Welcome to Methode Electronics Fiscal Year 2017 First Quarter Earnings Conference Call. At this time, all participants are in a listen only-mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. This conference call does contain 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 statements to conform the statements to actual results or changes in Methode’s expectations on a quarterly basis or otherwise. Forward-looking statements in this conference call involve a number of risks and uncertainties. The factors that could cause these actual results to differ materially from our expectations are detailed in Methode’s filings with the Securities and Exchange Commission, such as our annual and quarterly reports. Such factors may include, without limitation the following. Dependence on a small number of large customers, including two large automotive customers, dependence on the automotive, appliance, computer, and communications industries, investment in programs prior to the recognition of revenue, timing, quality and cost of our new program launches, ability to withstand price pressure, including pricing, concessions, currency fluctuations, continued economic challenges in Europe including the exit of the United Kingdom from the European Union, customary risks related to conducting global operations, ability to successfully market and sell Dabir services, dependence on our supply chain, income tax rate fluctuations, dependence on the availability and price of raw materials, fluctuations in our gross margins, location of a significant amount of cash outside of the U.S., ability to withstand business interruptions, ability to keep pace with rapid technological changes, a breach of our information and technology systems, ability to avoid design or manufacturing defects, ability to compete effectively, ability to protect our intellectual property, ability to successfully benefit from acquisitions and divestitures, the recognition of goodwill impairment charges and cost and expenses due to regulations regarding conflict materials. It is now my pleasure to introduce your host, Don Duda, President and Chief Executive Officer of Methode Electronics.

Thank you, Audrey, and good morning, everyone. Thank you for joining us today for our fiscal 2017 first quarter financial results conference call. I am joined today by John Hrudicka, our Chief Financial Officer; and Doug Koman, our Former Chief Financial Officer and Ron Tsoumas, Controller and Treasurer. Both John and I have comments and afterwards, we will take your questions. First, I would like to welcome John to the team and his first quarterly call with our Company. He joined us from Titan International, another publicly held company where he was CFO. Prior to that, he was CFO at Elkay Manufacturing. Also noteworthy, John held both operational and financial executive roles at Baxter. I look forward to working with him as we continue to create long-term value for our shareholders. Additionally, I would like to thank Doug, who retired as Methode’s CFO. Doug has agreed to remain with us through mid-September, and subsequently as a consultant, to support the transition of responsibilities to John. I thank Doug for his consistently strong leadership of our financial, treasury and accounting operations, and the many important contributions he has made to Methode over the years. It has been an honour to work with you Doug. Moving on to review the quarter, year-over-year first quarter fiscal 2017 sales decreased 5.6% to $192 million with lower sales in all segments. We have seen almost and across the board decrease in our European revenues and most notably from a largest customer in our European automotive segment. As we have seen in this past, this could be a short-lived matter as some of our automotive sales are take rate dependent, and we may see increased volumes in the future periods. We are however closely monitoring the situation. Net income decreased, affected mainly by lower sales, but…

Thank you Don, and good morning everyone. First let me say what a privilege it is to join the Method team during this very important time in its rich history. I also want to thank the management team for being so welcoming during my first few weeks here. I'm extremely excited to be here, and look forward to working with both our analysts and shareholders in discussing our Company's results and strategic initiatives as we move forward. I have just a few brief comments this morning. Let's begin with the effective tax rate. For the quarter, it was 20.6%. This was down slightly from fiscal year 2016, primarily due to multi-tax credits associated with the estimated qualified investment for fiscal year 2017. While it's a low end, this remains within our guidance range of low to mid 20s. Turning now our attention to SG&A, you will note that in the first quarter, SG&A, as percent of sales, was 14.3% compared to 11.4% the prior year. This was driven primarily by higher legal fees of $2.9 million and RSA and RSU amortization of $3.2 million, compared to minimal amortization in the first quarter of last year due to the grant of 2015 awards, not occurring until the second quarter. These increases were partially offset by lower bonus expense and other general expense reductions. Moving to capital expenditures, in the first quarter, we spent $4.2 million. For the fiscal year 2017, we expect capital expending to be between $18 million and $22 million. Expense for depreciation and amortization in the quarter was $5.8 million. For fiscal year 2017, we expect depreciation and amortization to be between $23 million and $25 million. Shifting to EBITDA, this was $32.5 million for the quarter or 16.9% of sales. Based on our fiscal 2017 guidance, we expect EBITDA to be in the 15% to 16% range, or between a $126 million and $141 million. Lastly, free cash flow for the quarter was $22.8 million. Based on our guidance and capital spending estimate, we expect fiscal 2017 free cash flow to be between $83 million and $92 million. Don, that concludes my comments.

John, thank you very much. Audrey, we are ready to take questions.

Ladies and gentlemen, at this time we will be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Chris Van Horn with FBR. Please state your question.

Good morning and welcome John.

Thank you.

Just a quick question on the -- congrats on the Ford win, or multiple wins here. Could you just comment, with those competitive bids, were you the incumbent or is this a new business win? And then, are there any other opportunities with that customer that you are looking at going forward?

They were new wins over the council in new area. We have some programs on overhead councils in Asia, but this is, I believe, the first one with Ford. And it was a competitive bid. And we would anticipate to answer your second part of your question that we would have other opportunities with Ford and others in that area. And it's been very similar manufacturing to what we are doing with center of councils. So it makes sense for us to move there. The tailgate is really look-forward to customer carrying it into other area, so, again someone else is being displaced with that win.

And it sounds like there is a lot going on with Dabir, and the abstracts and all the studies going on. But could you just update us on, is there anything in your guidance for Dabir for the year, if so, if you could quantify that? And then how does the sale cycle really starts to ramp up? What are some of the milestones and things that need to happen for the ball to get rolling?

We've not specifically said what the number is for Dabir, but it is in our guidance range minimally. And again, really in the latter half of the year may be even in the fourth quarter. But what is happening now, the five peoples that are close to presentations that are being presented are key and that's independent verification or begin of the independent verification of efficacy of Dabir, so that’s very, very important. We mentioned over 3,000 surgeries will be key there as we want to present hospital to adopt Dabir as a standard of care and they’ve got 13 operating rooms. That would also be a key. It’s really just turning these trials into adoption and we’re very excited about SAWC, a major accomplishment for the Dabir team and Dabir technology.

And then just one more if you don't mind. Could you just comment on what's going on in Europe in just a little more -- is it macro-driven in some of these categories? I know you mentioned the customer on the auto side, that it may just be a one-time order thing here. But is there a lot of macro headwinds that you're facing -- it was in Europe? Because it seems like it's across all segments. Could it be a Brexit thing, or what's going on there?

It’s really too soon to tell. We know that, Southern Europe, we’re seeing on the customers there is down. But we mentioned our largest customer in Europe, somewhat across the board. We’re going to monitor that closely. I’ve said in the past that our European revenues, we look at on a quarter-to-quarter basis that they have not been as predictable in recent years as our U.S. revenue. So I don’t know that it has anything to do with England and UK, but it could be an issue of consumer confidence, or again, as I said in prepared remarks, it just to be take rate. Some of the -- unlike GM business, we’re not necessarily one-for-one on the all platforms. So we’re going to monitoring it, and we’ll make adjustments accordingly.

Our next question comes from David Leiker with Robert W. Baird. Please state your question.

Good morning, everyone.

Good morning, David.

John, it’s a pleasure finding, and Doug work together a long time. So thanks for the opportunity to know you.

Thanks David.

I want to follow-up on Dabir here, initially. If we look at number of procedures the 4,500 surgeries. How many units are in the field, what does that work out to?

We know that number, but I don’t know that we have it handy. We’re looking…

I'm guessing it's hundreds of units?

In our numbers let's say over a 100 units.

And then what are you seeing in terms of the performance of the -- not the efficacy, but the performance of the units, operating structure, your cost of manufacturing. I know that it’s small volumes, and then the operating costs of that. How are those tracking versus what your expectations have been?

As far as -- let’s talk about the quality of the product and any issues of what very much like our automotive products, although they have been performing without issues. So we design that in from the beginning. The auto crew designed the -- and produced the production line and they manage that production line. So that has gone very well. As far as our costs, those are all in line. We monitor that very closely. And as we begin negotiations with customers on adapting Dabir, our costs accounts are very integral with that product, so very much like we are doing, so there has been no issues thus far. And then, again, as I said in the call, very good performance on all these trials.

And the operating costs in the field, those are -- there is nothing unusual that's popping up there.

No. And as we’re able to demonstrate, operating costs from our standpoint are exactly what we anticipated to be and we are able to demonstrate to the hospitals that they were too adapt it, that they would obtain the savings that we have forecasted for them.

And then the other piece of this is -- and I know you are doing a great job on documenting all of this, and that's great and exciting to see the outcomes here. Do you have any opportunity or any way you can give us some sense of the path to commercialization from here, and when you might be in a position on that you're monetizing this?

We've said that we would anticipate that in our fiscal ’18. That add our $7 million spend on Dabir this year, and we would anticipate that we would have sufficient revenue to offset that in our fiscal 2018. And that's dependent upon on the hospitals that we are working with adopting Dabir as a standard of care in their operating units. But we certainly have enough opportunity and visibility that we can talk about breaking even in fiscal ’18. Now that doesn’t say we don’t invest couple of more million dollars. And in the Dabir, it's certainly doing very well, but it's our long range planning so that we should be able to break even in ‘18.

And on the data center, can you help quantify a little bit of what's happening on pricing there in the 1-gig product? How much that's come down? And the spread between that and the 10, and just kind of the economics there of the value proposition your customers are looking at?

From a gross margin standpoint, that’s a very good gross margin product over the years. But we’re seeing that on ’15 maybe even ’18 points. And in past where we've had price pressures, we were able to offset that with cost reductions, which again we do routinely. But this has then -- a contract manufacture coming in essentially made a play for increased volume. And then since we have to make adjustments, that's -- there is no -- no more complicated than that. But one of our competitors have sold out the product line to -- and contract manufacturer have to respond. Now 10-gig is absolutely -- we're the first start with that, no one has that. It's slowing the adoption of it, but we don't see that price pressure there. And in fact good costs will help us.

Yes, I guess I was more curious on the spread between the 1-gig and the 10-gig. That seems like it will push out that adoption curve for you.

Well, I think we're still confident with the product. But as I said, we're evaluating our whole data center business that's a thing move forward. It helps on the power side because of our Big Data customer and PowerRail, but it is having a negative effect our data segment.

The next question comes from Steve Dyer with Craig Hallum Capital Group. Please state your question.

Good morning, it's Greg Palm on for Steve today. I wanted to start with auto, specifically gross margins, if there were a few one-time benefits in the quarter. But overall still feel really strong. So the question is, even if you assume a flattish sales environment going forward for the next few years. Just wondering if there is any upside there, or if you at least have the ability to maintain current levels in the face of continued price downs?

Well, we do have contractual price down that occur every year. So we have that headwind. Our ability to maintain that is going to be, and let's assume that are saved as is, and our ability to continue to take cost out and operate with very low PPM in the case of some of our major products, zero PPM. So, it's really dependent upon cost reductions and quality. And then we do get recurrently favorable effect on currency and on raw materials. If that were to flip, that would obviously have an effect and that's very hard to predict.

In terms of awards, I know the F-series center of council has been brought up a number of times in the past. But may be wondered if you can give us an update there, and if there is anything else significant out there that you are tracking over the next few years?

Matter that I guess lot of business we don't comment on business we're going after for competitive reasons. And we've said that it's a target for us. There is really not much more we can say. In terms of other opportunities like that, I think we've said before, if you look at the GM truck line and the Ford truck line, those are mega programs that are having covered it. And we would expect that there will be a number of people competing for the 150. As far as other wins, $20 million is a good win in center of council and we’re very pleased that it wasn’t a center of council, and we’ve got $23 million of new business with Ford going forward. But I don't really know of any other programs other than the two auto ones that we would consider large game changer opportunities.

But fair to say you are still tracking some of these? Whether it's $20 million, $25 million, $30 million annual awards, you are still tracking?

Absolutely, we review our opportunities. Well, the team reviews them on a weekly basis. I review them at least once a quarter, if not more. So we're tracking opportunities now into 2020-to 2023. And we just announced the extension of T76 to 2024. I've said in the past transmission programs are quite wide, this one is maybe a record. I think that launched in ‘10.

And then just shifting gears over to data. Just curious, what's your view or take on that group in general? It feels like cost competing continues to accelerate. That's not going away. So are there opportunities there that exist? Could you potentially walk away from some of the data group's products, or divest that group as a whole? Just would love to get your overall thoughts on [multiple speakers].

I mean, that’s a certainly good question. It's something -- it's a double edged sword. Our power group will benefit from it, because that's where their PowerRail is positioned. 10-gig, I think, well, slower adoption, I think it's still a good product. 1-gig is still turning good gross margins, not as much as it used to, but that will ultimately wind down, be replaced by 10-gig. Our data center business causes me the most concern. And there we have made adjustments and we'll continue to make adjustments in that business. And I am not willing to predict what we're going to see. Data centers aren’t going to go completely away, but cloud computing is having an impact. On the other hand, a derivative of our 10-gig, we did a press release I think the last week on g-fast. The g-fast transceiver -- Methode developed that typology that came out of a telecom. But that is essentially fiber feeds over a conventional twisted pair that won't have an impact on near term revenues. But with the same technology that we're using for our 10-gig transceivers, we may see that market develop, because it does allow the telecoms to run gigabit over the plain old twisted pair that's coming into your home right now. So that's a major development. And again, it'll take some time to turn into revenues. So there are opportunities but we're clearly seeing a shift from the traditional data center to cloud computing. And I know that is certainly having an effect on our business, and we'll have to adjust to.

Okay, good color, thanks and welcome aboard John, looking forward to working with you in the future.

Thank you.

[Operator Instructions] Our next question comes from Jimmy Baker with B. Riley & Company. Please state your question.

Hi. Good morning, guys. Thanks for taking my questions. First, just wanted to follow-up on a response to I think David's earlier question on commercialization of Dabir, your comments about expecting revenues to offset costs in fiscal 2018. And I think you had previously set a threshold for a $20 million run rate exiting this fiscal year. But I believe all of that was first introduced when the target market was exclusively the OR. So now that you are seeing this incremental opportunity in what's a larger TAM in non-acute care, wouldn't you be revising those revenue targets higher; and hence, the economic justification for redesigning the controller?

To be bluff, no. Because we have to have our reimbursement codes that can take every bit of a year, we’ve just started on that. We can demonstrate to a hospital that even without insurance reimbursement they can save money on the cost of treating pressure ulcers, litigation and so on. That market, we’ve been pursuing for quite some time. And as we said, it's taken us longer than we anticipated. The non-cute is, well, it takes us a while as well, and that code is key. Now we did our studies, the Marwood study we’ve talked about, that does give us the financial specification to develop the, not too much of surface, but there’re surfaces as much of a lead time as developing that controller, that can be used in that environment. And that’s really making the controllers simpler, less expensive, perhaps maybe even a battery operate version. But I don’t -- at this juncture unless there were some fee state change, I don’t see that making big contribution in our fiscal ’18. I hope I am wrong, but I just think, we’ve learned how long it takes to adopt a new medical device, and so we’re being very careful about our expectations on non-acute.

So, the fiscal 2018 figures that you've talked about or the run rate exiting fiscal 17, I mean, that will still remain OR-only for now?

Yes, I wouldn’t rule out that maybe there is some sales at some place. But no that’s our focus. That’s where we’re tracking in opportunity, attracting discussions. That’s the nearest term nearest market to revenue obtainment.

And then just switching over to the auto business, I guess, even absent the one-time gains in the quarter, a 28.8% gross margin, I think, is a new high, or at least a recent new high for the business. How should we think about the sustainability of those gross margins? And then can you remind us the timing of the next cases you expect price down?

Let me add further. That’s, I want to say a calendar year event, also reported into model year event. So when the model changes, is when the price reduction would occur. But as far as gross margins as I said earlier we are getting favorable currency and commodity pricing right now, because that gets better maybe but it can also slip the other way. So we have that benefit in. And it is I thought I am repeating myself here. But it is depending on our team’s ability to offset that, those price reductions. They've done the very-very good job thus far in fact we've seen gross margin gains from it. And their cost of quality has been at a record. I said on August call before I'll say it again, we’re very proud of the entire automotive group for their quality performance. That has a huge effect on our margins. So it's really dependent upon our ability to continue to do that favorable commodity and labor, and as well as that’s our saying, work that with is critical too. We have a significant drop that has an effect on overhead coverage.

And then you reduced the 10-gig assumptions, but left the consolidated revenue guidance unchanged. So are you seeing some offsets elsewhere in the business? Or does this mean you are tracking towards the middle or lower end of the range for the full year?

No, we’ll take a look at that going forward. We had -- we were off our projections in Europe and we’re concerned about 10-gig. But we had good pick-up truck and SUV sales. GM had, I think their overall numbers were down in August, but they had good sales again in Silverado and Colorado, I think maybe had a record. So, that's really the offset, if that were to slowdown that would cause us to re-evaluate.

Just lastly for me, I guess at least on the non-auto side, it sounds like more of your revenue ramp is back-half weighted in this fiscal year. Just remind us the timing of any significant auto programs that are rolling on. And, I guess, as we think about the quarterly progression, would you expect your fiscal Q2 to still be down year-over-year in terms of sales and earnings?

Well, we don’t give quarterly guidance. So I don’t think I want to comment. They reaffirmed our annual. As far as ramps, I don’t have it in front of me, but that's generally starts in our fourth quarter anything new so that the fourth quarter is generally is one of our strongest quarters. We talked about 10-gig but that being slower, but we will see sales from that in our third quarter and fourth quarter. And then our power products, we're anticipating a back to ramp. And as I said in my prepared remarks, we've got purchase orders in house so that ramp is beginning.

That does conclude our Q&A session. At this time, I will turn it back to management for closing remarks.