Methode Electronics Inc (MEI) 2018 Q4 法說會逐字稿

Welcome to the Methode Electronics Fiscal Year 2018 Fourth Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. This conference call does contain 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 a 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 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 2 large Automotive customers; dependence on the Automotive, appliance, computer and communication industries; investment in programs prior to the recognition of revenue; timing, quality and cost of new program launches; ability to withstand price pressure, including pricing reduction; currency fluctuations, customary risks related to conducting global operations; ability to successfully market and sell Dabir Surfaces; dependence on our supply chain; income tax rate fluctuations; dependence on the availability and price of raw materials; fluctuations in our gross margins; ability to withstand business interruptions; ability to keep pace with rapid technological changes; breach of our information technology systems; ability to avoid design or manufacturing defects; ability to compete effectively; ability to protect our intellectual property; successfully benefit from acquisitions and divestitures; recognition of goodwill impairment charges; significant adjustments to expense based on the probability of meeting certain performance levels in our long-term incentive plan; success of Pacific Insight and Procoplast and/or our ability to implement and profit from new applications of the acquired technology; and costs 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, Sherry, and good morning, everyone. Thank you for joining us today for our fiscal 2018 Fourth Quarter and full year financial results conference call. I'm joined today by Ron Tsoumas, our Chief Financial Officer. Both Ron and I have comments, and afterwards, we will take your questions.

First of all, I would like to congratulate Ron as well-deserved promotion to Chief Financial Officer. He's a 34-year-old veteran of the company and is well-suited to lead our finance team as CFO.

Moving on to review the financials. Year-over-year fiscal 2018 sales increased 13.3% in the fourth quarter to $29.3 million. Fiscal 2018 sales improved 11.2% to a record $908.3 million. Earnings per share increased to $0.98 from $0.62 in the fourth quarter of last year.

In the fiscal 2018 fourth quarter, the company recognized a tax benefit of $10.5 million or $0.28 per share related to foreign investment tax credits and a change in the provisional estimate related to U.S. tax reform. For the year, earnings per share decreased to $1.52 from $2.48. In fiscal 2018, the company recognized a tax charge of $53.7 million or $1.43 per share due to the enactment of U.S. tax reform.

The fourth quarter and year benefited from higher sales in the Automotive and Power Products segments, increased international government grants and lower legal fees. The full year also benefit from lower expense for stock award amortization and the gain from the sale of exclusive rights for a licensing agreement. The fourth quarter and year were negatively impacted by higher wages and compensation, travel and intangible asset, amortization expense, increased investment in Dabir, customer price reductions and unfavorable commodity pricing. The year was also negatively impacted by acquisition-related expenses and purchase accounting adjustments, unfavorable currency impact and the absence of commodity pricing adjustments and onetime reversal accruals in the Automotive segment in fiscal 2017. Compared to last year, consolidated gross margins decreased 20 basis points in the fourth quarter to 24.9% and 30 basis points in the full year to 26.4%. In both periods, margins were negatively impacted by a sales mix related to newly acquired businesses in the Automotive segment.

Full year margins were also negatively impacted by purchase accounting adjustments; unfavorable currency impact; price reductions; higher commodity pricing; and the absence of the commodity pricing adjustments and reversal of customer commercial accruals in the Automotive segment in fiscal 2017. However, in both periods, this was also partially offset by a favorable sales mix in the Interface segment and higher sales volumes in the Power Products segment. Year-over-year, fiscal 2018 fourth quarter selling and administrative expenses increased due primarily to expenses from new acquisitions and increase expenses for wages and travel. This was partially offset by the absence of expense related to operating units exited at the end of fiscal 2017.

For the full year, selling and administrative expenses increased year-over-year, due mainly to M&A expense, selling and administrative expenses from acquisitions and higher wages and travel expenses. These increases were partially offset by lower legal and stock award expense and the absence of expense related to operating units exited at the end of fiscal 2017.

Year-over-year, fiscal 2018 fourth quarter pretax was $30.8 million compared to $27.8 million in the previous year. Fiscal 2018 pretax income was a record $123.8 million compared to $115.9 million in fiscal 2017. Fourth quarter operating margin was 11.1% this year compared to 11.8% in the fiscal 2017 fourth quarter. Fiscal 2018 operating margin was 13% compared to 13.6% for fiscal '17, mainly due to acquisition costs.

Moving on to review our segment results. Year-over-year, Automotive segment sales increased 17.6% in the fourth quarter and 15.3% for the full year due to sales from Procoplast and Pacific Insight acquisitions; favorable currency impact; higher customer-funded tooling and design fees; and increased hidden switch sensor and user interface product volumes. In both periods, these improved sales were partially mitigated by a lower transmission lead-frame assembly and steering-angle sensor product volumes and price reductions.

Year-over-year, Automotive gross margins declined to 180 basis points to 25.6% in the fourth quarter and 120 basis points to 27.7% for the year due to sales mix related to newly acquired businesses, unfavorable currency impact and price reductions. The full year was also negatively impacted by acquisition-related purchase accounting adjustments and the absence of the commodity pricing adjustments and onetime reversal of accruals related to customer commercial issues, which occurred last year.

Moving to Interface. Year-over-year segment sales decreased 9.2% in fourth quarter and 9.1% for the year, driven mainly by the exit of the Connectivity, which contributed $2.9 million in the fourth quarter and $15.5 million last year. And decreased legacy product sales in Asia, which were $300,000 less than the fourth quarter and $1.4 million less for the year over fiscal 2017. In both periods, these decreases were partially offset by improved radio remote control sales.

Compared to last year, Interface's gross margins increased 290 basis points to 21.7% in the fourth quarter and 90 basis points to 21.8% for the year due to improved radio remote control sales, partially offset by price reductions.

Fourth quarter gross margins were also negatively affected by another unfavorable currency impact. Fourth quarter Hetronic litigations costs were $2.1 million this fiscal year versus $2.8 million last year. In total, these costs were $8.1 million in fiscal 2018. We anticipate litigation costs to be $4 million to $5 million for fiscal 2019, with the majority be incurred in the first half of the year as we currently anticipate litigation ending in fiscal 2019.

In our Power Products segment, sales increased year-over-year by 12.2% in the fourth quarter due to higher PowerRail sales and bus bar sales in North America and Asia. Segment results also improved year-over-year by 12.3%, mainly due to higher power connected volume and increased power -- excuse me, bus bar volume in Asia, partially offset by lower bus bar volume in North America. Year-over-year, segment gross margins in the fourth quarter increased 240 basis points to 30.4% and 40 basis points for the year to 27.2%, primarily due to higher sales partially offset by increased copper prices.

As we announced in the release this morning, Methode anticipates fiscal 2019 sales in the range of $950 million to $970 million, pretax income in the range of $127 million to $134 million and earnings per share in the range of $2.81 to $2.96. Fiscal 2019 guidance considers price reduction of approximately $14 million on purchased displays negotiated by customer in the Automotive segment as discussed last quarter. A significant amount of previously announced Automotive new business not launching until late fourth quarter of fiscal 2019. But the late launch of fiscal 2020 of a laundry program in the Interface segment, which results in lower-than-anticipated revenues of $7 million in fiscal 2019 and pretax expense of approximately $6.5 million for initiatives to reduce overall cost and improve operational profitability but most of that expense to be incurred in the first 3 quarters.

The guidance ranges for fiscal 2019 are based on management's expectations regarding a variety of factors and involve number of risks and uncertainties, which have been detailed in this morning's release and Form 10-K.

I want to talk briefly about the expenses we will incur this year to reduce overall cost and improve operational profitability in margins. As a matter of practice, Methode develops and undertakes initiatives that enable us to serve our customers better at lower operating cost. Among other benefits, rationalizing our expenses increases our cash flow, which enable us to make investment that can have a positive impact on our growth. These actions are designed to improve efficiency while reducing organizational complexity. At this time, I am unable to write anymore details on these initiatives, but we'll do so on our second quarter call.

Before moving on to new business wins, I want to provide some insight as to where we currently stand in our 2020 EBITDA target, with the start of fiscal 2020 now approximately 10 months away.

First, the expenses associated with Hetronic litigation, which we currently expect to end this year as well as the initiatives to reduce overall cost and improved operational profitability will not reoccur in fiscal 2020. Additionally, we see the benefits from these cost initiatives next year plus the full year of the new Automotive programs launching late in the fourth quarter of this fiscal year, and the benefit of the launch of the delayed laundry program previously discussed and a significant increase in our e-bike business and sales growth in our Dabir, Hetronic and Power businesses, all of which would contribute to a successful 2020.

As far as new business in the fourth quarter, leveraging our expertise in overhead console in our TouchSensor technology, we booked an overhead console or roof module, as known in Europe, with Volkswagen for average annual revenue of $16 million for 6 years beginning in fiscal 2021. This overhead console encompasses not only the typical LED lighting, ambient lighting, switches and (inaudible) slider but also an integrated digital microphone. Additionally, our European Automotive group booked hidden and ergonomics work program for premium vehicles for $2.5 million in average annual revenue for 5 years beginning in fiscal 2020 and another $1.5 million average annual revenue for 5 years beginning in 2021.

In Interface, our TouchSensor team, a supplier to Coca-Cola for over 15 years was awarded the integrated lighting on Coca-Cola soda-dispensing machines designed to attract customers and offer a unique look. Launching later this fiscal year and running for several years, this backlit, brand labels are first of several lighting-only opportunities that TouchSensor group is pursuing in coordination with our Pacific Insight division.

Now let's move on with an update on Dabir. Since the third quarter, Dabir added 2 new health system customers for the hospital and Greenville health system. Additionally, successful clinical evaluations were completed at 6 hospital sites and new clinical evaluations [begin in] 5 others. Dabir now has extensive experience managing clinical evaluations in critical care units, diagnostics areas, med-surg units and a variety of perioperative, especially areas including cardiovascular, neurology, transplant, colorectal plastic oncology and post-anesthesia care. The 2018 conferences kicked off the spring with Dabir participating in several national conferences, including the Association of Perioperative Registered Nurses and American Association of Nurse Executives. Dabir's chief clinical officer delivered continually education units to over 300 OR nurses at 8 sessions entitled: Pressure injury preventions throughout the continuing of perioperative patient care. These continuing educational sessions enable Dabir to drive collaboration with the customers and prospects and more sessions are scheduled. Dabir's publication strategies on target, delivering a peer-reviewed special report on pressure injury prevention last month.

Now I will turn the call over to Ron, who will give further details regarding our financial results.

Thank you, Don. Good morning, everyone. I have a few brief comments on the quarter and full year period.

Before I begin my commentary, I want to clarify that my comments include 7 months and 9 months of results for acquisitions of Pacific Insight and Procoplast, respectively.

The company's effective tax rate was 54% for the fiscal year ended 2018 based on a tax expense of approximately $67 million. This higher tax expense was the result of a few significant events that occurred during the year. First, the U.S. enacted the Tax Cuts and Jobs Act in December 2017. This resulted in a total tax reform charge of approximately $54 million or $1.43 per share for the year. This charge is comprised of 2 components: the tax toll charge of $49 million, which was primarily related to accumulated overseas profits, and the remaining $5 million was due to the remeasurement of net deferred tax assets. In addition, the company recorded the discrete tax benefit of $7.4 million related to investment tax credits resulting from a tax law change in a foreign jurisdiction, which occurred in the fourth quarter. U.S. tax reform reduces the statutory U.S. federal tax rate from 35% to a blended 33% -- 30% for 2018 and will further be reduced to 21% for fiscal year '19 and beyond.

For the fourth quarter, the company reported an effective tax rate benefit of 19%. This was primarily driven by the benefit from the tax law change in the foreign jurisdiction of $7.4 million and a tax expense reduction to the provisional estimate for U.S. tax reform of $3.1 million. The 2 adjustments combined to $10.5 million or $0.28 per share. Without these 2 discrete tax items, the fourth quarter tax rate would have been 14.6%.

For the full year of fiscal '18, the company's effective tax rate, excluding the impact of tax reform charge and the foreign tax law benefit mentioned above, would have been 16.4%. The provisional estimates and the adjustment in the fourth quarter of tax reform were based on the company's preliminary analysis. The changes included in tax reform are very broad and complex. The final impacts of the tax reform may differ from the amounts estimated thus far due to, among other things, changes in the interpretation of the tax reform act and legislative guidance. The company currently anticipates finalizing and recording any resulting adjustments within the 1 year allotted remeasurement period, which will occur in the third quarter of our fiscal '19. We anticipate that our effective tax rate will normalize for fiscal year '19, and we estimate the full year effective tax rate to be in the range of 16% and 18%.

Turning our attention to SG&A. You'll note that in the fourth quarter, SG&A, including intangible amortization as a percentage of sales was 13.8% as compared to 13.3% in the prior year or an increase of $5 million. During the quarter, we had increases of $3.8 million of selling and administrative cost, and $1.4 million of intangible amortization from our new acquisitions. We also experienced increases in wages and travel of $1.1 million and $0.5 million, respectively. The increases were partially offset by the absence of $900,000 of expense related to our Connectivity and Active Energy Systems reporting units exited in Q4 of fiscal '17 and lower legal and stock-based compensation expense of $500,000 and $400,000, respectively.

For the full year of fiscal 2018, SG&A, including intangible amortization as a percentage of sales was 13.3% as compared to 13.2% 1 year ago or $13.8 million higher. This was driven primarily of $6.8 million of acquisition-related expenses, $9.4 million of additional selling and administrative expenses from our 2 acquisitions and $3.3 million of associated intangible amortization. We also incurred increases in wages and travel of $7.8 million and $1.5 million, respectively. The increase was offset in part by the $6.9 million reversal of performance-based stock awards in 3Q, lower legal fees of $2.8 million and the absence of $3.8 million of expense related to our Connectivity and Active Energy reporting units, which we exited in fiscal '17, fourth quarter.

Moving to capital expenditures. In fiscal 2018, we invested $47.7 million, which was in line with our previous guidance of $44 million to $48 million. We are estimating our capital investment for fiscal '19 to be in the $52 million to $58 million range. Depreciation and amortization expense for fiscal 2018 was $28.1 million, which was in line with our guidance of $28 million to $30 million. For fiscal year 2019, we expect depreciation and amortization to be between $34 million and $36 million.

Shifting to EBITDA. The company generated $39.5 million in the fourth quarter or 15.9% of sales. For fiscal 2018, EBITDA was $152.8 million or 16.8% of sales. For fiscal '19, we expect EBITDA to be between $161 million and $170 million or in the 16.5% to 17.5% of sales range.

Free cash flow for fiscal 2018 was stated at $37.6 million. Adjusting for the 57. -- $53.7 million tax reform charge and a discrete foreign tax credit of $7.4 million, free cash flow would have been $84 million. Please note that the transition tax from -- for U.S. tax reform is payable over a 8 year period and is backloaded. We expect fiscal 2019 free cash flow to be between $85 million and $90 million.

Don, that concludes my comments.

Ron, thank you very much. Sherry, we are ready to take questions.

(Operator Instructions) Our first question is from Christopher Van Horn with B. Riley FBR.

I was hoping you could comment on Procoplast and Pacific Insights. And where we are in the integration and your kind of -- your vision of getting to you -- you're kind of improving the margin structure there and getting it more into the Methode line of margins. And then, maybe comment on the revenue or cost synergies that you see really you can take advantage of.

Sure. We're knee deep in integrating the back office functions where we see some near-term benefits from that. Most of the actions we're taking are on our debt for this year. Procoplast, in particular, we need to get the cost of quality in line with ours and we're taking significant actions to do that, and I would anticipate that we'll make significant progress this year with them. Without being specific to customers, Procoplast has their ongoing -- customer relations has afforded us a number of RFQs. Nothing that we won, but certainly, we're seeing more opportunities there than we would have without Procoplast. So that is proceeding as planned and integral to our earnings this year and also to 2020. Moving onto Pacific Insights, I would say the same. That's a larger operation so there's much more going on in the production areas which Methode excels at. I think the team has identified a number of areas so they can reduce cost in, we do have to be sensitive to our customers. They have to approve all the changes that we want to make and -- as we do on any of our Automotive lines. So that's the proceeding. We're seeing more opportunities with them. I talked about touch sensors. That's a minor win, but it does demonstrate that our teams are working together to garner business. Pacific Insight has been slightly impacted by some of the changes at Ford, and we've taken that into account, they're much more heavily weighted towards passenger cars. Right now, they did win the F-150, but that obviously hasn't launched yet. So they've been affected by that. And we pretty much took that into account when we looked at their projections and when we priced the purchase of that. So there are really no surprises there, but it is -- we did take that account into our guidance. But again, I would say that's going as planned. So in summary, that is our mission, in fiscal '19, is to get them to our standard margin because while they're impacting positively our income and our sales, they are affecting margins because they -- because of the mix there.

Got it. Thanks for all the detail there. And then for a macro perspective, have you guys looked at the potential? I know it's early, and I know we don't have to do anything -- done yet. But have you looked at the potential impact of a NAFTA tariff? Or in addition, have you looked at any impact from the Chinese tariffs as well?

Now from a macro level, we have. You really have to wait for the fine print on all of this from a tariff standpoint. We've sketched out contingency plans, but it really will be dictated, Chris, by our customers. They'll tell us what they want us to do. And that's really all I can comment on it, it's just, I'd say, [we just] have to wait and see what happens. NAFTA, again, I -- we operate as (inaudible). So there's some benefit there, but again, if the tariffs are put on, then that would affect us as well. So that's as far as I can go with that.

Okay. Got it. And then lastly for me. Could you just comment on -- The radio remote control had some good strength in the quarter. Just comment what you're seeing on there. And then maybe a little bit of follow-on. It seems like transmission lead-frame volumes are declining in both Asia and North America. And I was just wondering, was that a program roll off and are there opportunities maybe to -- if it is -- that is the case, there are opportunities to backfill that?

Yes, let me answer that one first. That lead frame goes into passenger car transmission. So we're going to be at the mercy of what the customers -- and we're tier 2 on that to Continental. So that's going to ebb and flow with PAS car. That has not been announced, so that's going end-of-life. It's been a long-run -- transmission programs run a long time. But that's just normal fluctuations in business. And -- but there are also some price reductions in there too, which I -- I know on the top of my head, I don't recall what those were that contributed to a decline there. But that -- we've seen that in the past. As far as Hetronic, I have to give the Hetronic team applaud here because they have done an excellent job of reducing their costs, introducing new products, reducing their inventory and probably, most importantly, reducing their lead time. And that's key in that business. If you have a $0.5 million piece of machinery that you want to ship, and you don't have a radio remote control for it, well, you can't ship it, but our team has jumped through hoops to improve dramatically, improve their on-time delivery plus shorten their lead times. And that translates into more business because those customers, they'll pay the prices that we offer because of the lead time. It's not a pricing issue, it's a lead time issue oftentimes. And so I think the team has done an excellent job in that business. And we're seeing that. And we believe we're going to continue to see it going forward.

Our next question is from David Leiker with Robert W. Baird & Co.

So some of this has been answered. But if you look at the Automotive business, organically, you're down 7%. How much of that can be attributed to the lead-frame business?

I don't -- we can get you that number. I don't want to guess. But I don't want say it's significant. But we'd have to calculate that number.

Okay. Could the -- but the broader question I was going to ask is, what -- if you could fill in the blanks that details a little bit of that organic growth being negative 7%, where you've been running mid- to upper single digits here. I know -- and just what that swing factor was in Q4?

I'm hesitating because I don't want to get into customer specific. I'm trying to figure out how to answer that. Let's talk about Asia. Our steering-angle sensor business was down there. This was result of customer demand. And then overall, our North American business was down with Europe being up. But David, I can't get into the specifics because [at the end] of -- talking about customer volumes and so on. But that's really -- Europe is up, Asia is down because of both steering-angle sensors -- and I also mentioned lead frames. And just U.S. volumes were less.

Let me come at it this way. So if we looked at from -- it sounds like it seems these are more customer-mix or product-mix-related issues than business that's running off or new business that's slow to launch. Is that fair?

Yes, it is. As I've often said, we cannot affect revenues other than to ship everything our customer wants in a given fiscal year. We're booking now for really '21. So yes, it is demand. And the price reductions go into effect the first of the year. So you have to take into account price reductions at the beginning of the calendar year. So all of that contributed to where we are.

Okay. As we look at the '19 guidance, you make the comment that it's around the 3 things here we can -- you can just fill in the blanks here, but you're talking about the Automotive launches are back-end loaded in the year. Is that what they always were, have those been pushed back a bit?

We went back and checked, and those have always been late in the year. We'll see the benefit of them in 2020. When I say late in the year, I mean...

And then on the laundry side?

There was a delay by the customer. We didn't lose any business, right? Just -- not for any Methode or TouchSensor reasons, the customer delayed the launch. And so we're reversing that, occurred in our fourth quarter.

And then on the correct actions you're taking. It sounds like these are actions that are beyond what you would normally do for your traditional -- typical cost reduction to offset price downs. Can you just give a little background on what you're doing there? And what's precipitated it?

As I said, I really don't want to comment on the specific actions because we're still -- I'm sorting through exactly how we'll implement some of those. But those are across-the-board. It -- as we look at our businesses, we've acquired companies, we've exited companies. We felt that -- as we're lying down the launch of a major program, we looked at how should we adjust our expenses, probably a good way of putting it going forward. And we do want to reduce the complexity of Methode a bit. You've seen us exit a couple of business. So that's what that's geared to. And we'll see the benefit of that in 2020.

Okay. Then one last item. I appreciate that -- the comments you made as it relates to 2020. If I recall correctly, last quarter, maybe this quarter before, that's a $200 million EBITDA number. It seemed to me like that's still intact? Or is that something that we need to be looking at adjusting?

Oh, that's really why I made that comment. I always give the disclaimer that [it depends on] what the auto market does and what the economy does. We anticipate the lawsuit ending. We're not going to reoccur the initiatives we just talked about. So there's a number of things that if you do the math, gets close to that number. And then we have to execute, of course, on improved sales. But it's not as much of a gap as one might initially look at.

Well, it seems from the announcements that you've made over the last several years, most of the revenue that you need for that has already been booked in contracts. It's just a matter of some of these exogenous things mix and build rates and things like that.

Now that's the very nice thing about the Automotive business is that normally, there's a predictability to it. You get some fluctuations based on the customer demands, but our job for 2020 is to launch everything successfully, watch our expenses. And then we do need to grow our non-automotive businesses, which we're quite -- right now, we're doing quite well. And I mentioned earlier to Christopher, I'm very pleased with what Hetronic is doing. And Power's having a very good year. And Dabir is -- our mission this year is to build multiple hospitals in a health system. So there's work to do, but we're feeling very good about that.

And then just to close the loop on all of this. It sounds like the actions that you're taking now, looking to 2020, are to help offset some of these mix-related issues that are headwinds. So that jump from '19 to '20, part of it is already booked, the other part, some of these cost actions fill the gap that I'm missing right now in the guidance?

Yes, I couldn't it say better.

Our next question is from David Wetherell with Oberweis Asset Management

I just have one very quick question and that is related to the pricing reduction scheme. Without going into any detail, of course, with respect to the terms of your contracts with your customers. Do you get the sense -- Do you believe that you've seen an increased purchase volumes and will see increased purchase volumes as a result of the price concessions you've given?

It's a very good question. The automakers don't, as a matter of practice, tie cost reductions to new business. You have to remain what is referred to as green from a number of aspects. You have to be launching well, be supporting the factories and routinely giving them cost reduction or price reduction opportunities. And that's in the heated negotiation every year, but in the end, why do we do that is that we want to stay in the favorable graces of the automaker. And so we plan for that in our operations. And generally, and it gets much harder towards the tail end of a program, we've been able to offset that with cost reductions in our own factories. That's about all I can say. If you don't do it, we're not going to book more business. And that's -- as I just said, David, one of the nice things about Automotive is, it's predictability, one thing that's not so nice is either it's constant pressure for price reductions. And that's just our -- partial being in the Automotive business.

No, that's very helpful color. So let me ask just one more related to that if you don't mind because you answered a little bit of the question, I was curious whether it was relationship building as well. With that, maintaining the positive relationship with the automakers and those price reductions, can you tell whether you believe it's tied more to the customers seeing competitive pressures across the industry? Or the fact that Methode has been hitting these very positive benchmarks along the way?

I've been asked that question before. That pressure is constant, and it is high pressure. So I -- in good times, the automaker's looking for the same reductions in bad times, it's -- as I said, it's a fact of life in auto, and it's -- for the most part, we have good relations with our customers, but it does get a little difficult when you're looking at price reductions because that's -- takes the top line and the bottom line, those are painful. But it's -- I don't know what more I can say, I don't -- I suppose, in certain instances, there's more pressure but I -- it's -- for the most part, I would say it's constant, and it's intense.

Okay. So is it fair to say that the pricing reduction you've seen this year is in line with what you see on an annual basis?

Oh yes, yes, absolutely. We did comment last quarter, and I commented in the prepared remarks is that our -- one of our customers in North America negotiated a price reduction on displays. We don't make the display itself. We become what -- that's actually the display supplier becomes what's called the directive sub to us. But then, since it's part of our cost of goods sold, that price reduction is passed directly through to the customer. So in this instance, we saw $14 million less revenue, not because of really anything in the marketplace or anything in -- because of Methode is just a price reduction that the automaker receives. So we do get those occasionally. And I think the prior year, it was $25 million if I remember correctly. So that's the other thing we take into account, not so much from a bottom line standpoint but from a top line. So you get the cost reductions. And I think I said, their average for -- on the auto supplier plus occasionally you get something like that. And we usually call out as far enough in advance as we can.

(Operator Instructions) Our next question is from Steve Dryer (sic) [Steve Dyer] with Craig-Hallum Capital Group.

It's Ryan Sigdahl for Steve. Just a couple of quick ones for us. You mentioned the Coke award. I didn't catch, did you give how big that award is? And then...

No. I know. As I was reading that. I realized we didn't. It's up $1 million. It's just -- I wanted to mention it because one is Coca-Cola. It also involves our Pacific Insight group working with touch sensor. And we see that as an avenue for our touch sensor group to garner more business. And -- but it's up $1 million. It'll run 5, 6, 7 years, I would expect.

And is there opportunity to grow that? Then, I know you said -- I mean, Coke is obviously big, $1 million a year. Do you think you can grow that pretty meaningfully? Or is that kind of end game there?

No, I know, I believe, again, that's really why I mentioned it. A good collaboration with the 2 groups. I like that. And -- this is -- lighting the vehicle is very important today, point of sale is important. And it's not necessarily easy to do. And if you look at the interior of a vehicle, you need uniform lighting. Point of sale, it's very challenging, too, that's not something that you can go to, say, a third party that doesn't have expertise in lighting and just have him put some LEDs into the display. So you're right. We should be able to grow that area again, that's why I mentioned it.

All right. And then, you guys [have had] an international government grant. Should you expect that -- [anything] in fiscal '19?

We applied for them. And we've had 2 years in a row, I believe. But I -- that's something I can't guarantee because it really -- we're dealing with the government entity. And it's not an exact science, let's put it that way. But we're -- certainly applied for it.

So safe to assume nothing is included in guidance that would be incremental upside there?

Yes, it would.

All right. Lastly, digging into the 2020 EBITDA target, $200 million. Don, you mentioned the need to grow non-auto business. Previously, Dabir was a big part of that plan, but it seems like there's a bigger emphasis on Power, Hetronic, et cetera, now. Have expectations been lowered for Dabir and then kind of offset by the other stuff? Or is the ramp still as it was before there?

I would say that's equal. We mentioned Power and Hetronic -- I'm sorry, I was thinking TouchSensor for a second. Because they've had issues in the past, and we've taken corrective actions both from a management standpoint and internally. [We] spent a lot of time on Hetronic a few minutes ago. So I was emphasizing them as not to diminish Dabir, it's just that those are integral to our plan, and now they're starting to hit their stride. And it was worth talking about. Dabir, this is a pivotal year for Dabir. And then -- that it needs to penetrate multiple hospitals in a system. The team's done a good job of one hospital, [the time] we just talked about Florida Hospital, [well], there's a number of hospitals in that system, we need to go beyond just having one hospital. So this is a critical year for Dabir. But if we go into 2020, and we're not where we need to be on Dabir. We have other contingencies there, but I don't mean to deemphasize Dabir, but I thought it was appropriate we talk about these other groups.

Great. And then actually one last one. Just to confirm that 2020 target of $200 million, that's an organic number, right?

Yes, that's all organic, yes.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Well, Sherry, thank you very much, and I want to thank everyone for listening today, and have a good and safe summer. Thank you, everyone.

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