Methode Electronics Inc (MEI) 2004 Q1 法說會逐字稿

Good morning. My name is Lynn and I will be your conference facilitator. At this time, I would like to welcome everyone to the Methode Electronics' first quarter earnings release 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. (OPERATOR INSTRUCTIONS).

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 apply to the automotive, computer and telecommunications industry, such as general economic conditions, interest rates, consumer spending patterns, and technological change. Other factors which may result in materially differed results for future periods include market growth, operating costs, currency exchange rates, evaluation delays and 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 and this conference call are subject to the Safe Harbor protection provided under these security laws. I will now turn the conference over to Mr. Donald Duda, President of Methode Electronics. Please go ahead, sir.

Thank you Lynn. Hello everyone. Thank you for being with us today. Most of you should have received our earnings results released this morning. If not, you can obtain a copy from the investor relations page on our website. With me today is Doug Koman, Vice President Corporate Finance, and Bob Kuehnau, Methode's Treasurer and Controller. Also with us is Joey Iske, Director of Investor Relations. Feel free to contact Joey if you have questions or need additional investor information.

She can be reached at the number listed in the contact information section of our press release. Both Doug and I have comments today and afterwards we will be pleased to take your questions. Methode completed the first quarter of our 2004 fiscal year in line with our guidance and expectations for both revenue and net income. Revenue was slightly lower by 2.6 percent than one year ago as was expected.

Our first quarter is traditionally the lowest revenue producing quarter due to the automobile manufacturer's plant shutdowns as part of their model year changeover. This year the OEMs took advantage of that period and extended their shutdowns at several plants to adjust their inventory levels as a result of reduced sales earlier in the year. Overall, we're pleased with our results during what could have been a very distracting quarter for everyone at Methode.

Our Automotive Safety Technologies units continue to produce strong year-over-year results with better than a twofold increase in sales almost offsetting the effect of the extended summer shutdowns by the OEMs. AST continues to work with their existing customers to expand to other platforms as well as develop working relationships with new OEMs as they work to meet federal safety standards for occupant protection.

Once again, our European automotive business exhibited substantial revenue growth in the first quarter over last year yielding a 27 percent increase. This is due in large part to increased customer demand for our high-quality switches along with new business developed over the past two years. Methode in Europe is receiving greater attention and name recognition as our capabilities become more widely known to OEMs and tier ones.

During the quarter, our European operations added approximately $7 million in new business for the 2006 model year. Most significant is our entrance into the Mercedes A class with our steering wheel switches and floating horn switches. Methode's operations in England, Germany, Malta and Scotland continue to develop new products to distinguish Methode's from our competition.

We expect further growth in these business units to continue our expansion in the European auto market. In the quarter, we also had some disappointments. Sales from our optical group continue to feel the effects of the weak telecommunications market and price erosion with a year-over-year sales decline of 24 percent. Also, during the quarter, our nonautomotive electronic businesses saw slower demand and increased price competition coupled with an ongoing mass infusion of products from China.

We continue to monitor the telecommunications computer markets while working with our business groups to better enable them to meet these challenges. We will be opening our new facility in Shanghai, China after the first of the year to further develop our international manufacturing capabilities, keeping Methode competitive on a worldwide basis, as well as allowing Methode to serve the local Chinese market.

In part, offsetting these reductions was our network bus division which continues its revenue growth posting almost a $2 million year-over-year increase. Many of the programs from (indiscernible) customers continue to ramp up. We congratulate network bus on their business gains. In the area of acquisitions, we remain committed to enhancing shareholder value while seeking to acquire synergistic companies and technologies to expand our products and customer depth.

We intend to be opportunistic in our approach taking advantage of our expertise and electromechanical devices, electronics, switch design and manufacturing excellence to sell our offerings to new industries and markets, thereby lessening our shareholder's dependence on one particular market. Our recent acquisition of the intellectual property rights of a former competitor, Fast AG, which engaged in torque sensing technology in Munich, Germany, is an example of this strategy.

This move will solidify our market position and enhance our patent portfolio in this field. Moving to Methode's second quarter of our 2004 fiscal year, we are forecasting second quarter net sales between 85 and 95 million and are forecasting net income in the range of 18 to 20 cents per share. These projections are before onetime costs associated with the ongoing elimination of the company's dual class structure.

For the full year, Methode reiterates its previous guidance of sales between 350 in 365 million with a net income of 63 to 68 cents per share. Before Doug's comments and we take your questions, I would like to take a few moments to discuss the pending Dura tender offer. As you know, Methode has entered into an agreement with the McGinley Family Trust in which we will eliminate Methode's dual class stock structure.

As we announced on August 14, Methode is fully committed to this transaction and to completing it in a timely manner. Under the company's plan, if approved by the shareholders, the Class B stockholders will be cashed out and the Class A stockholders will receive new common stock and the rights to elect all of the company's directors. Our Board has determined that the Dura offer is not superior to the company's plans.

Dual's offer is an opportunistic attempt for a nominal investment to take control of Methode by acquiring less than one percent of our outstanding shares. The Dura offer would deny our Class A shareholders who collectively own 99 percent of the economic interest in Methode any voice in Methode's future.

As I mentioned the company's party to an agreement with McGinley Trust under which the Trust may not tender into the subsequent Dura offer which means that the Dura Dura offer cannot be completed on these terms. With this, as well as other reasons, our Board has recommended that Class B shareholders reject the Dura offer. We discuss these matters in much more detail in the 14(d)9 (ph) that we filed with the SEC on August 14.

However, today, we're here to discuss our financial results and we will not be taking any questions regarding this matter during the Q&A session. At this point, Doug will provide additional financial commentary.

Thank you, Don. Let me just briefly touch on some of the highlights. Net sales for the first quarter of fiscal 2004 were 78 million which is a decrease of 2.6 percent from 80 million in the first quarter of fiscal 2003. Net income for the first quarter of fiscal 2004 was 4.3 million or 12 cents per share. This is down from 4.6 million or 13 cents per share on the first quarter of last year.

For the electronics segment, net sales were 68.6 million, that is a decrease of about 4.9 percent compared to 72.2 million last year. Within the electronic segment, our automotive businesses had sales up 57.8 million, slightly down from last year's first quarter of 58.7 million. The increase in sales from our Automotive Safety Technology products and gains in Europe was offset by Detroit's lower domestic unit production.

The nonautomotive businesses in the electronics segment were the main contributor to the segment sales decline as the telecommunications and PC markets continue to be weak and subject to aggressive competition. These businesses had sales of 10.8 million in the first quarter compared to 13.5 million last year. In our optical segment, we had a decline in sales for the quarter to 3.9 million versus 5 million last year.

This was primarily from our European operations caused by price erosion for fiber-optic cable and excess inventory levels of several major customers. The other segment had sales of 5.5 million versus 2.8 million last year. The increase here was due primarily to new programs at our network plus power distribution unit.

For the quarter, the company had depreciation expense of 4 million and amortization of 900,000. Our earnings before interest, taxes, depreciation, and amortization was 10.8 million. Capital spending in the quarter was 3.7 million. We still expect our full year capital spending to be about 20 million.

During the quarter, we reduced accounts receivable by 8.9 million, inventories by 1.8, and other current assets by 8.5, and also accounts payable by 3.6 million. This would have indicated a much stronger buildup of cash than the 1.8 million shown on the balance sheet. But this was offset by the 17.1 million we paid to purchase 750,000 Class B Shares from the McGinley Trust as part of our planned elimination of our dual class structure. Don, that concludes my remarks.

Thank you. Lynn, we're ready for questions.

(OPERATOR INSTRUCTIONS). Steven McBoyle (ph) of Lord Abbott.

Good morning. Perhaps first to start on the auto safety group since you saw continued strength there. Can you talk and refresh me in terms of which platforms you currently are on? You made reference to perhaps new OEM relationships, and then to the extent that you have seen the strength that you have, do you stand by the $25 million expectation for the year or perhaps is there some upside in that?

I don't have the platform descriptions in front me, but it is something we certainly can get you. From memory, there are several GM platforms, a couple of long-standing 2 1/2 year Ford platforms and one Chrysler. I can -- Doug can get you that information, we just don't have it in front of us. In terms of do we stand by the 25 million? Yes, we do. Occupant detection is as you know being mandated and I have not seen any relaxation of the rules for the '04 and '05 model years beyond what they did a year-ago. So there is potentially some upside there. We will have to see what Mitsu (ph) does.

Again, I think in your prepared remarks you referenced to new OEMs specifically within auto safety. Is that encompassing of the names that you made reference to?

In addition, and I just want to be a little careful there because there is some competitive activity. It would be in addition and we have not announced any new programs there, but we have had discussions and engineering activity.

Fair enough. Perhaps maybe just looking out a couple of years on this business, is the technology advances -- is there certain events that could take place whereby you may have to make further acquisitions in this area whether it is -- because as I understand, the technology is going to become a little bit more adaptive whether it picks up on movement in addition to wait and so forth. Is there anything in terms of technological change over the next couple of years that you guys have to address that ATI does not provide?

There are always different systems that are being worked on. A lot will depend on what Mitsu does moving forward, how much they mandate in adaptive airbags that of course adds class to the vehicle. We probably are looking at the '08 model here before you see different systems coming about. They could be vision based. There are some frame based systems, ultrasonic systems, capacity systems. So there is the technology, perhaps we can continue to monitor that because we are going to work with our customers.

Currently there seems to be in any of the systems, a need for some weight sensing. So what Methode will probably have to do to participate in the market moving forward is improve or enhance our capability to actually measure the weight. What we do right now is really look at a threshold, 75 pounds or less, and that is based on pressures.

So, moving forward, we're working on systems that would actually give the occupant's weight or at least expand the threshold and that in conjunction with whether it would be a vision system or some other system would enhance the safety system. But again, I think through '07 model year, we're probably not going to see a lot of change and again I stress a lot depends on what the government mandates. These systems are -- some of our advanced systems are quite expensive.

Great. Continuing on the auto side and to the extent you had decent growth in Europe, are there any additional bid activity or platform wins beyond the Mercedes switch that you made reference to in Europe?

There are -- the Mercedes business is probably of that number I gave you, is about 2.5 million on an annual basis. I mentioned that because it is significant for us to get on a Mercedes platform. The others, I don't have those in front me and we're being a little more cautious because there is increased competition on what platforms and what customers. I don't really want to get too much into that. We have attracted, as you have probably noticed, some additional attention recently.

Yes. Presumably though you have made reference to continuing to -- I think those remarks were specific to Europe. Is it continued penetration on the switch side or in addition to switches?

Switches and sensors. As you know, Europe is more -- tends to be more innovative in the vehicles early on and then ultimately transfers to the U.S. and drive-by wire, brake by wire will become more prominent in Europe long before the U.S. So we're seeing design-ins there. You have to capture the drivers intent in the brake system or drive-by wire system, so our sensing technology is coming into play there.

So we're certainly looking forward to additional design-ins. We announced maybe two quarters ago a program for Audi which was our first medal sensor win with an OEM. We are also, I'm very pleased with our operations and that they are unconventional switches. They are very innovative, they are very cost competitive, and we know how to service the customers and so they are picking up business and they are gaining a good reputation. So, we're looking forward to more wins. (multiple speakers) price competitive and all the things we experienced in the U.S.

Sure, but again it is a growing opportunity, one that you did not address previously. On the clock spring side, can you tell me what you are doing at GM currently?

We do not have a clock spring on a GM platform. We're working to get there. It is an area that in prior years Methode has really not pushed in GM and we have announced were we did receive some driver information switches for the GM T900 platform and that is really our first entree into GM and getting to know them. We do anticipate we will have opportunities in the clock springs, but not right now.

Is there any bidding, current bidding activity at this point in time?

I believe there is some coming up here in the fall.

On the competitive front, I think AMP (ph) was trying to get into clock springs. I'm just curious if they -- if you have begun to see them or if there is any immediate threat there?

No, I'm aware of that. Our competition tends to be people like Elton Tokarika (ph), pretty well entrenched suppliers like a Methode and it is a safety item. You don't, as an OEM you don't necessarily want to change that out without having a fair understanding of your suppliers. So there have been clashes there on the OEMs, about five or six suppliers that we routinely see. AMP has been at some accounts, but to my knowledge if they want anything it has been minimal.

Okay. Maybe just an update on KBA. Has there been any progress there? I know again the strategy here was to try to penetrate and to refocus and penetrate into the transplant opportunities. Is there anything that you can speak to there?

We cannot announced any design-ins with the Japanese yet. I can report that we have seen significant quoting activity, and we have had at least two of the Japanese firms in our plants twice, and we have been to Japan a number of times working on clock spring and multifunction opportunities. So we're hopeful there in the next six months or so to be able to announce something. I am pleased on how that is going. We went from them really not knowing us to having fairly significant design meetings with them. Also, as I said earlier, we have booked some business with GM which is something that historically KBA has shied away from.

Again, the booking of business at GM was largely due to the re-engineering of KBA in that relationship?

I believe so, very much so. That was an area that we wanted to move into. Our sales and program managers I thought responded very well to that. There were 35 initial suppliers on the opening bit call on the switches.

Right. One area I have not talked to you about is the magna-lastic (ph) devices. I'm just kind of curious, I guess this is the noncontacting torque sensing. It seems as if you have in the past made some favorable comments there and it seems to address some fairly broad applications, but can you just talk to the size of the opportunity there and perhaps whether you have seen any near-term design win related activity?

It is an emerging technology. It is not something that -- I think I've said this before. It is not something that we have put a lot of revenue growth in our projections because it is too soon to tell. It is very unique technology. It is, as you have said, it is noncontacting torque sensing. There is a variety of applications where, a few of them, in elevators, in agriculture equipment, transmission torque sensing, exercise bikes, there is a recent European requirement that dictates that the calories burned accuracy on these things have to be within 20 percent. And so once you have that requirement you have to start looking at torque, helicopter rotor blade torque sensing.

So there is a variety and probably the holy grail of applications at MEI is in auto, but we have chosen to really develop and refine the technology on an industrial basis. You probably, four to six years before you see something in an auto, but in an auto that would translate to improved full fuel economy. So that is an application that at some point when we feel more comfortable with the technology, we will pursue. We certainly have the inroads and the contacts to do that. I have not again made any significant projections in what the technology can do in terms of sales just because it is just too soon to do that, but it is quite interesting.

Just turning to nonauto electronics midpoint to mass infusion of products from China, presumably we have seen that trend before. Are you seeing new players in new areas or is this just a continuation of a trend and perhaps maybe progressively getting a little bit more competitive?

I think it is just a continuation of what we have seen in the past. China is going to be a major factor in certainly electronics, and it will be in auto too. I read the other day that a number of people feel the economy is recovering but what is not recovering is the manufacturing jobs sector and the reason for that is China. It is going to affect our businesses probably for the next ten years.

They are doing a good job of exporting deflation, right?

Yes.

The optical, when do we think the comps turned flat to positive in this business? Is there any visibility there?

I don't know. There is still overcapacity, the ramifications of the difficulties, of the scandals if you will, over the last couple of years, I'm not sure where the investors are putting there money and I'm not sure there is a need for improving the infrastructure. So, I think it will be a very slow return to what -- it probably will never return to the way it was in 2000. It is just going to be a slow process. We have kind of resigned ourselves to that.

Should we just expect to see a slow bleed from the $8.9 million level or is there some sort of --?

I think it will level off. We have made adjustments in the operations again in Europe in our facility in England. We sell EMC take the business to China for a cost reduction, a significant cost reduction. So that will happen and it will seek a certain level and we will see what happens. But there will be some more erosion, I don't think as dramatic as we saw in the last year, but it is a tough market. Not one that we particularly have chosen to focus on for those reasons.

I understand. Do you have a book to build number for the nonauto electronics?

We can get you that. We don't have that with us.

Okay. Maybe just lastly, turning to the guidance numbers. Maybe just a little further clarification, for the full year I guess you're 350 to 365. How much of that would be tooling?

Let me just doublecheck that number.

Maybe I would just ask a follow-up and that is of the nontooling revenue for the year, can you actually give a split for auto versus nonauto?

On the tooling? We have about 15 million in our guidance for tooling. Basically, all of that is automotive.

Right. So for the remaining 335 to 350, what would the split be between auto and nonauto?

You mean as far as the guidance, the total (multiple speakers)?

The guidance or the tooling?

No, for the full year guidance of 335 to 350, absent that 15 tooling.

Again it is weighted just depending on certain things that might happen, but automotive is probably about 75 percent of that number.

Okay. I guess for my perspective, it seems to be somewhat conservative to the extent that you have got auto safety that seems to be performing certainly at your expectations which if it were to contribute 25 million for the year, relative to the 13.5 million it did last year, it seems like you've got a fairly decent opportunity of $12 million incremental opportunity there this year. Is that to say that the auto would be auto absent of 16 that is, would be flat to down for the year?

I think in our U.S. operations, I think we are expecting it to be flat. If we look at, and I clipped an article out of the Detroit News, that August car sales were up, but if you look at Ford and primarily Chrysler and to some degree GM, these guys are losing market share. It is not clear what will happen to the truck sales this year, and maybe not so much this year but next year the Japanese start to invade their market.

We can look at our platform wins and look at what JD Powers says the future holds and look at the build rate, but it is really dependant on what happens in the six months to 12 months from now. Is there some conservatism in that guidance? Perhaps, but it could also -- Detroit has its hands full with the market share that they are giving (ph) out. Hence, our desire to deal with the transnational and improve our standing in Europe and GM (ph) might lose some market share but we think we came gain business with Good morning. They are certainly the largest and they are not going anywhere.

It just seems like with the ability to as you have quickly shown here, some infiltration into GM with Europe growing as it is, with fairly healthy bid activity, I'm just wondering if -- again with auto safety contribution, what sort of declines are embedded within the Chrysler and Ford side of the equation. But, the other line of questioning I had was the numbers you have given obviously are absent any cost related to the governance issue. Is that something that you can give an order of magnitude for?

I don't think we're ready to do that yet. We're not through it. I think as we get a clearer picture on the expense, we will certainly announce that.

Great. Thank you very much.

Have a good day.

(OPERATOR INSTRUCTIONS). There are no further questions. Mr. Duda, are there any closing remarks?

No. Thank you, Lynn. We wish everybody a very pleasant day. Thanks a lot.

This concludes the Methode Electronics' first quarter earnings release conference call. You may now disconnect.