On Thursday, Methode Electronics (NYSE:MEI) discussed fourth-quarter financial results during its earnings call. The full transcript is provided below.

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The full earnings call is available at https://www.webcaster5.com/Webcast/Page/2152/54113

Summary

Methode Electronics' fiscal 2026 net sales were approximately $1 billion, down 3% year-over-year, due to automotive program roll-offs and market challenges, but adjusted EBITDA increased 60% to $68 million.

Strategic initiatives included simplifying the portfolio, divesting Datamate for an $11 million gain, and relocating headquarters to improve operational efficiency and leadership.

The company expects fiscal 2027 net sales between $1.025 to $1.075 billion and adjusted EBITDA of $72 to $82 million, driven by a 60% anticipated growth in data center-related sales and operational improvements.

Operational highlights include a strong financial recovery through customer recoveries totaling $45 million, enhanced manufacturing execution, and significant restructuring efforts in Egypt and Mexico.

Management emphasized ongoing transformation efforts focusing on sustainable growth, with significant investments in leadership and strategic shifts towards high-growth areas like data centers and commercial vehicles.

Full Transcript

OPERATOR

Greetings. Welcome to the Methode Electronics fourth quarter and fiscal year 2026 results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press Star 0 on your telephone keypad. 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.

Joni Konstantelos, Managing Director

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 am joined today by John De Gaynor, President and Chief Executive Officer, and Laura Kowalchik, Chief Financial Officer. Please turn to slide two for our safe harbor statements. This conference call contains certain forward-looking statements which reflect management's expectations regarding future events and operating performance and speak only as of the date hereof.

These forward-looking statements are subject to the safe harbor protection provided under the securities laws. Methode undertakes no duty to update any forward-looking 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 will also be discussing non-GAAP information and performance measures which we believe are useful in evaluating the Company's operating performance.

Reconciliations for these non-GAAP measures can be found in the conference call materials. The factors that could cause actual results to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission, such as our 10-K and 10-Q. Please turn to slide 3 and I will now turn the call over to John De Gaynor.

Jon DeGaynor, President And CEO

Thank you, Joni, and good morning everyone. Thank you for joining us for Methode's fourth quarter and 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, 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, strengthen 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 program roll-offs, 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 Methode, they demonstrate meaningful progress. We expanded margins, improved cash generation, and 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 two 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 in 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 timeline 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 and 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 attention 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, lowered 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 to see tangible evidence that our efforts are working. Our progress can be viewed through three areas: our people, the strategic actions we've taken, and improved operational performance. Starting with our people, we've invested heavily in building the leadership team and operating model needed for the next phase of Methode's evolution.

Over the past two years, we substantially reshaped the organization, including changes to eight 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 visibility, 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 globally aligned and collaborative operating model. This is improving coordination across regions, strengthening accountability, reducing redundant efforts, and driving more consistent execution throughout the company.

Turning to strategic actions, our focus has been on simplifying the portfolio and directing resources toward 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 Howard 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 can 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 progress. 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 through execution. We look forward to sharing more details on business wins and 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 is power solutions.

Methode has more than 60 years of expertise designing and manufacturing complex, high-performance power interconnect solutions, often pushing the limits of thermal and electromagnetic constraints to 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, Methode 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 800-volt 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 a more 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 in 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. Our 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. Unless otherwise 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 interface segment and the impact of one 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 to $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 initiatives costs, and a $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 non-deductible items and $3.4 million of higher foreign taxes. The comparison was also impacted by a non-recurring tax benefit of $3.9 million recognized in the fourth quarter of fiscal 25 related to the 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 an 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 customer 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 schedule 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 than 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 two 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 a 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 in 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 US tariff policies, and bank forecasts for currency, we expect fiscal 27 net sales to be in the range of $1.025 to $1.075 billion and adjusted EBITDA to be between $72 and $82 million, representing an adjusted EBITDA margin of approximately 7% to 7.6%. We expect capital expenditures of $25 to $30 million and free cash flow to be comparable to fiscal 26. We expect interest expense of $20 to $22 million, income tax expense of $24 to $26 million, and depreciation and amortization expense of $58 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, generated positive free cash flow, strengthened the balance sheet, and continued 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 two years have created a stronger foundation for sustainable value creation. With that, I will turn the call back to the operator for questions.

OPERATOR

Certainly, at this time we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

Your first question for today is from Gary Prestopino with Barrington.

Gary Prestopino (Equity Analyst)

Hey, good morning all.

Jon DeGaynor, President And CEO

Good morning, Gary.

Gary Prestopino (Equity Analyst)

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

Jon DeGaynor, President And CEO

Gary, as we've talked about, both the results of fiscal 2026 and the guide for fiscal 27 are based on our current bus bar business into the hyperscalers. When we reference the future technology and the 800-volt architectures, 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.

Gary Prestopino (Equity Analyst)

Okay, so right now it's just all bus bars, which is good. And then the other, the other thing, could you maybe just talk about these recoveries? These recoveries were from the automotive programs that you guys had taken on over the last couple of years, correct? Due to the old management team or these agreements that you guys had put in place, and then the market just really turned against you in a sense that the volumes you anticipated were not there.

Jon DeGaynor, President And CEO

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 won years ago and as recently as a year and a half ago. When we went through the revenue plan, as we laid it out in earnings calls, we talked about an opportunity of a couple 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.

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 got.

Gary Prestopino (Equity Analyst)

Okay, so do you feel that, 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?

Jon DeGaynor, President And CEO

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 FY26. 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 three to four years.

Gary Prestopino (Equity Analyst)

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

Jon DeGaynor, President And CEO

Thanks, Gary.

OPERATOR

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

John Franzreb (Equity Analyst)

Yeah, congratulations, everybody, and thanks for taking the questions. I just want to recover. Go back to the recoveries. 20. 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?

Laura Kowalchik (Chief Financial Officer)

Yeah. Hi, 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, down to the bottom line.

John Franzreb (Equity Analyst)

All right, got it, Laura. Thank you. 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 what's going on the tax line? That's for the full year. It's been all over the board. So this maybe just kind of recap. And how should we think about modeling that on an adjusted basis going forward?

Laura Kowalchik (Chief Financial Officer)

Yeah, so as I mentioned, we had 12 million in FY25 and 25 million of tax expense in FY26. This is primarily due to non-recoverability of non-deductible assets. So higher tax expense of non-deductible amounts as well as additional foreign tax expense. And then there is a one-time benefit in FY25. So that is non-recurring 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.

John Franzreb (Equity Analyst)

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?

Jon DeGaynor, President And CEO

So John, we base our guidance based on programs tied to IHS or third-party forecasts. 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.

John Franzreb (Equity Analyst)

Got it. And from what I recall from years past, that was a higher contribution margin business than the overall portfolio.

Jon DeGaynor, President And CEO

I'm sorry, say that again. Sorry John, say that one more time.

John Franzreb (Equity Analyst)

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

Jon DeGaynor, President And CEO

Yeah, it still is the case and we continue to, you know, refine that, 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 create additional opportunities for growth for us.

John Franzreb (Equity Analyst)

You know, one last question related to this and I'll get back into Q. 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?

Jon DeGaynor, President And CEO

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 facilities. 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, it's supporting our commercial vehicle localization. And yes, you will see that from a growth from a year-over-year standpoint in the Mexico facility activities.

Part of it will be a commercial vehicle.

John Franzreb (Equity Analyst)

Got it. Thanks John. I'll get back into Q. Thanks.

OPERATOR

As a reminder, if you would like to ask a question, please press Star one. Your next question is from Luke Junk with Baird.

Luke Junk (Equity Analyst)

Morning. Thanks for taking the question, John. Hoping we could start with auto. I guess if you back out the EV recovery this quarter, margins still mixed 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 on under the surface including the improvement that you cited 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 break even. Thank you.

Jon DeGaynor, President And CEO

Yeah, thanks. Thanks for your question, Luke. And you're right and certainly the customer recoveries do make that, you know, 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 COVID recoveries are worth $19 million. And then we see volume of mix as a negative in 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 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 then 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 our 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 then we'll talk much more in our Q1 call.

Luke Junk (Equity Analyst)

That is helpful, thank you. I want to switch gears to the data center opportunity and the guidance specifically. Just want to understand some of the girding 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.

Thank you.

Jon DeGaynor, President And CEO

So the business as we've talked about it is 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 moved 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 two new programs and so there are program changes throughout that and these programs move in an 18 to 24 month cycle.

So that 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. 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.

Luke Junk (Equity Analyst)

A couple. 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.

Jon DeGaynor, President And CEO

It's multiple programs and multiple customers.

Luke Junk (Equity Analyst)

Understood. I'll leave it there. Thank you.

Jon DeGaynor, President And CEO

Great. Thanks Luke.

OPERATOR

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

John Franzreb (Equity Analyst)

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?

Jon DeGaynor, President And CEO

Yeah, John, that is the datamate business that we sold that we discussed as well as the appliance program roll-off in our interface segment.

John Franzreb (Equity Analyst)

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.

Jon DeGaynor, President And CEO

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 from customer negotiations as we look at unprofitable programs to also us deciding on certain product lines or segments that we will expand or that we won't continue with.

John Franzreb (Equity Analyst)

Got it. And John, maybe you could just update us on what's the plan for the interface segment on a go forward basis.

Jon DeGaynor, President And CEO

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 in 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, 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, 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.

John Franzreb (Equity Analyst)

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. Can we expect continued debt reduction in 2027?

Jon DeGaynor, President And CEO

Yes, that's definitely a focus of our capital allocation.

John Franzreb (Equity Analyst)

Great. Thank you for taking my follow ups. Congratulations again.

Jon DeGaynor, President And CEO

Thank you.

OPERATOR

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

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