Methode Electronics Inc (MEI) 2003 Q4 法說會逐字稿

Good morning. My name is West and I will be your conference facilitator today as of this time, I would like to welcome everyone to the Methode Electronics and fiscal year-end 2003 conference call. All lines have been placed on mute to prevent any background noise. After the remarks of the speaker, there will be a question and answer period. If you would like to ask a question during this time, press star then the number one on the keypad. If you would like to withdraw. Press star then the number two.

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 the same risks that apply to other industries such as general economic conditions, interest rates, consumer spending pattern and technological change. Other factors which may results in materially deferred results or future periods include market growth. Operating costs, currency exchange rates production and marketing of new products and other factors set forth from time to time in the company's form 10-K and other forms filed with the Securities & Exchange Commission. These are subject to the Safe Harbor protection. I will now turn this call over to Donald Duda. You may begin your conference.

Thank you West. Good morning, everyone. Thank you for joining us. Most of you should have received our earnings results released earlier today. If not, you can obtain a copy from the investor relations page an your website. With me today is Doug Koman Vice President of Corporate Finance. And Bob Kuehnau Treasurer and Controller. Also with us is Joey Iski Director of Investor Relations feel free to contact if him if you have questions of additional investor information. He can be reached at the number listed in the contact information section of our press release. Both Doug and I had comments today and we will be able to take your questions after that. Methode's fourth quarter completed year with continued growth in both revenue and in the net income on a full year basis we produced year over year growth for each quarter of the year. Our automotive business units have increased year-over-year sales by 14.8% excluding [inaudible]. This increase was primarily result of new business at North American and Malta automotive facilities in our North American facilities we had new product ramp up for Delphi, Ford and Chrysler contributing to an increase. Methode is pleased with the significant growth at our automotive safety technologies division which provide seat sensor for vehicle occupant detection we expect this business unit to continue its rapid growth in the year. In our non-automotive area, other departments receiving market tension is MBI. It's sensing technology utilizing non-contacting magnetic field senses to determine minute changes in applied torque in rotating and fixed shaft. This technology unlike other techniques is impervious to environmental contamination and requires no costly periodic maintenance.

While not a significant contributed to Methode this time, the business is gaining momentum in varying commercial industries from aerospace to agriculture with minimal competition and solid margins. In the quarter we had some disappoints. Sales from our optical group continued to feel the effect of the weak communication market with a year-over-year sales decline of 30%. Also during the quarter Methode Iron (ph) and Methode development lost business to Chinese suppliers and electronic consumers, but to further reduce the product cost we instituted an action plan and the associated cost have been recognized in our fourth quarter financials. As a result of the restructuring undertaking in fiscal 2002 and general pick up in the connector market during the past year our inner connect probable group reported favorable year-over-year profit comparison. However, the connector industry as a whole has experience a slight downturn since mid April and is difficult to determine when we might see that reversed..

Our net robust business unit which designs and manufactures our distribution products also provided year-over-year growth of just over 30%. This growth is as a result of design win of high end server products and next generation mainframes as well as increase this defense spending. As we announced previously, we completed the acquisition of exclusive automotive sales representative [inaudible] both associates KVA. Since the acquisition we’ve evolved a more diversified approach to the domestic automotive market. We continue our commitment to consumer relationships continue to improve our product launches. All of these paramount to realizing growth in the automotive market. As a result of these efforts, Methode was able to win new business from General Motors for a switch bank on a GNT900 platform. This will provide $8 million to $10 million in annual revenues beginning in model year 2006. Moving to Methode's fiscal year 2004 we are forecasting sales between $75 million and $80 million and forecasts net income of 11 to 13 cents per share. For the full year, Methode's forecast sales between $350 million $[365] million with net income increasing to 63 to 68 cents per share. This guidance does not reflect the reduction in shares out standing in the event that the successful class A vote and successful tenders from class B stock. As we stated in our press release, the lower end of the company's full year guidance reflects a fairly weakening in our non-automotive businesses servicing the telecommunications and computer markets. Clearly, we must face the real possibility that these markets may not offer Methode to business opportunities necessary to meet our long term growth and profitability objectives. However, despite the difficult market conditions, the company is projecting improved margins in fiscal 2004. At this point, Doug will provide additional financial commentary.

Thank you, Don. Good morning, everyone. I would like to start with the brief review of year-over-year sales and net income comparisons. Reported net sales for 2003 were $363 million including $22.8 million of costumer tooling sales resulting in about $340 million in product sales. In fiscal 2002 reported net sales were $320 million about that included about $4 million of customer tooling leaving about $316 million in product sales. Therefore, sales growth when adjusted for customer tooling was 7.8% year-over-year. Reporting net sales for the fourth quarter for fiscal '03 were $94 million and including $7 million of customer tooling. This resulted in about $87 million in product sales for the quarter. And last year's fourth quarter, net sales were $85 million and included about a half million customer tooling leaving about $84.5 million of product sales. So quarter over quarter. The growth in sales was about 3%.

We should note that the first quarter guidance just provided by Don between $75 million and $80 million includes $2 million of customer tooling sales at both the high and the low end. The full year guidance for sales between $350 million and $365 million includes $50 million of customer tooling and both the high and level end. Moving to the bottom line reported net income for the fourth quarter fiscal 2003 was $6.7 million or 18 cents per share. Included in this amount the after tax gain of sales of technologies one of our business units that after tax amount was $700,000 about two cents per share. Excluding the gain, the net income for the quarter was $6 million or about 16 cents per share. In the fourth quarter fiscal '02 we reported a net loss of $4.7 million or 13 cents per share. Included in this amount were two unusual items after tax charge of $13.2 million or 37 cents per share for restructuring costs and asset impairment, second, because of tax law changes in Malta we recognize the benefit for foreign investment tax credit, credits of $3.7 million or 11 cents per share. So excluding these two items, net income for last year's quarter would have been $4.9 million or 13 cents per share. Therefore, on an adjusted basis, we saw 20% increasing in fourth quarter net income this year compared to last year. This was primarily attributable to restructuring in ‘02 and continued attention to controlling our costs.

Reported net income for fiscal '03 was $21.9 million or 60 cents per share excluding the gain on sales of Atom technologies , that would left was with net income of $21.2 million or 58 cents per share for the year. Reported net income for fiscal year 2002 was $3.8 million or 11 cents per share. In addition, to the previously discussed charge for the restructuring about the acid impairment and the foreign impairment tax credit last year's net income for the year including after tax charge of $3 million or 8 cents per share for settlement of a warranty issues excluding these three items pro forma fiscal year 2000 net income of $16.4 million or 45 cents per share. So on an adjusted basis we saw a 26% increase in fiscal year 2003 of net income compared to 2002. Again this is primarily attributable to to the restructuring and cost control efforts.

Now like to provide some detail on the business segments. In the fourth quarter, net sales for the electronics segments were $83 million versus $75 million last year. When you exclude the customer paid tooling which is primarily from the automotive OEMs net sales for the electronic segment was about $76 million for the current quarter which is increase of about 2.2% compared to $74 million in the fourth quarter last year. The sales increase in the electronics segment was provided by automotive businesses which had sales of $79 million up from $60.8 million in last year quarter. Again excluding customer paid tooling net sales for the automotive businesses were about $65 million in the current quarter which is increase of 7.6% compared to the $60 million for the fourth quarter last year. For the quarter, we saw the optical segment at 18% decline in sales to $5.3 million versus the $6.5 million reported last year. The other segment had sales of $5.9 million versus $3.5 million last year. The increase here was primarily due to program wins at network plus power distribution unit.

For the fiscal year net sales for the electronic segment were $326 million in fiscal ’03 versus $277 million last year. Excluding the customer tooling net sales for the electronic segments were up $303 million which is 11% increase compared to $273 million last year. As in the quarter, the full year increase in the electronic segment was driven by the automotive businesses debt at increase of sales to about $270.6 million which is up from last year's $220.5 million again, excluding the tooling sales for the automotive business, we would have had $247.8 million this years compared to the $217 million last year which is about 14 .5% increase. The optical segments for the year had sales of $19.5 million. And as Don mentioned that's 30% decline compared to last year's $28 million. Other segments had $17.8 million increase in sales to about $17.2million versus last year's $14.7 million. This was as a result of business at network plus.

Some other highlights for the year, the earnings before interest taxes was $43.5 million. Return on equity for the year was 9%. Capital spending this year was $23.8 million. The increase in capital spending this year was primarily the result of our decision to up grade and bring additional molding capabilities in house in our [inaudible] automobile Illinois plant. Lastly full year depreciation expense was $14.9 million and amortization was $1.8 million. Don that concludes my remarks, so I’ll turn it back to you.

West, we think we are ready to take questions

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

Good morning

Good morning

Just a couple of questions for you here. First question is, you know you mentioned bringing KVA in house. Have you had some quantifiable success there? Can you talk about business you may have won with transplants following the acquisition?

We are -- we have no business that we can announce right now. We are in final stages of quoting some business. I don't necessarily want to say what that is because it is a competitive situation. But we have had the Japanese in our [inaudible] and golden plant plus other facility and we've been to Japan twice to make presentations. We're fairly far along on some new business. But no details right now.

Okay. My other question would be a little bit of a modeling question with the acquisition, did that shift some of the expenses that previously were in SG&A sales commission to cost of goods sold bringing that in-house, is that?

No, we kept that transparent.

Okay.

So the cost of KVA is still running through the SG&A line.

Okay. Okay. Can you talk about new business that you won. Can you talk about the major launches that you have coming up in next fiscal year?

Sure. For ford, we've got a six launches this summer on speed control. Two multi-functions then also some redundant radio controls. Chrysler, we've done 7 already. This calendar year. Most of them in January for ignition, lift gate switch, power seat controls, speed controls. We have three more this summer for ignition mounting housing. And with Mitsubishi. We have a disarm switch that will launch this summer.

Okay. Great. And then housekeeping. Do you have the (inaudible) income in the quarter split out from the other income

I don't know that we have had -- yeah. It's up in other income but we don't have the split out with us, Laura.

Okay. And then I had some questions on Atom tech but you answered those already. So my last question. In terms of automotive safety technology Don had mentioned things are going good well there. What were you sales in that for fiscal year 2003 and then what would be a kind of a good run rate going forward?

The sales for AST were $13.5 million in 2003. And that's coming off of $1.9 million the prior year.

You said -- I'm sorry? 15 and a half

$13.5 million.

Going forward obviously that business is growing and will do some as more (inaudible) do you have kind of a growth rate?

This model year is really the first model year that the safety standard kicks in. We do expect to see nice increase in business this year.

Care to quantify that at all

If Don cares to--

I think that we said that before we're looking at $25 million in sales from that

In fiscal year '04

Yes.

Thank you.

Our sales point out in the launches I gave you, I did not detail the AST launches

Okay. Right

I don't have that with me.

Okay. So those are incremental to that list that you gave.

Right. Right

Thanks

Thank you

Next question comes from Dan Kashaba (ph) from Deutsche Bank.

I didn't see a cash flow statement in the press release. Forgive me if I just missed it. Doug, what was the cash the operating cash flow in the quarter?

You didn't miss the cash flow statement.

Okay.

We did not publish it. For the year, it was $53.9 million

For the year was $53.9 million?

And I don't believe we have the quarter worked through yet

What was CAPEX for the year?

The CPAEX spending was $23.8 million.

23.8 million

Correct.

Okay. It likes like you might have generated and again you don't have the number, but I'm looking at the cash balance. It's difficult because I don't have all the numbers it looks like you generated some cash for in the quarter. Do you have any metric you can share with us? Just looking at the cash balance on the balance sheet.

I'm not sure I'm following you

It looks like you generated free cash flow in the quarter. Because you don't have the operating cash flow number on add because I can't determine that I am look at the cash balance sheet on the fourth quarter I'm hoping you can help me in letting me know did you generate cash flow in the quarter

Part of it Dan, is probably coming from my comments I spent probably too much time on customer tooling. We did work down some backlog this year. That's why we had $22.8 million in tooling. Not all of that is current. Is catching up some backlog. I think in the quarter, we had about $7 million and that probably essentially represents most of that cash.

Okay.

So that would explain I think major portion of that difference

That's helpful. Thank you. What do you expect CAPEX to be in this new notice -- fiscal year '04

I would think this year we're probably going to be more in line with typical run rate somewhere between $18 million to $20 million.

Okay. So it's going to be a little bit

This past year was higher because we did put a quite a bit of capital into your plant promoting.

And operating cash flow is just based on guidance that you have given should, you know, I guess that you come in roughly around the same amount that it was for '03?

Yeah. I wouldn't expect a material deviation from that --

Just trying to work those numbers mostly 54… Forgive me again. Currently for the current give tend that you pay out on the $36 million roughly shares, what is that costing us? I guess that's 20 cents? What does that cost you?

It's about $7 .5 million.

About $7.4 million. Okay. So the give -- dividend is about $7.4 million or so. Okay. Good die -- guys thanks a lot. Thank you.

Again, I would like to remind everyone, in order to ask a question, press star then the number one on the telephone keypad. We'll pause for just a moment to compile the Q and A roster. Your next question from your Laura Thurow of Robert W. Baird.

Just a quick follow-up for you, gentleman. You said in the 2004 sales guidance you say that about $15 million of that was tooling?

Yeah. We did that because it's, you know, such a large number. It does effect some of the ratios when you start looking at margins.

Okay. That's all. Thanks

Thanks.

Next question comes from Steven McBoil of Lloyd (ph) Abbot.

First perhaps with respect to coming on the call here a little late. The 2004 guidance specifically sales $350 million to $365 million, had you broken that out auto non–auto. And talk to in the press release you anticipate increase in margins through 2004 which I presumably will be driven on the auto side of equation. If you can talk about where the margins are currently auto, non-auto where they ought to be in 2004 in terms of the guidance you've given at 63 cents.

Steve, I don't know that we go in to breaking out margins that deeply auto versus non-auto. I don't believe we've done that.

Okay.

In general, our margins improvements will come from our continued review of our purchase goods, from select vertical integration, we will have full year of rebound molding facility in [inaudible]behind us. That was just generally from the operations management. We will have a an increase from AST that is a slightly better margin product than some of the speed controls and radio controls controls. That business wraps up, we'll also see a throw to margin from that.

And just with respect to the opportunity of increase margins for 2004, is it fair to say that those platforms that you are competing for in 2004 obviously at higher margins of relative to what you've done historically. And if that is the case, if you could talk to a little bit ability the order of magnitude there is in terms of improvement again with respect to profitability of those opportunities you're competing and bidding on currently relative to what you had done in the past

Anything would have lounge launching here this fiscal year would have been bid probably two years ago. And with the restructure we've down in automotive in the last couple of years, the margins in general will increase from probably what they were bid at. But do you have to reduce that by the price reductions that have requested or demanded from the automakers

Understand

New programs, we tend to target at higher margins. I don't necessarily want to publish what we target. But they're all geared to increased -- increasing our margins. Some of the margins improvement is sourcing more out of China. We do have all of AST is in Monterey Mexico. I can give you a little bit more detail on splitting out non-auto and auto. The margin improvement does come from auto in your fiscal plant. We are still anticipating pretty tough (inaudible) computer market. They're you're seeing price erosion from primarily china.

Sure. And have you in the past disclosed the book to bill numbers with respect to the electronics?

No, we have not.

Okay. Okay. Very well. Thank you very much

Thank you, Steve.

At this time, I'm showing no further questions.

We'll conclude the call and thank everyone for listening today.

That conclude it is Methode Electronics fourth quarter and 2003 earnings conference call. You may now disconnect.--- 0