Methode Electronics Inc (MEI) 2002 Q4 法說會逐字稿

Good morning. My name is Tiprika, and I will be your conference facilitator today. At this time, I'd like to welcome everyone to Methode Electronics's fourth quarter end of year conference call. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press star and the number two on your telephone keypad.

Certain statements in this conference call are forward looking statements that are subject to certain risks and uncertainties. The company's results will be subject to many of those same risks that are applied to the automotive, computer and telecommunication industries, such as general economic conditions, interest rates, consumer spending patterns and technological change. Other factors which may result in materially deferred results for future periods include market growth, operating costs, currency exchange rates, devaluation delays and develop, production and marketing of new products and other factors set forth from time to time in company's form 10-K and other reports filed with the Securities and Exchange Commission. These forward looking statements and this conference call are subject to the safe harbor protections provided under these securities laws. I will now turn the conference over to Mr. Donald Duda, President of Methode Electronics. Thank you, sir. You may begin your conference.

Thank you, Tiprika. Good morning, everyone. Thank you for joining us today. On the called with is Douglas Koman, Vice President of Corporate Finance and Bob Kuehnau, Methode's treasurer and controller. Both Doug and I have a few opening remarks, and then we will be pleased to take your questions. Methode's fourth quarter showed positive and encouraging signs, most notable was the company's sequential revenue growth. Fourth quarter revenues increased 11 million to 85 million from the third quarter of 74 million. In addition, we were very pleased with the pre-production run at rate results achieved by our automotive safety technologies division in Monterrey, Mexico. More importantly, our customers felt buying General Motors, who monitored the test, were impressed with our production readiness. This new plant was commissioned late last year after the acquisition of ACI to produce a seat sensor which is an integral component of Delphi's passive optical detection system. This successful production launch was a major milestone that will enable Methode to obtain the budgeted revenues in income for this new division in fiscal year '03. I want to take this opportunity to thank all the Methode employees who worked so hard on this very important project. The fiscal year just concluded has been quite busy and certainly economically challenging. During the year we took proactive measures to refocus Methode on its core competencies by restructuring and consolidating certain of our electronic business. Throughout Methode, we improved operational efficiencies by aggressive cost-cutting measures, basic balance sheet management and by instituting new financial planning metrics for all our units. In addition, we acquired American Components Inc., ACI, hired a general manager for our North American automotive operations, and in Europe, successfully redirected our efforts to obtain new business. Summarizing the year, I believe our divisions demonstrated good execution. They addressed a number of very difficult issues efficiently and effectively set the stage for Methode's growth, and most importantly, continued profitability. For fiscal year '03, as we indicated in the press release, we are reaffirming our previous guidance of sales of 350 to 360 million with net income between 58 and 62 cents. For the first quarter, EPS guidance is 12 to 13 cents. We anticipate sales growth primarily from the automotive business with additional margin improvement resulting from the recent restructuring in non-automotive electronics. While we will continue to closely monitor our progress in Methode Electronics's North American automotive operation, our corporate focus will be to improve our sales and profitability in non-automotive electronics and to seek good fitting Acquieb (phonetic) acquisitions to leverage the company's customer position and manufacturing expertise. In closing, we will continue to conservatively manage Methode and maintain our strong financial position. At this point, Doug will provide additional commentary on the financials.

Thank you, Don. Good morning, everyone. Before I summarize the results for the quarter and year, I'd like to walk you through three special items that occurred during the year. First, the restructuring charge totalled 13.3 million after tax or 37 cents per share. This amount included a writeoff of 8.9 million of good will, a write-down of 2.8 million for fixed assets and inventory, and 1.6 million related to current and future cash outlays for such expenses as severance and lease obligations. On the income statement, the restructuring charge is included as 4.6 million in cost of products sold and 11.1 million as impairment of assets. The income tax benefit related to the restructuring is $2.4 million. The second item was the tax credit. This arose from Methode's continued investment in its Maltese manufacturing operation. The Malta government recently amended its business promotion act to provide various tax incentives, including investment allowances and accelerated depreciation and the fourth quarter of fiscal '02, our Maltese affiliate filed its election to qualify for this investment tax credit. The credit totalled 3.7 million, or 11 cents per share. The credit not utilized in fiscal '02 is recorded as a deferred tax asset on the balance sheet. The last item in fiscal '02 which was discussed on the third quarter conference call was the increase to warranty reserve for dispute with an OEM concerning certain products manufactured sold by Methode prior to fiscal '02. This $5 million pre-tax expense was included in cost of products sold and resulted in $3 million aftertax or 8 cents per share. These three items resulted in a net charge of 26 cents per share for the fourth quarter, and 34 cents per share for the full year. In fiscal 2001, Methode also had some special items with a $12.5 million or 35 cent per share charge primarily for the write-down of its previous investment in technology. This was offset by 6.6 million or 19 cents per share for life insurance gain. These two items netted to an aftertax charge of 5.9 million or 16 cents per share. Adjusting for these items, we can then compare the pro forma results for this segment. In the fourth quarter, the electronics segment had net sales of 75 million, which was up 9 million from the prior quarter. Income before income tax was 8 and-a-half million, compared to 7.1 million in the third quarter. For the full year, net sales for the electronics segment were 277 million, down 37.4 million or 12 percent from last year, and income before income taxes was 27.2 million, down 4 million compared to 31 million last year. The optical and other segments had sales of 10 million for the quarter, up 2 million from the prior quarter. Income before taxes for the quarter was 200,000, compared to the third quarter loss of $1 million. For the full year, net sales for the optical and other segments were 42.7 million. That's down 2.7 million from last year. Income for optical and other was 1.4 million, compared to 4.6 million last year. Across the board, the business units in these two segments showed poor year over year results but the materialation was primarily the result of a much more difficult fiber optic in Europe versus what we saw happening in the U.S. Over the year, our earnings before interest taxes in depreciation was 36.1 million. Our return on capital for the year was 7%. Working capital was 115 million, compared to 123 million in 2001. The balance sheet continues to be strong with cash at 49. 9 million. That's up 7.1 million from last year. Inventories are down 14 million and receivables are also down 2 million. With those brief comments, I'll now turn the call back over to Don.

Thank you, Doug. Tiprika, I believe we're ready to take questions.

At this time I would like to remind everyone if you would like to ask a question, please press star and the number one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. (pause) Your first question comes from Laura Theroux of Robert W. Baird.

Good morning.

Good morning.

Just a couple of quick questions for you here. Could you give us just a rundown of your new business pipeline which you got coming onstream in the next couple of years?

Okay, let me start with launches in our Illinois plants. This year, we'll have 13 programs for Chrysler, five for Ford and four for Mitsubishi. These will contribute 10 to 11 million in our fiscal '03, and on an annual basis, not necessarily model year but on a calendar year, 31 million.

As we also said in previous calls, in Europe, we have booked an additional 40 million dollars in business. The contribution in fiscal year '03 will be about 3 million, '04 about 10 million, '03 17 million, and the balance in '06 we continue to solicit programs in Europe and anticipate booking additional business, which we'll probably see sales on in the '05 and the '06 fiscal years.

Okay, great, thanks. Secondly, where do you think operating margins can go on current base of business? Obviously, you know, new business will increase those margins but operating margins on the current bases businesses that you have, where do you see those going down the line?

Well, we're going to see some improvement because of the restructuring with respect to dual and Atom Tech. For next year, just to give you an idea, we're probably expecting - oops, let me do this - yeah, we're looking for the return - we've got here return on capital of 8 and-a-half million. I think the margins, which is your question, is probably in the 6 and-a-half percent range and hopefully better, but.

Okay, and then you gave the breakout on revenue for your segments historically for the quarter and the year but can you give us your outlook on those segments by segment?

For the full year, we're looking at electronics up 10 to 12 percent, growth primarily from automotive with non-automotive electronics expected to be flat. Optical up 4 to 5 percent and other would include our laboratories and our bus bar division up 6 to 8 percent.

Okay, great, thank you.

Thank you.

At this time, there are no further questions. Again, if you would like to ask a question, please press star, the number one on your telephone keypad. (pause) Your next question comes from David Sachs of Hockey (phonetic).

Hi.

Good morning, David.

You went through the European booking schedule for revenue for '03 through '05. Could you overlay also what you anticipate the revenue ramp for ACI might look for these fiscal years as well?

Certainly. Sorry, on ACI, the revenue ramp. This year, while Doug's looking at '04, this year we're expecting 12 to 13 million in sales from ACI. Bear with -

Would that be second half or would you see some of that in the first half?

We're - I think we really expect the second quarter, to begin in the second quarter but the heaviest in the third quarter. We're just, we have two lines running now. We've bought up two more. As I said in my opening comments, we've got our run up rate and one more to go in the July F3 lines and then the August, September, October time frame we'll be ramping. '04, we're looking at 36 million in sales and in '05, 52 million.

That's healthy, and then in Europe, as you go from 3 to 10 to 17, when do you start to deliver enough revenue to have that adequate margin recovery?

I think in the case of our Malta operation, which is our largest in Europe, we'll start to see that contribution in the '04 fiscal year. Some in '03, and then Scotland we'll begin in late '04 and '05.

In addition to 409 million you've already booked and you said you're soliciting more business, how much more business would you be comfortable with at this point and what do you think you need to show potential customers to win that business or there's not a performance issue? I guess the question would be, is it a performance issue or capacity issue in terms of taking on additional European business?

Okay, I think, first of all, we have to demonstrate our capabilities of launching the business we recently won, and I have every confidence that we will do that successfully. So that's the first thing. Secondly, business that we're pursuing now really won't go into production until probably our fiscal year, like '04 - actually '05, so we have some time to make the necessary production capacity improvements if we needed to do that. So I don't think that's a detriment to obtaining additional business. I think it's executing what we've won so far, and I think very important to note is that Malta received a GM Supplier of the Year Award, and that's very significant, because what GM does is assign an ambassador, if you will. This is a fairly high up GM executive that works with our managing director and helps guide Malta to obtaining new business, and we had their first meeting. They meet on a monthly basis, and they've identified a significant amount of business that could be slated for Methode Malta, of course, if we're competitive and it suits our manufacturing capabilities, but that's very significant and we're very pleased with Malta's performance in that area.

And then on the non-auto side you've announced or completed the restructuring. What would you anticipate the pay back would be on the charge that you took and secondly, are there any new products or any reasons to be optimistic about revenue growth in non-auto in '03 or any further doubt?

In '03, you know, while some of the analysts are predicting our recovery towards the end of this year, we certainly don't see that, and we're anticipating flat revenues in the nonauto electronics area. You know, because of the number of business units, it's very hard to provide specific detail on this action, say this amount. I would say that savings that's contemplated in our '03 EPS guidance in the margins Doug spoke about earlier.

New product development in non-automotive in Europe and in Datamate's, some of the small form factor pluggable patch cord assemblies, both active and passive and copper, they're actively working on. Our Singapore division began development of a new serial ATA side connector for disk drives, connector products is working on some custom connectors. We're also in the process of launching in Europe some of the same programs I discussed, the smaller form factor. They've, they've generated a fair amount of interest, but but again we're not anticipating that we're going to see increased revenues this year. We're working on designs with Cisco, which again, are certainly promising, but again, I don't see that being a significant contributor this year. Also, in fiber optics in Europe, we're realigning some of our fiber facilities. The majority of manufacturing will now be done in the Czech Republic and we'll focus our UK facility on a more service-type business, very similar to our connectivity division which services the data centers in Dallas, since we're trying to transfer that technology and, I guess business model to the UK.

Okay, and last question, just in walking through the 60ish cent estimate that you've given guidance to, that implies about $20 million in net income. Kind of walk us through the cash flow dynamics for fiscal '03 in terms of what you're looking up in a static environment of Cimino (phonetic) acquisitions. How much free cash do we deliver from that depreciation cap backs in your sense of working capital requirements for this year.

What we expect for next year, given no unusual advance and given the guidance, we probably would expect to generate positive cash flow in excess of $8 million.

Okay, now what happens, so net income is about 20. Where does the $12 million difference from net income -

Dividend, we'd expect to continue to pay our dividend, reinvest in cap backs.

Do you have a range for cap backs, 10, 15?

We're looking at probably 16 to 17.

Okay. Got it. Thank you. Oh, and I guess one last. In terms of the board putting in place a share repurchase program, has that been addressed at this point or contemplated?

At the moment, we have no plans to do so. We feel that our cash is probably better suited for internal growth on vertical integration and cost savings, and as you said, smaller lukive acquisitions.

And the profilists would be single digit million dollar purchase prices or not big bets, just small incremental, buying a product line or something like that.

Right, not big bets.

Great, thank you.

Thank you.

Your next question is a follow-up question from Laura Theroux of Robert W. Baird.

Actually, I think most of mine were addressed just now but one housekeeping item. Do you have the split between royalty and other income?

I'm looking. We probably do but not with us.

Okay, we can follow up.

Yeah, we can give that to you later.

And I think the rest of my follow-ups were all answered. Thank you.

Thanks.

Thank you.

There are no further questions at this time. Mr. Duda, do you have any closing remarks?

Other than to thank everyone for participating in the call, I think we can conclude.

Thank you for participating in today's Methode Electronics fourth quarter year-end conference call. You may now disconnect.