Methode Electronics Inc (MEI) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Methode Electronics second quarter 2004 earnings conference call. My name is Alisha, and I'll be your operator. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of the conference. If at any time during the call you require assistance, please press star followed by zero and an operator will assist you. As a reminder, this conference is being recorded for replay purposes. 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 industries. 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, devaluation delays in development production and marketing of new products and other factors set forth from time to time in the company's form 10K and other reports filed with the securities and exchange commission. The forward-looking statements in this call are subject to the safe harbor protection provided under the securities laws. I would now turn the conference over to Mr. Donald Duda, President of Methode Electronicscs. Sir, you may begin your conference.

Thank you very much. Good morning, everyone. Thank you for joining us today. Most of you should have received our earnings results released earlier. 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 Doug Tino, Methode’s Treasurer and Controller. Also with us is Joey Iske, Director of Investor Relations. Feel free to contact Joey in the future if you have any questions or need any additional investor information. He can be reached at the number listed in the contact information listed on our press release. Both Doug and I have comments today and afterwards we'll be pleased to take your questions.

Methode completed the second quarter of our 2004 fiscal year in line with our guidance and expectations for both revenue and net income. The strong sales results from our automotive safety technology business and our European automotive electronics control group offset the decline in unit sales experienced by Methode's traditional North American automotive customers.

To be specific, sales to Ford were down 13.5% and Chrysler sales were down 5.7% from the previous year. We will continue to monitor the production levels of the North American OEMs and make appropriate adjustments in our operations as warranted. Our net income improved to $6.5 million from $6.2 million last year as we continued to reduce our costs while implementing programs with technologies that provide stronger margins.

Our automotive engineering and launch management groups were very active during the quarter with five new product launches for Ford and design work on a 2006 Chrysler steering angle sensor and spring module. The steering angle sensor represents our first microprocessor based product for DaimlerChrysler.

As anticipated, Methode's automotive safety technologies group, AST, produced strong top and bottom line growth in the second quarter. Their volumes continue to increase as the federal motor vehicle standard 208 continues to take effect over the next few years. By 2006, nearly 100% of the automobiles sold in the United States will need to be equipped with a system to minimize injuries to front passengers caused by air bag deployment.

In the quarter, we gained new business with HVAC control module and an ergonomic paddle switch both from Mitsubishi. They'll be on 2006 model vehicles and will add approximately $3 million in revenue. We also successfully launched our first HVAC control system again for Mitsubishi motors. This is a fully integrated electronics system containing software to drive off climate control functions in the vehicle. These programs are consistent with our corporate objectives to increase organic growth while expanding margins as we reduce projects that are below our targeted margin levels.

Sales in our Scotland facility increased nicely as a result of stronger demand from Volvo and Jaguar. Also adding to Scotland’s quarter was business from Porsche, Rolls Royce, Fiat and Aston Martin. While we are pleased with the sales increase in Scotland, the quarter produced extra costs affecting the bottom line such as higher than expected labor costs, associated product launches redundancy costs and relocation of some production to a temporary facility due to a small fire at the plant on October 12th. These costs that were approximately $250,000 are one time and will not carry over. In addition, our European management team is working to enhance their launch management infrastructure as we position ourselves to support the expanding launch schedule of 2004 and 2005.

I would also like to take this opportunity to welcome to Methode the new managing director of our Scottish operation, Corey Smith. He has an extensive automotive background and has managed operations in both the U.S. and Europe. Looking at our businesses outside of automotive, our Network Bus business unit continued to show strong improvement in both top and bottom lines in the quarter compared to last year. They have begun shipping a new bus bar assembly for a major computer manufacturer with a custom power connector developed by our conductor products business unit. This is an example of the synergies we're beginning to develop between our various business units. In addition, we're working on five projects for the new joint strike fighter. We expect sales from this business unit to grow to $25 million by 2005 with strong double-digit margins.

Moving to the third quarter of our 2004 fiscal year, we're forecasting net sales between $80 million and $90 million and earnings per share in the range of 11 cents to 14 cents. For the full year, Methode is providing guidance for net sales between $350 million and $360 million with earnings per share between 60 cents and 65 cents. These projections are before any future one-time costs associated with the company's ongoing elimination of the company's dual class stock structure. As we indicated in our release, third quarter earnings per share in fiscal 2004 year-end projections reflect continued weakness in the dollar, increased health care costs and continued production level declines from North American automotive OEMs. We remain focused on enhancing our profit levels while continuing to seek new business opportunities outside of our traditional customer base to offset the decrease in their new car production.

Before I turn the call over to Doug for the financial discussion, I would like to give you a brief update on our long, anticipated plans to eliminate class stock structure. We have completed our review process with the SEC and filed our definitive proxy on December 2nd. We expect to hold a special shareholders meeting on January 8th 2004, to vote on the merger of the Class A and Class B stock. The record date is November 18th 2003. Shareholders will receive additional detailed information for this vote in the coming days. In the meantime, if you have any questions, please feel free to contact Joey. I'll now turn the call over to Doug.

Thank you, Don. Good morning, everyone. Since the consolidated results are available in the press release, let me briefly touch on the segments and some balance sheet information.

In the second quarter, net sales for the electronics segment were $84.5 million compared to $87.8 million in the second quarter of fiscal 2003. For the six-month period, net sales for the electronics segment were $153.2 million compared to $160 million in last year's fiscal period. Within the electronics segment, our automotive businesses had second quarter net sales of $71.8 million, down about 3% from last year's second quarter of $74 million. In the six-month period, the automotive businesses had sales of $130.1 million, down about 2.6% from last year's number of $133.6 million. Included in the second quarter net sales were customer tooling sales of approximately $3.8 million for fiscal 2004 and about $7.9 million for 2003. So for the second quarter in the six months, we actually had a modest increase in automotive product sales. In this automotive sales mix was an increase in sales for our automotive safety technologies products. And gains in our European automotive businesses. This was offset, however, by lower domestic unit production from our China manufacturers had net sales of $12.8 million in the second quarter compared to $13.8 million last year. And for the six-month period, sales were $23.1 million compared to $26.4 million last year.

In the optical segment, we had a slight decline in sales in the second quarter to $5 million versus $5.2 million fiscal 2003, and for the six-month period, sales declined to $8.8 million versus $10.2 million the prior year. While we saw modest improvement in our domestic operation, the reduction in sales is attributable to our European operation that experienced continued pricing pressure, saw some excess inventory levels at several major customers, and some business being lost to China manufacturers.

The other segment had second-quarter sales of $5 million versus $3.8 million last year. And for the six months, sales were $10.4 million, up from the $6.7 million in fiscal 2003. Primary reason for the increase in this segment were the program wins at our Network Bus power distribution unit which Don commented on earlier. For the six-month period, depreciation was $8.3 million, amortization was $1.8, earnings before interest, taxes, depreciation and amortization for the six-month period was $25 million. Capital spending was $7.4 million in the first six months. We still expect our full year capital spending to be about $20 million. Since the beginning of the year, accounts receivable increased by $8 million to $66.2 million. This was the result of increased billings at our automotive safety technologies and European automotive units. Inventories and accounts payable were held relatively flat since the beginning of the year. Cash was down about $5.1 million from the year end, but this is after some large payments and receipts in the first six months. We paid $17.1 million to purchase 750,000 Class B shares from the McKinley family trusts, this was offset by the receipt of $7.9 million for reimbursement of split dollar insurance premiums, and the repayment of principle and accrued interest on a loan to the McGinley family trusts. Don, that concludes my remarks.

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

Ladies and gentlemen if you would like to ask a question, please key star followed by one on your telephone. If your question has been answered or you wish to withdraw your question, please press star followed by two. Again, star followed by one to ask a question.

First Laura Thurow of Robert Baird, please go ahead.

Morning.

Good morning.

A couple questions for you today. Could you just talk a little bit about your European automotive electronics group? What all is this that group and what's driving the growth over there?

In terms of what operations comprise the group, Laura?

Right.

That consists of our manufacturing and design center in Scotland and also our operations in Malta, also design and manufacturing and then our design and sales center in Germany. The growth that we're seeing there are from the companies that I mentioned in Scotland.

Um-hm.

And we can probably give you some more detail on that offline. And in Malta, there they have business gains with Fiat would be the major driver.

Okay. So just traditional-type products but just expanding over there?

Yes, traditional. In the coming model years, they have pedal sensors with light, which is not traditional, it's a new product for them.

Right. Okay. And then just a follow-up question on your strong new business in the network bus group. You expect that to be $25 million by 2005. Where is that now?

It's about 75% of our other.

Okay.

You can calculate it from that.

Sure. And then to follow up on the costs associated with limiting the dual class structure, I realize those aren't in the guidance numbers you provided. I guess how are you accounting for them? What would your GAAP guidance be? And what kind of impact have you seen from that in Q1 and Q2?

In Q2, we probably have probably about -- I mean, if you look at the cost incurred including some of the litigation from the transaction, maybe somewhere between 300,000 and $400,000 net. Because we have, in the second quarter, we did receive a reimbursement from our D&O carrier for some of the litigation costs. So in the quarter, there's probably a net -- call it $400,000 of label expense. And going forward, it's -- until we've got everything in, I don't know that we want to even venture what that number might be. We just don't have our hands around it at this point.

Okay. That sounds like it's maybe a penny in the quarter type of number?

Yeah. It might even be, you know, more than that. We'll -- you know, I just don't know what to tell you at this point.

Okay. And then in terms of questions on the quarter, the other income item that you report above your costs of goods sold line, I assume that's primarily royalties, and forgive me if you said this already, what was the behind the big increase year over year on that line item?

Sure. First of all, last year our joint venture in the second quarter, we had a large loss. That was related to some of the warranty expense that was allocated to the joint venture. And so last year's numbers are affected by that loss in the joint venture income. This year the increase is that, first of all, we've got a normal joint venture income running through that line, plus we had some design fee income from our facility in Scotland. Some of the new business that Don talked about, the reimbursement of the design fees run through that line item.

Okay. And I guess what do you see as a fair run rate going forward at kind of a normalized level?

You know, that's kind of hard. It just really depends on the level of activity. And the joint venture is primarily Chrysler. So I don't know, you know. We can maybe, you know, talk about that. I just, at this point, to look at a normal run rate going forward, I'd have to give that a little thought.

Okay. Just a couple quick ones now. Customer paid tooling down significantly year over year. Is that just a function of the timing of when the new business is coming on?

Right. I think in our full-year numbers we still expect that to be about $15 million. I think we've just seen it maybe some of it pushed into the third and fourth quarter.

Okay. And then finally, just a question on your full-year guidance, 60 to 65 cents, I'm just trying to kind of reconcile with of some the projections that were in your proxy. It looks like the sales numbers are in line with what was in the proxy, but the EPS guidance is lower. The proxy was about 55 and you're saying 60 to 65. What's behind this? Is it conservatism or something new that's come along?

It's an internal document that we use. It was never intended to be public, it was just something that the SEC required us to put out there. We're not -- that's not guidance.

Okay. And then what kind of bill assumptions are you using for your guide anticipate?

Annualized?

Yes.

About 16.5, but, again, we look at our releases on a quarterly basis, which tends to be a better predictor of our sales, and we also use JD Powers', but our sales releases tend to be a better indicator.

Um-hm.

And there is a discrepancy between the models that we probably should rectify.

Laura, this is Doug again. Just to go back to your previous question, if you read the -- you know, the footnotes in the forecasts in the proxy, you'll see that, for instance, there was no effects, foreign exchange costs. We talked about health care. So, you know, that report does really not take into account what we're seeing in the market today.

Okay. Great. Great. That's all I have for now. Thanks a lot.

Thank you.

The next question we have comes from Steve McDoyle with Lord Abbott. Go ahead.

Good morning. Missed a good portion of the prepared remarks. If you covered this, just let me know. Just curious, are there any meaningful new business wins that you talked about or could talk about on the auto side in this quarter?

We talked about $3 million worth of business gain from Mitsubishi for HVAC control and an ergonomic paddle switch for model year post 6 and approximately $3 million in business. We also mentioned that we have successfully launched our first HVAC module for Mitsubishi, and that represents, you know, microprocessor-based system to control the climate functions in the vehicle.

Okay. And any new wins coming out of KBA or any potential successes on the horizon with respect to penetrating some of the transplants?

Not that I'm prepared to mention in this call as yet. We have significant activity going on and hope to be able to announce something in the coming months. But none that I can be specific on. Some of that is for competitive reasons.

Um-hm. And are these opportunities sizeable from your perspective, enough to move the dial?

Yes. Yes. Again, I don't want to get too specific. But I'll also say that that's, you know, model year '06-'07 business. It's not going to move the dial next year.

Sure. I understand. Is it possible to quantify the health care impact and foreign currency in the quarter on an EPS basis?

Sure. In the six-month period, health care costs were probably about $1 million more than we saw last year. But we had rolled out a new medical plan, made some changes. We were expecting to see some savings in our health care costs. So one of the reasons that our guidance has changed for the full year is the fact that not only did we see a year-over-year million-dollar increase, we didn't get the savings we were expecting. So -- but that's health care. On foreign exchange, we have had -- it's a little over half a million, maybe half a million in foreign exchange in the six-month period. And, you know, given the dollar and what it's been doing lately, we're anticipating that that will replicate itself in the six months.

Continue to be a drag, no increase in hedging activity anticipated to offset that, then?

Again, it's difficult in Malta because they have restricted currency.

Yeah. Okay. Great. Thank you very much.

Thanks, Steve.

Thank you.

I have no more questions in the queue. Would you like me to repeat the instructions?

Well, I think we'll wish everybody a good day and happy holidays, I guess. Thank you very much.

Okay. Thank you. Ladies and gentlemen, thank you for joining today's conference. This concludes today's program. You may now disconnect. Good day.