Methode Electronics Inc (MEI) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, my name is Paul, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Methode Electronics first quarter fiscal year 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question at this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

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 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, devaluations, delays in development, production and marketing of new products and other factors set forth from time to time in the Company's Form 10-K and other reports filed with the Securities and Exchange Commission. The forward-looking statements in this conference call are subject to the Safe Harbor protection provided under these securities laws.

I will now turn the conference over to Mr. Donald Duda, President of Methode Electronics. Sir, you may begin.

Thanks, Paul. Good morning everyone. Thank you for joining us. With me today is Doug Koman, Vice President of Corporate Finance, and Bob Kuehnau, Methode's Treasurer and Controller. Both Doug and I have some opening commentary, and afterwards we will be pleased to take your questions.

Methode's first quarter of fiscal year '03 continued to exhibit momentum in our automotive business. As we reported in our release this morning, the automotive sector increased sales 12.4 percent year-over-year. Automotive Safety Technologies contributed to this increase approximately 3 percent. However, the increase was primarily the result of ongoing business at our facilities in Carthage and Golden, IL, along with Methode Malta in Europe.

As we move forward, we continue to invest in our automotive business. For example, in our Carthage, IL, facility, we are upgrading our injection molding capabilities which, beginning next fiscal year will save approximately $2 million annually. In our Malta facility, we are adding paint and laser-etch capabilities which will save approximately $500 thousand per year and will allow Methode to be more competitive on future bids. In Scotland, we've just signed a lease on an additional facility adjacent to our current property in preparation for product launches for the '04 and '05 model years. The initial lease costs for this facility are being underwritten by the Scottish government and the cost of the production equipment is recovered via grants over the next four years. In Mexico, we have approved funding for two additional product lines for -- excuse me, production lines for Automotive Safety Technology and are very pleased that in the coming quarter ASP will be contributing positively to Methode's earnings.

Regarding future automotive business, while we are not able to announce any major business gains at this time, we continue to see increased opportunities, particularly in Europe, as a result of our Malta subsidiary receiving a Supplier of the Year Award from General Motors. We view this event as extremely important and positive as it not only provides Malta new opportunities at General Motors, but also opens doors for our North American operations as well. This should allow Methode to diversify its automotive customer base. We want to take this opportunity to congratulate Methode Malta on its achievements and thank them for their very hard work.

Domestically in automotive, we are intensifying our efforts to achieve business wins at the trans-national automakers. We feel these customers represent considerable upside potential for Methode in the '06 and '07 model years and will further diversify our customer base.

In our non-automotive business there has been little change in the macro market conditions in the last three months. Computer related products has been flat and telcom continues to be depressed. We have seen some pick-up in business in wireless PCMCA cards and in compact flash connectors in cases for digital film. The restructuring and consolidation that was undertaken for these business units in fiscal '02 have shown positive results, however, the gains have been offset by further declines in optical and in our overseas operations by the weakness of the dollar during the quarter.

Regarding the recently announced plan tender for Methode's B shares, it is not appropriate for me to speak for the special committee. However, I believe it is important that I comment on the strategic value of this deal to the A shareholders.

The transaction, as proposed, would essentially eliminate a dominant class of stock. A class that owns only three percent of the outstanding shares of the company, yet essentially controls a $350 million enterprise via its ability to elect 75 percent of the board of directors. I feel that restoring more conventional corporate governance to Methode is clearly in the long-term interest of the company, and the A shareholders. And additional commentary on my part regarding the proposed tender is not appropriate at this juncture.

Moving to Methode's second quarter, we are forecasting sales between 85 million and 88 million, and net income of 17 to 18 cents per share.

As a result of the lower consumer confidence index announced earlier this week, we are taking a slightly more conservative view of our full year revenue projections, and forecast sales for fiscal 2003 -- between 340 and $350 million.

I am pleased that we are ahead of schedule on our cost management program, and therefore are able to maintain our prior guidance for net income between 58 cents and 62 cents per share for 2003 fiscal year.

Now, at this point, I'll turn it over to Doug for some additional commentary.

Thank you, Don, and good morning everyone.

By segment, the quarter breaks down as follows: electronics had sales of 72.2 million, except 5.7 million from the first quarter last year. All of the entries was from the automotive markets we serve.

Balance of the electronic segment, made up primarily of telecommunication and computer end markets, saw flat sales. Gross profit for this segment was 16.6 million, compared to 12.3 million last year. This is an improvement in margin to 23 percent, from 18.5 percent last year's quarter, and an improvement over our run rate of 21 percent for the last fiscal year.

The optical segment had sales of five million for the quarter, and that's down 4.1 million from the first quarter last year. This decrease is the result of continued softness in the optical market, and from increased competition for the business that is available. Gross profit for the quarter was $1 million, compared to two million in the first quarter of last year for optical.

The other segment comprised of power distribution and testing laboratories had sales of 2.8 million for the quarter. This is down 1.2 million from last year. The decrease in this group is also attributable to softness in telecommunication and computer markets. Gross profit for the quarter in this segment was a half a million, compared to one million in the first quarter last year.

Some of the highlights for the quarter: EBITDA was 9.9 million, annualized return on capital was 7.7 for the quarter. Both EBITDA and return on capital were negatively impacted by foreign exchange losses of 1.4 million in the quarter.

SG&A is at 12.8 percent. This is in line with our normal run rate of between 12 to 13 percent.

Working capital was 119 million compared to 115 million at the end of last fiscal year.

Capital spending for the quarter was 4.5 million, which is in line with the expected capital spending of between 17 to 18 million for the full year.

Depreciation expense was 3.6 million. Amortization was 300,000.

Cash is strong at 64.6 million. That's up 14.7 million from year-end.

There was a corollary decrease of 11.3 million in accounts receivable to 52.7 million. Both the increase in cash and reduction in receivables is typical of our first quarter, since fourth quarter automotive sales are stronger than in the first quarter, catch up and - on our collections.

Lastly, inventories are at 38.6 million. This is up 1.7 million in the quarter and that is in anticipation of the stronger automotive sales in the second quarter especially at our automotive safety technologies unit.

With those comments, I'll now turn the conference back over to Don.

Thank you, Doug.

, I think we're ready to take questions.

, I hope you're there.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment for your first question.

Your first question is from Mr. David Leiker of Robert W. Baird.

Good morning.

Morning, David.

Hey, did I hear you right that your telecom and computer-related electronics business was flat in the quarter year-over-year?

Let's see - year-over-year, I believe we were flat. Well, actually by segment ...

The electron - in the electronics business.

In the electronics, yes, we were flat. Quarter - this quarter versus a year ago.

Do you happen to recall offhand what that number was in the fourth quarter?

I - yes, in the fourth quarter it was - David, it was actually about the - about the same.

OK, so that business ...

So we'd be flat ...

... has flattened out here for you.

Right.

OK. And then on the automotive side, what are, with the new model year here - new vehicles coming out, what - if you can give us some highlights of some new business or new programs that you're shipping to this year that would be incremental for you.

We have about 13 launches for Chrysler, five or six for Ford, a few for Mitsubishi. About 30 or 40 percent of those have been launched. The balance will be launching in January. I don't have the full launch list with me. That's something we can provide you offline if you'd like.

OK. And of the ones that you've launched, it's all gone smoothly for you?

Yes.

I think it's an area that we continue to improve on. If you remember two years ago it was quite a problem, and I think it's something that domestically has gotten better. I think there's still room for improvement, but in terms of the auto makers, they are pleased. I'm not as pleased as I'd like to be with some of the startup costs involved and so on, there's always room for improvement.

And you know there's really nice improvement here in margins, is that level of improvement here sustainable going forward?

Yes, I believe so.

Okay, great. That's all I need right now.

All right, thank you, David.

Sure.

Again, ladies and gentlemen, if you do have a question or a comment, press star and the number one on your telephone keypad.

You have a follow-up response from Mr. David Leiker, from Robert W. Baird.

I just stay on the line here. Your tax rate was a little bit lower than we were modeling it; is this where you expect it to be for the whole year?

Yes. Yeah, we're at--we would expect that run rate to stay.

Okay. And then, give me a little bit of color and background on the currency losses.

Primarily it's related to the euro, and we just saw some extreme--you know, the dollar was extremely weak for a period of time there, and since many of those business units sell in U.S. dollars and collect in U.S. dollars, but pay in local currency, we did see a problem this quarter.

Is that--where do you expect that to be, going forward?

I haven't talked to the business units, but I don't think that they see that to be a significant--as significant a problem in future quarters, but I think we'll also be looking at how we might help protect the company from those fluctuations.

And that all showed up at Other Income expense line, is that right?

Correct.

So that number is pretty close to zero, excluding the losses?

Yeah, that would have been just marginally positive without the foreign currency losses.

Okay.

And David, to give you a little more information on our launches in and , our largest dollar count-- are still on the high-volume minivan and truck segments, Caravan, Grand Cherokee, the Ram trucks, the F-150s and 250 Ford trucks and Explorer. We continue to expand along those lines, and we're also working aggressively to enter GM truck segments.

Okay. The , do you have to make another payment to them this year?

The--we ended up not having to make a payment this year because of a combination of some offsets that were made during the course of the year, and since that--sales since the period we bought them were not that significant, there was actually no cash payment made.

And then, in the 2003 fiscal year?

Yes. Then we would anticipate a cash .

The payment will be made in 2004 for 2003.

OK. And how much -- what do you think that that's going to be?

That would probably be somewhere between maybe 1.3 to 1.5 million.

OK, and then ...

That will not hit expense, that will be capitalized as a deferred purchase price.

Right. And then just lastly, do you have your revenue mix between auto and non-auto? Where you were in the quarter? That's a little different than the segments you report.

Sure, we can ...

... below 25 percent given optical and the other?

Electronics was 72.2 and automotive made up about 58.7 million of that.

OK. OK, great. Thank you much.

Thank you.

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

With that we'll wish everybody a good day and get on to work here. Thank you, Paul.

Thank you all for participating in today's Methode Electronics first quarter fiscal year 2003 earnings conference call. This concludes today's presentation. You may now disconnect.