Methode Electronics, Inc. (MEI) Earnings Call Transcript & Summary

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.