submit questions, and I'll present them to management. With that said, thank you, everybody, for being here. The floor is yours.
Good afternoon, and thank you for joining us today. I'd like to thank John and the Sidoti team for the invitation to present at their small cap conference. Before we get started, I just want to remind you that some of my statements today are subject to safe harbor protection. For a complete summary of our disclosures, please see Methode's filings with the Securities and Exchange Commission, such as our 10-K and 10-Q reports. To start, I'd like to take a minute and share the key messages from our recent earnings call. They're relatively fresh, and the messages that I think are important for you to take away from the presentation today. I'm proud to share that Methode has continued on its transformation journey, and it's 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, and our income from operations was up $9 million from the prior year. This was a result of a reduction in SG&A costs and the 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 improvement was three straight quarters of strong free cash flow and net debt reduction. Our management team is focused on maintaining a key and keen focus on both the income statement and the balance sheet. As we look to the remainder of FY2026 , we are confident in reaffirming 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 reaffirm this profit growth is a direct result of the significant and tireless efforts of the Methode team. They've put a lot of hard work into our transformation, and the progress is tangible. We turn to a brief overview of the company. Let me spend just a minute on Methode. Methode is a leading global supplier of custom engineered solutions for applications in transportation, construction equipment, cloud computing, and automotive applications. Our FY2025 sales were just over $1 billion, with the majority of our business in North America and Europe. We operate the business via three segments of automotive, industrial, and interface.
From a solutions perspective, we view the business through the applications of user interface, lighting, power, and sensors. Together, we are widely recognized as a global tier-one technology supplier to the OEMs. If we go to the next slide, we've invested in a global footprint with vertically integrated manufacturing locations in North America, Europe, the Middle East, and Asia. This cost-efficient footprint is strategically located in proximity to key customers, in keeping with our make-where-we-sell strategy. It has also allowed us to make moves in support of our customers and act nimbly when there are changes in customer demand or exogenous events like the U.S. tariff situation. Our ability to shift production between regions gives us the ability to gain share versus more regionally entrenched competitors. As we turn to slide seven, 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 supplied bus bars and connectors 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 vehicles, data centers, and military and aerospace applications. As you can see from the chart on this slide, these applications have helped us drive our power solution sales to a healthy 30% compound annual growth rate over the last three years. Going forward, we see even more opportunities for sales growth. For data centers, the need for higher voltage bus bars is driving further product innovation. In EVs, we're starting to supply interconnect boards for a more efficient power architecture.
Lastly, for 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 by listening to customer needs and bringing them solutions like cutting-edge high-voltage power products. Our power history and DNA are providing Methode with competitive differentiation in the marketplace. In regard to our forecast for FY2026 power sales, given our guidance for flat data centers and a decline in EV, our sales will moderate this year before reaccelerating in FY2027 . Power solutions are clearly a long-term growth engine for Methode, and we are actively investing in this area. If we turn to slide eight, I want to give you an update on where Methode is on its transformation journey.
As I've said before, transformations are never easy, and I make a distinction between a transformation and a turnaround. Quite simply, a transformation is about fixing a business in a way that enables it to both evolve and position it for future growth. The Methode journey is undoubtedly a transformation. But like any journey, the path is not always linear. Our first order of business was stabilizing the base, which included significant organizational changes that we have made in the previous quarters. It meant focusing on executing program launches while simultaneously revamping plants and installing new leaders in many of those plants, all in the face of numerous external distractions. We've worked hard to remediate practices that had atrophied or institute practices where they did not 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're now better positioned to leverage synergies and utilize core competencies to align with the 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 are seeing potential future sales growth upside from takeover business. This takeover business is both in 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 a foundation has been laid for us to drive consistent and improved execution. Let's turn to slide nine. So how do we continue to earn the right from here? First, we continue on our foundational actions to successfully launch programs, drive improved operational execution, and accelerate lower-level team building, all of which will be enabled by our new global engineering and product management organization. Second, we keep refining the organization to harmonize it to market opportunities. That includes the right-sizing of plants and headcount. It also includes footprint consolidations. Finally, we take actions to address our structure and capital discipline while, like reducing our board size from 10 to seven, relocating our headquarters to an already owned Methode facility, reducing our dividend, and reviewing our portfolio.
All of these actions support Methode's core business in data centers, EV, and lighting, which provide an attractive foundation for value creation in FY2026 and beyond. While the transformation is certainly about improving execution and reducing cost, it is also about driving innovation. What drives competitive advantage at the end of the day is the ability for an organization to redeploy the knowledge, resources, and capital gains from its everyday business into new products and markets. Methode is systematically taking this proactive approach, whether it is digging deeper into the power needs of our data center customers or optimizing our footprint and portfolio for what customers and the business will need in the future. We're working hard to refine our business model.
As we turn to slide 10, everything I've shared with you today gave us the confidence to reaffirm guidance for FY2026, which is a notable doubling of our EBITDA from FY2025. For FY2026, we expect sales to be in the range of $900-$1 billion. Please note that FY2025 was a 53-week fiscal year, and FY2026 will be a typical 52-week fiscal year. So we will have one less week in FY2026 as compared to the prior year. We expect EBITDA to be in the range of $70-$80 million, as you can see from the charts on the right side of the slide. We expect FY2026 to be higher from both FY2024 and FY2025, despite significant reduction in sales over that same period of time.
Specifically, in FY202 6, we will not see any downward margin conversion from the $100 million in lower sales. We'll actually see almost a doubling of EBITDA margin from 4.1% to 7.9%. We are driving improved operational execution this past year that was often masked by various external and historical challenges. The result now is a solid foundation for the Methode team to build on in the future. In summary, we've embarked on a transformation, built a strong team, and stabilized the organization. Overall, we truly feel that we have put many of the issues of the past year behind us while still maintaining a strict focus on business performance. John, we can now move to the Q&A portion of the program.
Thank you, John. If you have a question, please enter it in the Q&A box, and I'll present it to management. I'd like to kick it off, John, with that you came aboard during a period of significant launch activity for the firm. Can you talk a little bit about that, and how has it proceeded relative to your expectations going in?
Yeah, we're still in the middle of that period of launches, 52 total launches over the two years. Both last year and this year, we got 30 more this year. What we really had to do is step back and look at where are the capabilities within the organization, and how do we make sure that we stabilize appropriately to when we talk about earning the right. Let me back up just a second. Methode's an 80-year-old company with many phases in its history. As we've talked to the organization, what we talk about as earning the right is earning the right to write the next chapter of the Methode story. The way we do that is we earn the right with our shareholders. We earn the right with our customers, and we earn the right with our employees.
Earning the right with our customers means that we launch products on time at the right quality and at the right capability, and we weren't doing that a year ago, so that was one of the first things we had to do was get our launches right and get our plants stabilized in order to protect our customers, and the team has done a fantastic job both in Egypt, Malta, and in Mexico to get those launches stabilized and get our customers moving from being upset with us to being happy and, in some situations, giving us supplier awards.
Not surprising, this question's coming in as an automotive supplier about the tariff environment. Can you kind of give us maybe your overview of how tariffs are impacting you, and what are you doing to mitigate some of those costs?
First, as we've said in many of the earnings calls, we have committed to pass on any tariff headwinds that we face. We did have $1 million worth of tariff headwind in Q1, but that's more of a timing thing. We have agreements with our customers to recover tariff expenses. Many of our products are not hit by tariffs, and our footprint allows us to move some end manufacturing around. Our Mexican facility is over 97% USMCA compliant, so it allows us to avoid any tariff issues between Mexico and the U.S. What we're actually doing is our footprint allows us to actually do some things with our customers and win some business with customers or have opportunities with customers that some of our competitors, where their footprint isn't quite as capable or isn't quite as flexible, can't do it.
We are not seeing a tremendous amount of financial headwinds. It certainly forced us to make sure that we understood our data, make sure that we understood our systems, make sure that we understood where all of our materials were coming from. But now that we have those things cleaned up, it allows us to, in many ways, delight our customers.
Understood. Can you maybe discuss a little bit about the changing EV environment? There was once a time when the expectations were rather significant about content, and the changing EV outlook has kind of, I don't know, thrown cold water on maybe some of those expectations. And how has that impacted your planning and outlook for the automotive side?
So I think it's important to break down the EV trends by end market. And we've spent quite a bit of time on that on past earnings calls, separating out what's happening in the Asia-Pacific region, what's happening in Europe, and what's happening in North America. Certainly, North American EV penetration has thrown cold water, and it's thrown cold water on a lot of suppliers. And for those of you that follow the industry, you saw announcements over the weekend of Stellantis canceling their EV truck program as an example. That has impacted us from a revenue perspective in the near term. And it's one of the reasons why the delays in North American cancellations in North American programs by Stellantis and other OEMs is a reason why we go down by $100 million year over year.
So we still believe in the core technologies, and we believe that there are core competencies both from a manufacturing and from a product design perspective that we can apply on EVs around the world, as well as from our data center and our military power solutions activities. So the core technologies we believe in, we think EVs ultimately will have a place in all of the end markets, even if the North American market is going to take much longer to adopt. But we're using our capabilities in China to win business with the China customers, and it actually helps us with our, if you will, our China speed product development. We're growing with OEMs in Europe from an EV program standpoint, and we're dealing with the challenges in the North American space.
Got it. You mentioned that you're in the process of reviewing the portfolio and looking at potential footprint consolidation. Can you kind of discuss what are you thinking about as far as both those points in FY2026 ? To what magnitude are we talking about here?
Well, so I think it's important to understand that Methode, for a billion-dollar company, if you look at it from the outside or if you look at it from the website and just see how complex the product portfolio is and has been. What we've sought to do over the last 12-15 months is really understand both where we make money, where we don't, but also which of our product, our base product lines, as well as our core competencies that support those product lines, how are they aligned with what we see as industry megatrends in the multiple industries in which we play. And as we said in the prepared remarks, we see lighting, user interface, and power as really the core basis for growth going forward.
What that should send a message to everybody is that there are other pieces that are outside of those three cores that, at a minimum, we're probably not going to make the same levels of investment in as we would in those three core areas. So that's the portfolio answer, John. As you think about footprint, our footprint, from a manufacturing perspective, is relatively well-positioned. But what we are doing is we're taking inventory down, and as we're making our plants more efficient, we're actually reducing our footprint from a warehouse perspective and, in some situations, from a manufacturing perspective. But what we're also doing is we're looking at all of the other sources of footprint, things like closing our headquarters, where we could use a building that we already owned and reduce our structural cost.
We've looked at all of our engineering centers and small sales and engineering activities around the world to see where do we take cost out. So it's not just manufacturing footprint. It's footprint everywhere, and it's cost everywhere from the board of directors on down that we're trying to evaluate and size this business appropriately to go forward.
Makes sense. Makes sense. We touched on the EV market. One of the better end markets for you as of late has been the data center market. Maybe we can give investors maybe an overview of where you participate in that market, maybe some of the recent growth activity, and also maybe what clients are telling you about the year ahead.
You can't pick up a newspaper or listen to read anything on the internet, or I'm still a dinosaur. I still pick up a newspaper. But you can't do anything without reading about data centers and particularly how the hyperscalers are making investments. Today, we provide bus bars that are basically bringing the power directly to the rack for the hyperscalers. We may not supply them directly. We may supply to their contractors that are producing the racks, but we are working with the hyperscalers in that situation. Basic foundational bus bars, common core competencies to what we have. What we have been doing over the last year, however, is trying to anticipate their needs more both from a lead time perspective, and we're doing more to do vendor-managed inventory and shorten the lead times with regard to the current technology, and that's providing an opportunity for growth.
And at the same time, we look at where they're going from a technology perspective as they try to bring higher voltages all the way to the rack, and how do we use some of our EV system capabilities to bring to them solutions in ways that maybe we haven't done in the past or we haven't thought about in the past. And thus far, while it's very early days, we see green shoots of, "Hey, this is exciting," and our customers are excited about it. So what's in our guidance today is flat year over year. But if you look at data centers, it went $25 million in FY2023 , $41 million in FY2024 , $80 million in FY2025. We guided to flat data center volume in FY2026 , but we believe there's upside there.
But until we get additional demand, we have not put that in our guidance. And none of the future activities is currently in our guidance, although we are excited both about the opportunities to grow the base business as well as where the future is going.
That's great to hear. Some of the people listening today might not realize you also participate in the Class A truck market, ag market, construction market. Maybe some general thoughts of what you're seeing in those markets for FY2026 .
So particularly in North America, it's still a challenge market. The commercial vehicle market is still down, both due to pure macroeconomic challenges, but also some of the unknowns with regard to emissions regulation, which either has changed the pre-buy or changed the way some of the fleets buy. And John, you know that I've got quite a bit of experience in previous lives dealing with the commercial vehicle guys, so I have a feeling for this. Where we're at right now is we have done a lot to refresh our relationships with our commercial vehicle OEMs and actually used the tariff challenges to address some of how our supply chain to them. We can change it to shorten our lead times and reduce their tariff expenses.
It's allowed us to deepen our relationships with them and actually fix some relationships in ways that weren't damaged 12 months ago. So yes, the volume today is a headwind. It's not that we've lost shares. It's just the fact that they're selling less trucks. The current ACT guidance is, I believe, second half of FY2025 and into 2026 is where they see it getting stronger. So we're optimistic about that, but all we can do is take ACT information, and that's the basis for our guidance.
Fair enough. Fair enough. Maybe we could shift a little bit to the balance sheet. You've refinanced. You've cut the dividend. Maybe talk a little bit about your thoughts about where you stand as far as capital allocation, maybe deleveraging. Maybe some financial bullets on the balance sheet would be helpful.
Yeah. I'm going to let Laura handle that if you don't mind.
Not at all.
Yeah. So as far as our capital allocation, we always use our capital first to invest in our business, being a CapEx or engineering. We also pay down debt. So over the last three quarters, we've paid down $41 million of our debt. And we had a good free cash flow quarter of $18 million, and this is the third consecutive quarter of free cash flow. So there's been a lot of focus on the balance sheet, John.
Excellent. Excellent. I'm sure people look forward to improvement there. Maybe an optimal leverage ratio in the future. Laura, what do you think?
Yeah. I'd certainly like to get down into the threes, and we're working our way down to that.
Okay. Fair enough. John, you reiterated your guidance. Maybe walk people through with a roughly $100 million lower revenue, how you're going to nearly double your EBITDA? People might not be aware of some of the things that the puts and takes that would take to get there.
First and foremost is operational execution and tremendous improvement from an operational execution standpoint, particularly in Egypt, both reduction of premium freight, reduction of scrap costs, and reduction of labor costs, although direct labor is relatively small in Egypt, SG&A reductions of over $9 million. Then just basic efficiencies in all of the areas. Plus a 3% improvement year over year from a materials perspective. What we're doing from a supply chain side to get more efficient, both on how we deal with our customers as well as how we reduce freight, what we're doing to reduce our costs in each of our plants from a structural standpoint, as well as from a quality perspective that will reduce scrap costs around the world and reduce our premium freight, and then reducing our SG&A costs and sizing the business from the leadership team on down.
Fair enough. Well, I don't see any other questions in the Q&A. If anybody has one, please enter it now. If not, I'm going to leave it to you, John, for some closing arguments and what people may be missing or not understanding as far as the Methode story at this point.
Thanks, John. For all of you who have taken the time to show interest in Methode, thank you very much. This is a leadership team that is both committed to and excited about the opportunity to transform the company. As I said, it's an 80-year-old company with a proud history, and we're all committed to helping write that next chapter. That starts with execution. That starts with understanding where we make money and where we don't and taking very strong actions to address areas where we're not performing. It also requires that we make very clear decisions on where the future growth can be and how that's aligned with megatrends so we start anticipating needs.
And as you watch us continue to perform on a quarter-over-quarter basis, hopefully what you'll see is that we start tying these quarters together, and the words that we're saying to you with regard to how we're going to focus and how we're going to prioritize your capital come through, and we work hard to earn your rights. So thanks very much for your interest, and we look forward to talking to each of you. Thanks, John.
Thank you, John, Laura, Randy, Rob. We appreciate you being here, and everybody have a great day.
Thanks.
Thank you.