Methode Electronics Inc (NYSE:MEI) reported its second-quarter fiscal 2024 earnings, surpassing analyst expectations with an adjusted earnings per share (EPS) of $0.14, compared to the forecasted -$0.16. The company's revenue also exceeded projections, coming in at $292.6 million against a forecast of $269.78 million. Following the announcement, Methode's stock price jumped 24.12% in pre-market trading, reflecting positive investor sentiment.
Key Takeaways
- Methode Electronics reported a significant EPS beat, with actual EPS at $0.14 versus the forecast of -$0.16.
- Revenue for Q2 increased by 2% year-over-year, reaching $292.6 million.
- The company's stock surged over 24% following the earnings release.
- Methode is expanding its data center business, which grew 50% year-over-year.
- New leadership appointments aim to strengthen global operations.
Company Performance
Methode Electronics demonstrated resilience in its second quarter, posting a 2% increase in net sales year-over-year. The company has been focusing on expanding its data center sales, which saw a significant 50% growth compared to the previous year. Despite challenges in the automotive and commercial vehicle markets, Methode has maintained a diversified customer base across North America, Europe, and Japan, reducing its reliance on any single customer or program.
Financial Highlights
- Revenue: $292.6 million, up 2% year-over-year
- Adjusted EPS: $0.14, up from $0.06 in the previous year
- Adjusted Pre-Tax Income: $6.2 million, an increase of $3.8 million from fiscal 2024
- Cash Position: $97 million, a decrease of $64.5 million
- Net Cash from Operating Activities: Negative $48 million
Earnings vs. Forecast
Methode Electronics significantly outperformed its EPS forecast, reporting $0.14 against the expected -$0.16, representing a positive surprise. The revenue also exceeded expectations by approximately $22.82 million, marking a robust performance amid industry challenges.
Market Reaction
Following the earnings announcement, Methode Electronics' stock surged by 24.12% to a last close value of $11.61. This movement positions the stock well above its 52-week low of $8.54, reflecting strong investor confidence in the company's future prospects. The stock's performance contrasts with broader market trends, indicating a specific positive sentiment towards Methode's strategic direction.
Company Outlook
Looking ahead, Methode Electronics expects fiscal 2025 net sales to remain flat compared to fiscal 2024, with adjusted pre-tax income projected to break even. The company anticipates improved financial performance in fiscal 2026, with net sales and pre-tax income expected to surpass fiscal 2025 levels. Methode is preparing for over 30 program launches in fiscal 2025, aiming to capitalize on growth opportunities in the EV and data center sectors.
Executive Commentary
CEO John DeGaynor emphasized the company's focus on executing its pipeline of new programs, stating, "Our immediate priority is to successfully execute on the large pipeline of new programs that must be launched in the next 18 months." He also highlighted the growth potential in the data center sector, noting, "We do see both AI and just overall data center growth."
Q&A
During the earnings call, analysts inquired about the timing of EV program launches and the company's cash flow challenges. Management addressed these concerns by outlining expected cash flow recovery and improvements in their Mexico operations. The company also clarified its strategic initiatives in the AI and data center markets, which are poised for growth.
Risks and Challenges
- Supply chain disruptions could impact product delivery timelines.
- The commercial vehicle market is expected to remain soft, potentially affecting sales.
- Macroeconomic pressures, such as inflation and interest rate changes, may influence consumer spending and investment.
- Execution risks associated with launching over 30 new programs in fiscal 2025.
- Dependence on successful expansion in the competitive data center market.
Full transcript - Methode Electronics Inc (MEI) Q2 2025:
Conference Operator: Greetings, and welcome to the Methode Electronics Second Quarter Fiscal 2025 Results Call. At this time, all participants are in a listen only mode and a question and answer session will follow the formal presentation. And please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Robert Cherry, Vice President of Investor Relations.
Sir, the floor is yours.
Robert Cherry, Vice President of Investor Relations, Methode Electronics: Thank you, operator. Good morning, and welcome to Methode Electronics' fiscal 2025 2nd quarter earnings conference call. For this call, we have prepared a presentation entitled Fiscal 2025 Second Quarter Financial Results, which can be viewed on the webcast of this call or found at mezzo.com on the Investors page. This conference call contains certain forward looking statements, which reflects 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 Q and 10 ks reports. On Slide 4, please see an agenda for our call today. We will begin with the business update, then a financial update, followed by a Q and A session.
At this time, I'd like to turn the call over to Mr. John DeGaynor, President
John DeGaynor, President and Chief Executive Officer, Methode Electronics: and Chief Executive Officer. Thanks, Rob, and good morning, everyone. Thank you for joining us for our Q2 earnings conference call. I'm joined today by Laura Kwalczyk, our Chief Financial Officer. We are pleased to have Laura join the Methode team given her background and experience.
She has an impressive track record of delivering successful business transformations within our industry and has gotten off to a fast start at Methode. Turning to Slide 5 and our results for the quarter. Our sales were $293,000,000 and our adjusted pre tax income was $9,000,000 As noted in our earnings release, the quarter benefited from an extra week. Our fiscal 2025 is a 53 week year and that extra week fell into this quarter. Aside from the impact of the extra week, sales benefited from higher demand from our power products and data centers and electric vehicles.
We also had growth in Europe from automotive program launches. Offsetting these strengths were program roll offs that we discussed before and demand weakness in the commercial vehicle market impacting our lighting business. Overall, our sales in the quarter were on track with our expectations. The solid sales volume along with progress on our cost reduction efforts drove the pretax income improvement in the quarter. In particular, we had a notable reduction in freight costs, particularly premium freight, which is a direct reflection of our overall improved operational execution.
Better than expected result was also driven by improved fixed overhead absorption, another sign of execution improvement. Turning to EV activity. Sales in the quarter were 20% of our consolidated total, a sequential increase from 18% in the Q1. We are experiencing the beginning of a wave of new program launches for EV power applications. As such, we continue to expect the EV percentage to grow further and it should be over 20% for our full year fiscal 2025.
While our sales are currently on track for the full year, there are clearly some tailwinds and headwinds in several of our key end markets, Helping us is the growth in data centers. Conversely, hurting us is the weakness in automotive and commercial vehicle demand. The EV market has clearly softened, particularly in North America, but our program launches are mitigating that softening. Turning to the balance sheet. We are maintaining an acute focus on managing it and generating cash.
While we experienced a timing issue with accounts payable this quarter that led to a sizable reduction of net cash from operating activities, we were comfortably in full compliance with all our debt covenants. On the order front, we had another solid quarter with over $50,000,000 in annual program awards. This is on track with our expectations for the year. The pipeline of bookings is subject to reduction and or delay due to customer decisions and or market conditions. Lastly, and as I have emphasized before, our immediate priority is to successfully execute on the large pipeline of new programs that must be launched in the next 18 months.
In fiscal 2025, we have over 30 program launches and in fiscal 2026, we have another 20 plus programs to launch. Our customers are counting on us and we plan to deliver. In short, we believe that our efforts to improve our execution have started to bear fruit as clearly evidenced by the better than expected results in the quarter. Turning to Slide 6, The awards identified here are some of the key wins in the quarter and represent $43,000,000 of annual sales at full production. As usual, the launch timing of these programs could be anywhere in the range of 1 to 2 years from now.
All of these awards were for power distribution products for applications in EV, traditional auto and defense. As you can see from this chart, bookings can be lumpy. What's important to note is that on a trailing 12 month basis, we are winning awards at a rate sufficient to at least maintain our current annual sales level. Overall, we feel our award activity has been solid. Turning to Slide 7.
One of my learnings since taking the CEO role in July is that the company's path to success relies on returning to a 1 Methode mindset, where all our global teams are working together and moving in the same direction. This mindset existed within Methode historically and needed to be reinvigorated. To facilitate this reinvigoration, we have made a couple of key executive moves. We've appointed a dedicated leader that will oversee all global strategic launch and commercial activities for the company's automotive business. On December 2, Lars Ulrich joined Methode as Senior Vice President, Global Automotive Business reporting directly to me.
Lars comes to us with over 20 years of business and strategic leadership experience in multinational companies, mainly as suppliers like Infineon (OTC:IFNNY) and Robert Bosch (NS:BOSH). During his career, he has built a reputation for strategic and innovative thinking, a collaborative approach to customer relationships, operational excellence and clarity in the face of challenges. He will be a strong addition to our leadership team and help us to develop and launch programs that delight our customers. In addition, we have also promoted Sadek Eldrisi to lead all operations and engineering in Europe and the Middle East. This will be in addition to his current responsibilities as our Vice President of China.
In his 18 year career at Methode, he has held management roles of increasing responsibility culminating with the successful execution of the company's strategy in China. Sadik is well respected and his experience, leadership and demonstrated ability to achieve results makes him an ideal leader to guide our European and Middle Eastern operations through a challenging period of growth. These are both initial but crucial steps to getting back to our history, operating as one method to drive success. And with these steps, we now have fresh perspectives in the roles of CEO, CFO, CPO and SVP of Global Auto as compared to just 5 short months ago. Turning to Slide 8.
In summary for the quarter, sales were on track, while our pre tax income was better than expected. EV activity steadily grew and was 20% of total sales. Data centers were a market tailwind, but the auto and commercial vehicle markets were a concern. While we experienced a timing issue on cash, we were comfortably in full compliance with all debt covenants. Lastly, program awards were solid.
Going forward, our focus this fiscal year is to transform the business while positioning it to return to profitable growth next fiscal year. Meanwhile, we are focusing intensely on executing our 30 programs while taking decisive actions to address execution and costs. Led by our new leadership team that we have systematically built over the last several months, Methode is focused on transforming its business. We are also committed to compliance and taking steps to invest in our compliance resources and processes. Regarding compliance, Methode has disclosed that the company has received a subpoena from the SEC seeking documents and information.
We take all compliance matters seriously and are cooperating fully. While we are limited in what we can say about this matter, we are committed to transparency and we'll keep you informed. Lastly, for fiscal year 2025, we are reaffirming guidance for flat sales and raising adjusted pre tax income guidance to approximately breakeven. I spent a tremendous amount of time traveling over the past quarter, meeting with customers, visiting our plants and talking to Methode employees. I can share with great confidence that our team is clearly energized and the results from this quarter demonstrate that our business is heading in the right direction.
At this point, I'll turn the call over to Laura, who will provide more detail on our Q2 financials.
Laura Kwalczyk, Chief Financial Officer, Methode Electronics: Thank you, John, and good morning, everyone. I am very excited to join the Methode team, and thanks to John for his kind remarks. Please turn to Slide 10. The 2nd quarter net sales were $292,600,000 compared to $288,000,000 in fiscal 'twenty four, an increase of 2%. On a sequential basis, sales increased 13% from the fiscal 'twenty five Q1.
As John referenced, the company's typical fiscal year is 52 weeks, but occasionally requires an additional week in order for the fiscal year to end on the Saturday closest to April 30th. The current fiscal year ending May 3, 2025 is a 53 week fiscal year with the additional week being included in this fiscal quarter making it a 14 week period. The prior year's Q2 as well as this year's Q1 were 13 week periods. As a result, the extra week contributed to our financial comparisons. In this quarter, sales of power products into data center applications grew both year over year and sequentially.
We also saw some modest growth in EV sales sequentially. The quarter also benefited from our launch activity in Europe. Offsetting those strengths was the impact of the previously disclosed roll off of an EV lighting program in Asia. That program ended toward the end of the last fiscal year and has had no sales this year. Also creating a headwind was the market weakness for our lighting products and commercial vehicle and off road applications.
1st quarter adjusted income from operations was $14,300,000 up $8,300,000 from fiscal 'twenty four. On a sequential basis, adjusted income from operations improved $19,000,000 from the fiscal 'twenty five Q1. Please see the appendix for reconciliation of all adjusted measures to GAAP. The increase in adjusted operating income both year over year and sequentially was driven by the higher sales volume. In addition, we were able to significantly reduce our freight costs, particularly our premium freight due to the operational improvements that John described.
The increased volume also served to improve our fixed overhead absorption. Overall, our 2nd quarter sales were on track with our full year expectations. Please turn to Slide 11. Shifting to EBITDA, a non GAAP financial measure, 2nd quarter adjusted EBITDA was $26,700,000 up $5,500,000 from the same period last year. On a sequential basis, adjusted EBITDA improved $16,900,000 from the fiscal 'twenty five Q1.
The adjusted EBITDA benefited both year over year and sequentially from higher sales and gross profit. It was also driven by lower selling and administrative expenses and both comparisons. Please turn to Slide 12. 2nd quarter adjusted pretax income was $6,200,000 up $3,800,000 from fiscal 'twenty four. On a sequential basis, adjusted pretax income improved $15,300,000 from the fiscal 'twenty five Q1.
Compared to the prior year and the last quarter, adjusted pretax income was driven by higher net sales. In addition, both comparisons benefited from lower freight, while being partially offset by higher net interest expense. 2nd quarter adjusted diluted earnings per share increased to $0.14 from $0.06 in the same period last fiscal year. On a sequential basis, the adjusted earnings per share increased $0.45 from the fiscal 'twenty five Q1. The 2nd quarter adjusted EPS included a tax expense due to the GILTI tax treatment on foreign earnings, which was offset by various tax benefits.
The result was approximately 0 adjusted tax expense in the quarter. Overall, our 2nd quarter adjusted pretax income was slightly ahead of our full year expectations. Turn to Slide 13. Debt was up $9,700,000 from the prior year end. We ended the quarter with $97,000,000 in cash, down $64,500,000 Elevator program launch activity drove higher inventory investment year to date.
This was the primary use of cash year to date. Net debt, a non GAAP financial measure increased by $74,200,000 to 243,600,000 The increase was mainly due to the aforementioned use of cash. Despite the consumption of cash, we were in compliance with all of our debt covenants at the end of the second quarter. Please turn to Slide 14. The 2nd quarter's net cash from operating activities was a negative $48,000,000 as compared to a negative $600,000 in fiscal 'twenty four.
The decrease of $47,400,000 was primarily due to a sizable decrease in accounts payable related to the timing of payments between the 1st and second quarter as well as the 14 week period. 2nd quarter capital expenditure was $10,400,000 as compared to $10,700,000 in fiscal 'twenty four, a slight decrease of 300,000 2nd quarter free cash flow, a non GAAP financial measure, was negative $58,400,000 as compared to a negative $11,300,000 in fiscal 'twenty four, a decrease of $47,100,000 This decrease was mainly due to the accounts payable timing issue that I just described. Please turn to Slide 15. Regarding forward looking guidance, it is based on management's best estimates and is subject to change due to a variety of factors as noted at the bottom of this slide. For fiscal 'twenty five, we are reaffirming expected net sales to be similar to fiscal 'twenty four with the Q3 expected to be similar to Q3 of fiscal 'twenty four.
We are raising adjusted pre tax income guidance to be approximately breakeven. This raise is mainly a function of our outperformance in the Q2. Please note that the adjusted pre tax income in the 4th quarter is expected to be significantly stronger than the Q3, with the Q3 potentially having a pre tax loss. Please keep in mind that our Q3 is historically our weakest quarter due to the holidays and customer shutdowns. In addition, it will be our 1st full quarter since the effective end of the GMT-one program, and we are also seeing some near term auto market weakness just like others in the industry.
This fiscal year 'twenty five guidance assumes depreciation and amortization of $60,000,000 to $65,000,000 CapEx of $45,000,000 to $55,000,000 and tax expense of $13,000,000 to $15,000,000 The reduction in CapEx guidance is primarily related to the lower run rate year to date. The increase in tax guidance is related to a higher valuation allowance for U. S. Deferred tax assets, which was $7,500,000 through the first half of the year. Looking further ahead to fiscal 'twenty six, we are reaffirming expected net sales to be greater than fiscal 'twenty five and pre tax income to be positive and notably greater than fiscal 'twenty five.
That concludes my comments, and we can open it up to questions.
Conference Operator: Thank you. At this time, we will be conducting our question and answer session. Thank you. Our first question is coming from John Franzreb with Sidoti and Company. Your line is live.
John Franzreb, Analyst, Sidoti and Company: Good morning, everyone, and thanks for taking the questions.
John DeGaynor, President and Chief Executive Officer, Methode Electronics: Good morning, John.
John Franzreb, Analyst, Sidoti and Company: I was wondering if you could quantify the impact of the extra week, not only on the top line, but perhaps on operating results.
John DeGaynor, President and Chief Executive Officer, Methode Electronics: So John from a what we look at with the extra week is it's approximately $20,000,000 worth of revenue. And then it would have that it would have the follow on operating results that go along with that.
John Franzreb, Analyst, Sidoti and Company: Okay. Those drops down. Got it. And what cost control measures impacted the 2nd quarter results beyond the reduction in freight costs? Was there anything else that had a positive impact on operating income?
John DeGaynor, President and Chief Executive Officer, Methode Electronics: Yes. And as we said, we're seeing thinning of overheads. We're also seeing improvement in our scrap activities. So it is execution driven activities that really are driving the performance, execution focused activities that are driving the performance.
John Franzreb, Analyst, Sidoti and Company: Okay. Fair enough. And of the $50,000,000 in new orders, how much was that directly related to new programs in the EV market versus other markets?
John DeGaynor, President and Chief Executive Officer, Methode Electronics: Well, the majority of our launches are all in EV programs, are on power programs as we talked about. So the all of the awards are in those areas as we said.
John Franzreb, Analyst, Sidoti and Company: Fair enough. And one last question, I'll get back into queue. In regards to the improvement in the data center market, can you kind of quantify what kind of impact that is up year over year or any other way that kind of puts it all in context?
John DeGaynor, President and Chief Executive Officer, Methode Electronics: So data centers are roughly 3% to 5% of our total sales. And what we're seeing is that we're about 50% year over year improvement. It's above average margin for us and we're really excited about the opportunities that we see in that space going forward and trying to expand that business beyond the 3% to 5%.
Conference Operator: Our next question is coming from Luke Yunck with Baird. Your line is live.
Luke Yunck, Analyst, Baird: Great. Thank you for taking the questions and good morning. I wanted to circle back just to the pretax income walk into the 3rd quarter. I appreciate the things that you should. I'm just wondering if there's anything else that we should be accounting for in terms of things that may have been temporary in the current quarter beyond the inventory reserve?
Any impacts that we should think about from the extra week that have an outsized bottom line impact either, John?
John DeGaynor, President and Chief Executive Officer, Methode Electronics: Hey, Luke, it's John. Good morning. I'll take the first piece and if Laura wants to add color to it, she can. There were not other than the extra week, there were not one off positive performance things in Q2. So as we think about Q3 and as we talk about the perspectives with regard to Q3, it really comes down to it's our latest revenue quarter.
So we feel confident about the base performance of the business, where we are and the progress that we're making, but we need to be transparent with our investors that Q3 is a challenging quarter just because of the holiday periods around the world, not because of something else one off or something else special within Methode.
Luke Yunck, Analyst, Baird: Okay. Then switching gears here, wondering if you'd be able to comment just where we stand from a launch standpoint right now. In other words, you're anticipating 30 plus launches this year. Just how many of those are already in motion versus what remains to execute? And maybe if you could just remind us of the weighting to Europe and risk of any launches flipping
Gary Prestopino, Analyst, Barrington Research: to the right geographically specifically?
John DeGaynor, President and Chief Executive Officer, Methode Electronics: So from a launch standpoint, many of them are capitals on the floor, where we're in final development phase or when ramp up phase. These launches are mainly between North America and EMEA and they're split relatively equally. The what we do see is we do see certain customers particularly on EV programs where they may delay the start of their programs. It's not program cancellations, but it is exactly when they start those ramp ups. So we're working with our customers from the standpoint of making sure that we've got transparency on when exactly they start and how do we manage our pipeline of inventory and some of what we talked about here with regard to the uses of cash, but also what do we do to support our customers there.
Luke Yunck, Analyst, Baird: I don't know if you're able to make any specific comments relative to Stellantis (NYSE:STLA), but obviously a really important launch customer this year. Any color there would be great as well, if possible.
John DeGaynor, President and Chief Executive Officer, Methode Electronics: So, Stellantis is, as we've talked about, is a very important customer for us. And as we get the programs ramped up, they'll be one of our largest customers, over $200,000,000 revenue customer for us. We do see some, if you will, some timing shifts and that's been publicized by them that they're taking their time with regard to their EV launches. So it's not new news. But what we see is we're not one EV programs are at 20% of total methods.
We're not overly exposed to EV programs and we're not overly exposed to Stellantis. We're pretty comfortable with our balance on the different OEs. So Stellantis is an important customer to us. We stay in very close contact with them and we feel good about where that business is going, but we do watch it closely.
Luke Yunck, Analyst, Baird: Got it. And then lastly, just on data center, a couple of maybe clarifying items. One, can you just help us understand within the 3% to 5% overall exposure, industrial segment versus interface? And then in terms of the really strong year over year growth, are you seeing any AI related impacts in that business? Or would
Gary Prestopino, Analyst, Barrington Research: you say this is more core data center that's driving improvement? Thank you. So
John DeGaynor, President and Chief Executive Officer, Methode Electronics: as we said, it is a relatively small portion of the total. It is fairly significant year over year growth. And we do see both AI and just overall data center growth. And what we're exploring right now and we're spending quite a bit of time on is what are additional opportunities where we can use our capabilities more fully to actually expand this space.
Luke Yunck, Analyst, Baird: Got it. I will go ahead and leave it there. Thank you.
Conference Operator: Thank you. Our next question is coming from Gary Prestopino with Barrington Research. Your line is live.
Gary Prestopino, Analyst, Barrington Research: Thank you. Good morning all and welcome Laura.
Robert Cherry, Vice President of Investor Relations, Methode Electronics: Good morning Gary.
Gary Prestopino, Analyst, Barrington Research: Couple of questions initially a little nitpicky. Interest expense looked like it was up sequentially almost $1,400,000 Was there any one time expenses in that interest expense number? Or is that going to be the run rate at 6,200,000 per quarter for the remainder of the year?
Laura Kwalczyk, Chief Financial Officer, Methode Electronics: Gary, that should be the run rate. But as debt does decrease, obviously, it will go down some.
Gary Prestopino, Analyst, Barrington Research: Okay. And then could you if it was a you mentioned something about an inventory reversal, reserve reversal in Interface (NASDAQ:TILE). Could you quantify that for us?
Laura Kwalczyk, Chief Financial Officer, Methode Electronics: Yes. The inventory reserve reduction in the Interface segment was approximately $500,000
Gary Prestopino, Analyst, Barrington Research: Okay. So $500,000 great. Thank you. So you mentioned one of the positive aspects of the quarter was premium freight costs are down substantially, which is great news. Have you reached a point here where you feel that your premium freight costs are now more normalized?
Or is there still room to improve that metric? And if you could, could you maybe share how much premium freight was down?
John DeGaynor, President and Chief Executive Officer, Methode Electronics: So the answer, Gary, is no. We're not at a normalized period. Both from a premium freight and from a scrap perspective, we're continuing to drive additional improvement there. In the quarter, we had $7,000,000 worth of premium freight, and we're working to move that down sequentially. And as we've said in the past, the team, particularly in Mexico I'm sorry, I misspoke.
It's a $7,000,000 reduction quarter over quarter.
Luke Yunck, Analyst, Baird: Okay.
John DeGaynor, President and Chief Executive Officer, Methode Electronics: I apologize. But the teams both around the world, but particularly the team in Mexico has done a very good job of getting their business stabilized from where we were in fiscal 2024. And from a scrap and premium freight perspective, I would expect to see continued improvement both in EMEA and in North America with regard to how we execute. There, we've got some additional work going on with regard to some pretty in-depth workshops to try to drive improvement in both Egypt and in Mexico that will drive scrap down and will continue to drive premium freight down.
Gary Prestopino, Analyst, Barrington Research: Okay. It's all good news. I just want to talk about some of these program launches, particularly with Stellantis. But first of all, beyond Stellantis, could you maybe talk about where some of this new business is coming from, what OEMs?
John DeGaynor, President and Chief Executive Officer, Methode Electronics: So we Gary, as you know, IntelliProgram is in production. We're not allowed to name customer names.
Luke Yunck, Analyst, Baird: Okay.
John DeGaynor, President and Chief Executive Officer, Methode Electronics: But it's balanced between, if you will, European OEMs, North American OEMs, as well as Japanese OEMs. That's as much detail as I'm able to give you at this point from stuff that hasn't started production yet. Okay. And it's both launches are primarily split between the European market and the North American market, again with the different nameplates that I mentioned to you or the different regional companies that I mentioned to you. But the teams around the world are working to try to make sure that those launches go well.
Gary Prestopino, Analyst, Barrington Research: Okay. So let me ask a question. Let me put your question to you this way, John. I follow other companies that are dealing with the EV market. They put together their projections on what at least some of the companies on what they can do to that particular OEM based on what the OEM is telling them they think their production levels are going to be.
And then we're starting to see a slippage in the EV market. And obviously those projections come down as we go through the year. So could you maybe are you could you maybe go through a sequence of how you're determining what your potential sales are going to be? I mean, are you taking the raw numbers from the OEM on what they think their production levels are? Or is just give us some insight into that because it just appears to be that there's so many EVs coming out in the market, but they're not really getting purchased as quickly as they had been in the past.
John DeGaynor, President and Chief Executive Officer, Methode Electronics: Yes. So as we've said in the past, so let me talk about how we think about this first. It's easy to get focused because the press is so focused on just North American EV penetration, while recognizing that we are selling into customers in the U. S, in Europe and in China. So when you think about electric vehicle market penetration in the U.
S, it's about 9%, in Europe, it's 21%, 22%, and in China it's 27%. So those take rates are and the market penetration changes depending on the region. So as we talk about launches both in Europe and in North America, we're not solely exposed to the North American market. That's part number 1. Secondly, we don't just take the customer volumes as they give them to us.
Certainly, we use that as a consideration, but we look at the sources of expert data, if you will, whether it's Global Insights or IHS or others to try to sense check what is the OE telling us, what do we read in the press as well as what are the global experts are saying. And we sensitize then the ramp up, the timing, the overall volumes and therefore what do conversations do we need to have with customers and what do we have to do with regard to our inventory plans as well as to our CapEx plans. So that's how the approach that we're taking, Gary, is we validate or we sensitize the customer.
Gary Prestopino, Analyst, Barrington Research: Okay. That's very helpful. Thank you.
Conference Operator: Thank you. We have a question from John Franzreb with Sidoti and Company. Your line is live.
John Franzreb, Analyst, Sidoti and Company: Yes. I'm just curious, is there any changes in your commercial vehicle assumptions in the coming year versus 3 months ago?
John DeGaynor, President and Chief Executive Officer, Methode Electronics: It's John. Thanks for the question. Like we just said with regard to the EVs, we rely on external forecasters like ACT for commercial vehicle. And 2024 is a decline year over year and 2025 is still down. And What we're seeing is we're seeing some positivity toward, if you will, toward the end of calendar year 2025, which would be the middle of our fiscal year.
What we have done So it hasn't changed materially over the last quarter, but what we are doing is we're spending a lot of time trying to reinvigorate deepen our relationships with the customers and I'm headed out to the West Coast to visit a couple of customers before the holidays here. And we're really seeking to make sure that all of the relationships that we have on the commercial vehicle side are as robust as possible. We had customers visiting us in Europe to our facilities in Europe a couple of weeks ago. I had the chance to be there at the same time, and we'll be seeing customers in a couple of weeks on the CV side. So the CV business is cyclical and it's got a little different cycle than the pass car space.
Their cycles are more dramatic peak to trough than what we see in the pass car space, but they're a very important customer base for us and we look forward to growing with our CV customers over time.
John Franzreb, Analyst, Sidoti and Company: Okay. And you touched on Mexico a few seconds ago. Where are we in that process of fixing the operations in Monterrey? Is that behind us? Or how much more is there to go?
Can you kind of talk through what's going on there?
John DeGaynor, President and Chief Executive Officer, Methode Electronics: So I guess what I would say to you is there's a difference between fix and improve. Fix would imply that a relatively uncontrolled set of activities where improved is more of a controlled set of activities. The team in Mexico, I've been it's the one place I've been to twice in my tenure. And the majority, I said to you that we had premium freight reduction on a quarter over quarter basis of $7,000,000 The majority of that premium freight reduction was in Mexico. The team there has done a very good job of getting from fixed into improve.
There's a long way to go from an improvement standpoint. But the leadership team down there and the global organization with some specific outside help is really continuing to drive progress there. So it's less about, if you will, an uncontrolled set of problems and more about controlled opportunities down there. Does that make sense to you, John?
John Franzreb, Analyst, Sidoti and Company: Yes. It's a thought. Forget it. Fair enough. And one other question, your reduction in the CapEx spending, does that represent just lower required spending or change in the timing of that spending from this year to next year?
John DeGaynor, President and Chief Executive Officer, Methode Electronics: Some of both. As I said to you, as we look at customer as we look at EV programs or if we look at customer needs, so part of my background and you and I haven't had a lot of chance to talk about but part of my background is operations and what we do with all these programs is we look at what was the initial capital assumption and where are opportunities for capital efficiency. And we've drawn a lot we've drawn driven a lot of productivity in a couple of areas, S and T being one of them, where we haven't needed to make investments that were originally planned. So some of it is actually capital reduction, capital spend reduction and others of it are timing change based on where customer programs go.
John Franzreb, Analyst, Sidoti and Company: All right. And I guess one last question to bother everybody here. The cash outflow was kind of sizable in the quarter. Will we be able to recapture that with cash inflows by the end of the fiscal year or will be a net cash outflow year?
Laura Kwalczyk, Chief Financial Officer, Methode Electronics: Yes. We are certainly looking to reverse some of that cash outflow in the next two quarters. And we certainly expect to be approaching neutral.
Conference Operator: Thank you. As we have no further questions on the lines at this time, I would like to hand the call back over to Mr. DeGaynor for any closing comments.
John DeGaynor, President and Chief Executive Officer, Methode Electronics: Yes. Thank you, operator, and thank you to everybody who joined us on the call today. Thanks for your interest and for your questions. We look forward to updating you on our Q3 call. And once again, we appreciate all your interest in the company.
Conference Operator: Thank you. Ladies and gentlemen, this does conclude today's call. And you may disconnect your lines at this time. And we thank you for your participation.
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