Methode Electronics Inc (MEI) 2003 Q2 法說會逐字稿

Good morning. My name is April and I will be your conference facilitator today. At this time I would like to welcome everyone to the Methode Electronics Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

Certain statements in this conference call are forward-looking statements that are subject to certain risks and uncertainty. The company's results will be subject to many of those same risks that apply to the automotive, computer, and telecommunication industry such as general economic conditions, interest rates, consumer spending patterns, and technological change. Other factors which may result in materially deferred results for the future periods include, market growth, operating costs, currency exchange rates, devaluations, delay in development, production in the 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 the securities law. I will now turn the conference over to Mr. Donald Duda, President of Methode Electronics. Sir, you may begin your conference.

Thank you, April. Good morning, everyone. Thank you for joining us. With me today is Douglas Koman, Vice President Corporate Finance. Robert Kuehnau Methode's Controller is taking a well-deserved vacation. Both Doug and I have opening commentary, and afterwards, we will be pleased to take your questions. Methode's second quarter of fiscal year ‘03 continued to exhibit momentum in our automotive business. As we reported this morning, the automotive sales increased some 19% year over year. Automotive safety technologies contributed to this increase approximately 6.5%. The balance of the increase was the result of increased business at our Illinois facilities [inaudible] [off of ]approximately 7%, along with Methode Malta in Europe which posted a 20% gain. Methode Malya recently secured business with Audi in Europe to provide a patented clutch pedal sensor for Audi’s premiere model, the A-6. This six-year contract, which commences in calandaer year 2004 will reach volumes of 75,000 units per year in 2005 and beyond. This [inaudible] business represents Malta's first entry into Audi and into pure electronic sensing versus the more traditional [inaudible] mechanical switches. It's also anticipated that this business will open up doors for Malta at Volkswagen. During the quarter, Methode began to explore low-cost tooling alternatives to further improve our margin. Representatives from our Malta and [inaudible] Illinois facilities visited China to review potential vendors. In general, pricing was 40% to 60% lower than current domestic suppliers. This initiative will not only benefit our automotive operations but Methode's other divisions as well.

In our non-automotive businesses, there's a little change in the market conditions in the last three months. Computer-related products have been flat and telecom continues to be depressed. This seems to mirror the comments made in the November 11 issue of Electronic Buyers News that the ECA monthly index of component orders remained flat for the fifth straight month. We continue to see a pick up in business in wireless PCMCIA cards and connectors. Regrettably these gains have been offset by further declines in our optical business.

On a more positive note, Methode recently acquired the business assets of Sonic Connections, which has opened up opportunities in medical Electronics. In addition, this patented ultra [sonic] [inaudible] technology has implications across all of Methode, including automotive.

Regarding the recently announced plan tender for Methode B shares, the request for an I.R.S. ruling that this tender will be will not affect the tax-free status of the Stratos Lightwave Distribution was submitted to the service on October 26 any additional commentary on my part regarding the tenders is probably not appropriate at this juncture. Moving to Methode's third quarter we're forecasting sales between $85 and 88m and net income of $0.13 to $0.14 cent per share. I want to point out this quarter includes the month of December where we anticipate lower automotive revenues as a result of plan idling by the auto makers. For the full year Methods reiterates its projections and forecasts sales between $330 to 340m and maintains prior guidance from net income between $0.58 to $0.62 cent per share for the 2003 fiscal year. At this point, I will turn the conference over to Doug for additional financial commentary.

Thank you, Don. Good morning, everyone. In the second quarter, the electronic segment reported net sales of $87.8m versus $69.5m last year. That's a 26.3% increase. This increase included customer paid tooling sales, which are primarily to automotive OEM's, and in the current quarter, that was $7.9m versus $1.2m last year. The increase in sales for the electronic segment, when customer paid tooling was excluded was still an impressive 17%. Sales increase in the electronic segment was driven primarily by our automotive businesses. And they reported a 31% increase in sales to $72.4m, which is up from $55.2m

last year, again, adjusting for the customer-paid tooling the sales growth was still impressive at 19.4% for the automotive businesses in the second quarter.

Gross profits in the electronic segment were $15.3m compared to $11.7m last year. This is an improvement in gross margin to 17.9% from 16.8. The optical and other segments reported combined sales of $9m this quarter versus $11.6 last year. Because of lower sales volume, gross profits for these segments dipped to $1.6m compared $2.3m in last year's quarter. For the six-month period, the electronics segment had net sales of $160m versus $136m last year, a 17.6% increase. Again, adjusting for the customer-paid tooling, which was $7.9m in this six-month period versus $1.7 last year. The sales increase in electronics segment was 13.3%. As in the quarter, the six-month period increase was driven by the automotive businesses. They reported a 22% increase in sales to $131m, up from $107.4m last year. And again, that's adjusting for the customer tooling. It's a 16.6% increase in sales.

Gross profits in the electronic segment were $33.5m for the six-month period. This compares to 23.6m last year. This is an improvement in gross margin to 21% from 17.4% last year. For the six-month period, the optical and other segments reported combined sales of $16. 9m versus $24.7m in last year’s six-month period. Again on the lower sales volume, gross profits for these segments declined to $3m this year from $5.2m last year.

On the income statement, other income, which is the line item just below net sales is lower in the second quarter and that is due to an allocation of warranty expense that was charged to a 50%-owned joint venture that is operated by Methode. The offset to the joint venture expense in other income was a reduction to Methode's cost of products sold in the second quarter. For the six months, earning before interest taxes depreciation and amortization was $23.3m. Annualized return on shareholders' equity was 8.9%.

Selling general and administrative expense represented 12.5% of net sales, which is in line with our normal run rate of 12 to 13%. Working capital increased to $124m from $115m at year end. Capital spending was $8.6m for the six-month period. This is in line with the expected full year run rate of $17 to 18m. Depreciation expense in the six-month period was $7.3m and amortization was $600,000.

Lastly cash is at $66.4m. That's up $1.9m during the quarter and up $16.5m from year end. That concludes my comments. Don, I will turn it back to you.

Thank you very much. April, I believe we're ready take questions.

Thank you, sir. At this time I would like to remind everyone, if would you like to ask a question, simply press the star and the number 1 on your keypad. To withdraw your question, press the pound key and if you're using a speaker phone, please pick up your hand set before asking your question. Gentlemen, we will pause for just a moment to compile the Q and A roster.

Gentlemen, our first question comes from David Sacks (ph.) of Hockey Capital (ph.)

I had a couple of questions. One, the thoughts buying the A shares [toss' a] bone since you're taking out the B shares. Is that something that sort of makes any sense given how you're looking at the business? Two, if you can sort of quantify the Audi contract, and sort of 75,000 units, does that turn into relevant revenue dollars? And I have one other one that I can ask later.

Okay. Currently on any type of repurchase, we feel that Methode's cash is probably better deployed on a solid accretive acquisitions, smaller ones investment into our business, capital cost reduction programs, I wouldn't rule that out. But right now I think we're focused on what is necessary to improve our margins moving forward in the capital required for that.

As far as Audi, the business is worth about three-quarters of a million dollars a year. I wouldn’t use that number for 2004. That's a ramp year, but by 2005, we should be at the $750,000 mark and that's significant for Malta. Also as I said earlier, I'm excited that’s our first [inaudible] and Audi but it also opens doors at Volkswagen and Europe. It's a fairly significant win in its patented technology.

Mr. Sacks does that answer your question Sir?

It does. I’ll come back [if] –

Thank you David.

Our next question comes from David Leiker, Robert W. Baird

Good morning.

Good morning David.

Trying to follow up with this sensor with Audi, what exactly is the sensor doing?

The clutch pedal sensor, and as you know, probably 70% of the cars sold in Europe are manual transmissions. And it's -- it gives true pedal rest position information for the engine controller and it's the -- it fulfills the requirements as Audi starts to brake by wire and probably in their A6 they will begin that shortly. The stand-alone system is integrated intelligence. It has the necessary backup systems, and you can use it for the clutch or ultimately they can use it for the brake by wire. So it uses any current sensing technology, which is something that -- has been working on for over three or four years.

Okay. And on the SG&A line, I guess a we go forward it’s probably more meaningful [inaudible] model that as a percent of revenue. [Because] sequentially on a dollar basis it’s a pretty significant increase. Seems that’s probably much more closely tied to the revenue line, that anything else, is that fair?

Yes, I think that’s fair David because the way that we currently handle commissions, and on increase sales, we’ll see that number rising. And especially when we go into the period where we’ve launched a new product and we have a sliding scale on the commissions so that – will cause sales expense to increase. We have older product going out at 2/5% and newer product at 5%.

Okay. And on this warranty item can you put a little bit of color on exactly what that is and what’s behind it and quantify it for us?

I don’t know if I can quantify it but what it is—it’s a warranty item that we discussed last year – it’s an item that we have already paid , and it’s behind us. But what took us just a little time to go through our data, so we could support the products that were actually produced by the joint venture. An the joint venture is really just a line of multifunctions that we have in [Carthage] Illinois . That’s running in our facility. We operate it but it’s a 5O% owed joint venture. So, we report that in the other income line. So, all we did was a reallocation of the expense and took it away. Previously,[it had] run through an entire cost of products sold, and now we're just getting the expense properly charged to the joint venture.

So does that change what that number should be on forward-going basis?

No, going forward, I think we should see that number be -- you know, normal. This quarter was an aberration.

And would you, without those costs, having, you know, more in that 4 to 500,000 a quarter rate?

David, I didn't look at the royalty -- the joint venture and the royalty run through that line item. And quite honestly, I didn't get a chance to look at the detail on royalty. But I would expect that to be in the 400,000 range. I wouldn't expect it to be that much different.

Okay. And what kind of -- one last question and I will come back. But on the cash flow statement, what were the outflows for you here in the quarter as relates to the capital spending, anything else that is unusual?

Just taking a peek summary, I have some of that information. We talked a little bit about the capital spending was 8.6 -- you're looking mostly for outflows, dividends for the six months we paid $3.6. CapEx, as I mentioned, was 8.6. Those are the large uses of cash.

What about anything on acquisitions?

No. The [inaudible] connections that Don referred to --for accounting purposes we're treating that as an asset purchase or product line purchase, so we won't highlight that an acquisition. It will be -- it's in our capital spending number.

Okay. Good. Thank you.

$400,000. Something like that.

Yeah, it as around $400,000.

Okay. Thanks.

At this time I would like to remind everyone who wants to ask a question to press star 1 on the keypad. The next question is from Alexander Paris of Barrington Research.

Good morning.

Morning.

Looking in detail at your auto sales, how much are your sales in the quarter of the six months, how much came from new programs that were starting up on the 2003 model year? If any.

I don't have -- I have the ones that are coming in the next quarter. I don't have the current – [inaudible] the previous quarter. I think I used in the past, 20% of the sales have come from new programs. At some point we can get back to you off line to give you more color on that. I just don’t--

Is that in general or is that from specifically new programs for 2003 model year?.

Specific to 2003 would be 20 -- 20% is probably a good number.

And then 2004 and 2005 model years, you mentioned the Malta. Are there any other programs that will be starting up 2004 and 2005?.

There are a number. Again, I don't have that information from front of me. I can tell you from November of this year through probably mid,-- first quarter, we have got 14 launches worth about $20m a year in annual revenues, three for [Ford], about nine for Chrysler and two for Mitsubishi. I don't have in front of me the exact details of what we're launching in the following year.

Okay.

And of those sales in the second quarter, were those mostly core sales? I see you probably had one month of sales from the American components acquisition that was made in August and then you the most recent one -- are those significant at all?.

They were about 7%, if I recall, for the quarter. Last year would have been almost zero.

We talked about a 19% increase in automotive. Of that 19%, it was close to 7% was contributed by the automotive safety technologies, which is the new product for us.

Right. That was of the acquisition that -- that's what came out of the auto components acquisition, American components acquisition, right?.

Correct.

Just one other question. Kind of as I review the -- the connection now between Methode and Stratos, I think when you first did it, there were some contracts in between the two companies. Are they now pretty much completely independent much each other?.

That's correct. There's really no sharing of services. that continues.

Does Methode itself own any shares anymore or if they ever did in Stratos?.

No.

Thank you very much.

Our next question is a follow up from David Leiker of Robert W. Baird.

Just a couple of other ones here. The tooling number, you know, a pretty big jump. What is behind that and what should we be looking for going forward?.

This quarter would normally have the heaviest tooling billed out as we launch programs and then bill out the customer-paid tooling. We have also had a push that Tom Reynolds initiated in Carthage that within 90 days we get the billing out, which we certainly applaud, that in times past have taken sometimes six to 12 months to collect the tooling money. So he set a goal for his people to get the necessary paperwork processed and in the hands of the auto maker and the bill in the hands of the auto maker so we get paid so. A portion of that is catching up some previous quarters. Next quarter will be considerably less. Then probably the fourth quarter as we get mid-year launches will have an increase, but I don't think to the tune of the $7m that we saw here.

Okay. And the pace of the margin improvement year over year, you have done a great job the past quarters, can we expect that pace of margin improvement here to continue through the rest of last year , it looks like --through the balance of the year?.

I think in our guidance, we have contemplated what we expect for the balance of the year. As I said in the past, we target to take 5% cost out and then realizing that we have to give some back to our customers and [inaudible] tried to give back two or three, so you should have, from a cost standpoint, have a good 2% each year. It's doesn't always work that way, but -- I would say it's contemplated in our guidance. We’ve talked about the improvements we're making in our molding facility in Carthage, and that's worth a couple of cents per share. I don't know that I want to try to forecast the next fiscal year quite yet.

Okay. And then -- I guess that's it. Thank you.

Thank you.

Gentlemen, your next question is also a follow-up question. It's from David Sacks of Hockey Capital.

Hi. Just going -- two questions. One, the tooling number, that's a pure pass through, there's no profit component tied to those revenues?

No.

And then secondly, on the restructuring, what is left to do on the non-auto portion of the company in terms of expense reductions or rightsizing and when do we think we will get to a stabilized profit level and at current revenues what do you feel is an appropriate margin that can be delivered?.

We're targeting [our] across the board and non-automotive is a minimum of 10%. We're not there. Let me answer your first question first about restructuring. We certainly have no more special charges planned or anything of that. We continue to look at all of the businesses to see where we can save costs, reduce expenses, whether it be in consolidations or reductions in force and so on. But we don't have anything major planned. At this point what the group needs to focus on is growing the businesses. We have taken their cost structure [down] and we have opened up Mexico to them if they choose to take advantage of our border plans. So really they need to focus on getting good margin business. Doug, I don't know if have you anything to add on margins?.

No, I think that covers it.

And on the current base of revenue, can you get to this 10% level or do we need to see some pop in top line?.

You need some top line. We stemmed the losses and have taken some pretty dramatic actions. So that when it does return, we should see a good throw to the bottom line. And I have reviewed the opportunities about a week ago, and particularly in the optical sector, it's pretty thin.

Last question. For the fiscal '04, I guess, we know we have won some European business and we have a full year of ACI or larger year of ACI so those should be helpful to the top line. What are the head winds that you're thinking about now for fiscal '04, in terms of if it's a labor expense or benefit expense or new product launches with lower margin -- what other kinds of things do we need to be worried about to offset the nice jump in revenues we should be seeing?.

Consumer confidence would be a concern to me. Automotive has been robust, if I can use that, in a pretty down economy. That certainly would have an effect. Although, we have not seen that in our releases. They've been good, not stellar, but they have been good. December looks, again, good. January, about the same. As we approach the end of our fiscal year, it really depends on consumer confidence. If people aren't buying cars, it's certainly going have an effect. I think we have in place, my shopping list of things to do in fiscal year 2004 from the automotive side is continued, our cost reduction efforts, we have had -- we have done okay on our purchase price variants. We need to get a better vendor management in place. There's money to be saved there. I think we can also improve our incoming quality which will have a positive effect on our manufacturing floor. So it kind of more of the same in automotive, get our products launched with less grief, and in the non-automotive, it is, gentlemen, let's go book business and manage our business as such that they contribute to the -- to Methode's bottom line. We do need some help in the computer and telecom markets to facilitate that. But it's really just manage the business the way we have been and continue to take costs out. We're striving to be the low-cost producer. Not that you give the margin back to the customers, but saving money is a way of life. So more of the same.

Thanks.

Gentlemen, at this time there are no further questions. Do you have any closing remarks?

Other than to thank everyone for listening and their questions and I wish everybody is safe and pleasant holiday. April, thank you very much.

Thank you, gentlemen. At this time I would like to thank everyone for participating in today's conference. You may now disconnect.