Methode Electronics Inc (MEI) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2003 Methode Electronics conference call. My name is Annemarie and I will be your coordinator for today. At this time all, participants are in listen only mode and we will be conducting a question-and-answer session towards the end of this conference. [Operator Instructions]

Certain statements in this conference call are forward-looking statements that are subject to certain risk and uncertainties. The Company's results will be subject to many of those same risks that apply to the automotive, computer, and telecommunications in his industry such as general economic conditions, interest rates, consumer spending patterns and technological change. Other factors which (indiscernible) results and materially deferred results for future periods include market growth, operating costs, currency exchange rates, devaluating [indiscernible] 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 Safe Harbor protection provided under these security laws.

I would now like to turn the conference over to Mr. Donald Duda, President of Methode Electronics.

Good morning, everyone, and thank you for joining us. Most of you should have received our earnings result earlier. If not, you can obtain a copy from the investor relations page on our website. With me today is Doug Koman, Vice President of Corporate Finance, and Bob (indiscernible), Methode's Treasurer and Controller. Also with us is Joey [indiscernible] Director of investor relations. Feel free to contact Joey in the future if you have any questions or need additional investor information. She can be reached at the number listed in the contact information section on our press release.

Both Doug and I have comments today and, afterwards, we will be pleased to take your questions.

Methode completed the third quarter of our 2004 fiscal year with 86.7 million in sales and earnings per share of 12 cents excluding an after-tax charge of 3.1 million or 8 cents per share due to merger related expenses to eliminate the Class B stock, an unsolicited tender offer for the Class B stocks and the closure of our Ireland facility.

Doug will review our financials and our third quarter charge in more detail later in the call.

First, I would like to say that we were all very pleased when we completed the elimination of Methode's dual class of stock. This is a process which began over two years ago with as many of you know took several twists and turns. Methode now has a single class of stock -- common stock with equal voting rights, one share - one vote.

On January 8th of this year Methode's Board of Directors elected three new independent board members -- Christopher Horning, Paul Shelton and Lawrence Gateoff. On Feb. 17th at our annual meeting shareholders elected all nominated board members to return.

This gives Methode a majority of independent board members with only Chairman Jensen and myself as insiders. We welcome our new directors and are pleased to have the opportunity to work with them as we begin a new era for Methode Electronics.

Methode's board will continue to seek additional independent candidates to fill future vacancies as some directors have indicated their desire to retire from the years of service with Methode.

Our decision to close two of our European manufacturing facilities was due in part to the continued price erosion in the copper and fiber optic cable company business. We continue to experience lost sales to lower-cost eastern European and Asian suppliers. Two facilities would have reported a combined loss for the quarter of approximately $400,000 which we believe would have escalated over the next several quarters.

In automotive, as part of our strategy to reduce our dependence on the traditional North American automotive OEM, we have continued to seek new opportunities with Japanese and European manufacturers. As a result of this effort our automotive controlled unit was awarded Methode's first-ever program with Honda of North America for the 2006 model year.

This represents an entry into a new major OEM for Methode and we are proud of our team and their commitment to obtain this business. In addition, our automotive groups continue to implement new Methode production system or as it is more conventionally known in the industry -- lead (ph) manufacturing. These improvements are focused around inventory reduction and labor efficiency improvements.

Our business group has developed this program centered around the Toyota production system and its philosophy. We are about halfway through our multiyear presentation plan and continue to receive positive feedback from our customers on our progress. This program and the associated upgrades to our factory systems were major factors in working with Honda.

The Company also authorized the spending of $1.6 million to develop a new flexible automation cell at our (indiscernible) Illinois automotive facility. We plan to have this flexible automation assembly cell in preproduction by late summer to build ergonomic switches such as speed and radio controls. When it is completely operational in 16 months the unit will be capable of producing 6 million parts per year and have the capability of handling up to nine different products.

More importantly, it can run several different assemblies per day with minimal transition time. With the manufacturing concept it represents a significant reduction in our manufacturing cost, reduces our capital outlay for product as well as using tooling cost to our customer all providing Methode a competitive advantage. We expect to return on our investment capital from this first (indiscernible) in less than three years with an IRR in the mid 20s.

Our China facility is completed and we're gearing up for manufacturing to begin in August as we transfer production from our Singapore facility and also begin manufacturing the new General Motors switchback (ph) for the GMT 201 platform. This switch is being manufactured for use by General Motors in China.

The production for the new GMT 900 switches will begin next year. We believe the opening of this facility provides a strong base of operation in China to supplement our U.S. manufacturing, support our existing non automotive customer base in China, as well as allowing Methode to gain additional business in China with China's domestic automotive market expanse.

In Europe, our automotive groups are inhabiting their infrastructure to manage increased (indiscernible) schedule as well as prepare for additional business expected to begin in model year 2006.

Moving forward, Methode executive management will focus its efforts to diversify Methode beyond automotive by seeking strategic acquisitions. While we were pleased that Methode stayed on course through the unsolicited tender offer this past summer, our acquisition program was delayed. We are now refocusing our efforts and are working with several groups to develop a solid pipeline of qualified candidates to enhance the breadth and depth of Methode's products and customer base.

In automotive, we will continue to seek new technologies that our engineers can further develop and enable Methode to bring to market leading-edge automotive products.

Moving to our fiscal year which ends April 30th, 2004, Methode is reaffirming its net sales forecast between 350 million and 360 million. The Company's prior earnings per share guidance was between 60 and 65 cents per share. As a result of the cost associated with the elimination of the dual class structure the unsolicited tender for Class B shares, the closing of the Ireland facility and the pending closing of our UK manufacturing facility in the fourth quarter, the Company's revising earnings per share guidance for fiscal year ending April 30th between 48 and 53 cents.

I can now turn the call over to Doug for his financial comments. Doug.

Thank you, Don. Good morning, everyone. Let me briefly talk about the charges we took in the quarter. We incurred 2.6 million of selling and administrative expenses related to the elimination of our dual class structure in defense of the unsolicited tender offer by Dura Automotive for the Class B shares. The after-tax charge was 1.8 million or 5 cents per share.

Additionally in the quarter, we incurred 1.3 million to close a manufacturing facility in Limerick, Ireland. This charge is included in cost of products sold and is comprised of severance, lease, and other related costs. We did not record a tax benefit for this charge because [indiscernible] allowed and it's uncertain how much if any will be carried forward.

Moving to the income statement, in the third-quarter net sales for the electronics segment we were 75.9 million compared to 84.1 million in the third quarter of fiscal 2003. For the nine-month period net sales for the electronics segment were 229.1 (ph) million compared to 244 million last year. Within the electronics segment our automotive businesses had third-quarter net sales of 63.5 million compared to last year's third quarter of 68.5. In the nine-month period the automotive businesses had sales of 192.4 million. This compares to 199.6 million last year.

Included in the third-quarter net sales for our automotive businesses were customer tooling sales of 3.4 million for fiscal 2004 and 7.7 million for 2003. For the nine-month period, [indiscernible] 7.2 million and the fiscal 2004 and 15.6 in 2003.

So for the nine-month period we actually had a modest increase in automotive product sales.

For the third-quarter and nine-month period, the automotive sales mix was increased in sales through automotive safety technologies products and gains in our European automotive businesses. This was offset however by lower domestic unit production at our traditional North American customers.

For non automotive businesses in the electronics segment continued to experience price pressure and business losses to lower-cost manufacturers. This gave rise to the third-quarter closing of the manufacturing facility in Ireland. The nonautomotive businesses had net sales of 12.4 million in the third quarter versus 15.5 million in fiscal 2003.

For the nine-month period, sales were 36.7 million compared to 44.4 million last year.

In the optical segment, we had increased sales in the third-quarter of 5.6 million versus 4 million last year and for the nine-month period sales increased modestly to 14.5 million versus 14.2 million the prior year. In the quarter we saw significant improvement from our domestic connectivity technologies operation. However due to continued pricing pressure and business losses to lower-priced manufacturers we have decided to close the Haverhill, England manufacturing operation in the fourth-quarter. Current estimates closing that facility are 1.2 million or 4 cents per share.

In the other segment, we had third-quarter sales of 5.2 million versus 4.7 million last year and for the nine months sales were 15.6 versus 11.4 million last year. The primary reason for the increase in this segment were the program wins at our network plus power distribution unit.

Looking at some other items in the income statement, for the 9 months, other income is up. This is due to design engineering fees in Europe and last year's other income had included some quality issues that impacted the joint venture with TRW and that income for the joint venture is included in the other income. The nine-month selling and administrative expenses increased again primarily due to the costs associated with the elimination of the dual class. We also saw some increased amortization expense relating to our automotive safety technology acquisition and we also had increased expenses, relating to our China venture.

For the nine-month period, depreciation was 12.8 million, amortization was 2.8 million. Earnings before interest, taxes, and depreciation and amortization for the nine-month period was 40 million excluding the Class B and facility closing charges.

Moving to the balance sheet, capital spending was 13.4 million for the first nine months. We saw no significant changes in inventories, accounts payables, accounts receivable since the beginning of last year. Cash was down 3.8 million from the year end but this is after some large payments and receipts that we saw during the period. We have paid out 25 million purchasing the Class B shares and additional 2.6 million plus as mentioned earlier for costs related to that merger and the hostile tender offer.

This was offset by receipt of about 7.9 million for reimbursement of split dollar insurance premiums and the repayment of principal and interest on the loans of the McGinley family trust. In other current assets we see a reduction of 8.5 million from year end. This is primarily due to payment of the principal and interest on that loan. And also the split dollar reimbursement. The increase in other current liabilities does include the accrual for the 1.4 million for the special dividend of 4 cents per share that was paid on March 1st.

The balance of the increase in that line item is substantially a reclassification of assets from non current to current. Don, that concludes my remarks.

I think we're ready to take questions.

+++ q-and-a.

[Operator Instructions].

David Leiker.

On the revenue line, what was the currency effect?

(indiscernible) (inaudible) because a lot of our foreign subsidiaries [indiscernible] sales are in US$. So the currency impact isn't quite as great as you might think. I don't have the numbers but we can certainly get that.

I don't think our impact is probably as substantial as some of the others [indiscernible] [indiscernible] (MULTIPLE SPEAKERS)

The UK facility closing, I think you said $1.2 million?

Yes.

That has not run to the income statement yet -- correct.

No, but it is in the guidance we have provided.

If I'm doing my math properly, implicity, it looks like you've raised your guidance by 4 cents.

No. I think you're missing one of the -- we have 8 cents in the third-quarter and then another four cents.

You had 4 cents in this quarter also.

We have 8 cents in this quarter for Ireland and for the Class B.

That is the total number.

Right and then another 4 cents for the UK in fourth-quarter. We're taking that 12 cents from our prior guidance.

[indiscernible] where are you in the ramp up of the AFT (ph) business and if you can give us a little bit of color there what you [indiscernible] what you have left to go as much as you can.

In terms of programs?

Programs. Revenue.

Programs we don't have that information with us -- it'd be difficult to do this. There's some 60 some different launches that are taking place but in terms of revenue generation, it will be in the $40 million range next year and about $20 million range this year so a significant ramp up.

That was essentially zero last year -- right?

Yeah, I think it was 2 or 3 million last year.

And just to clarify you said (indiscernible). (MULTIPLE SPEAKERS)

About 40 million was what we said, David.

And you have 60 launches.

6-0? No they're all very similar products not like you're launching (indiscernible) ergonomics which is...

Right that's 60 different vehicles -- correct? Or not?

60 different seats.

(MULTIPLE SPEAKERS)

We can provide you more detail but it's a little different than what we're doing with our base switches.

(indiscernible) Yukon you might have five seats or something...

Right.

Can you break down that number of vehicles?

We can get you that information -- I don't have it in front of me, but we can break it down.

[Operator Instructions]

I'll just stay on the line this time. Nice win with Honda there. Where are you in terms of other business with foreign OEs today? Is this your first business or are there other pieces already in place?

You consider Mitsubishi --

Yes.

As being part of Chrysler. We have business we are pursuing with them. They have been a customer of ours for some time I think we announced the steering angle for stability control probably a year ago -- those have launched and we have [indiscernible] controls within and we continue to pursue both of those products on (ph) additional platforms. Then there is some business we're looking at with Nissan. But Mitsubishi and Honda would be the two that are most significant at this point.

And then back on [indiscernible] do you have any (ph) note payments left on that?

Yes we do. And in fact as we make those payments, David, the deferred payments will be increasing our goodwill on the balance sheet. So those payments will go on for we hope not too much longer because that would indicate that business is very good -- predicated on sales but it's capped.

And how much are you paying this year?

We paid probably 2. (indiscernible) million or something for this year.

And that's already paid?

No, that's paid at the first quarter of the year -- following year.

Okay, so that won't hit until Q1 Fiscal '05.

Right, we probably had about 1.7 million that was paid in first quarter this year.

I'm sorry, 2 million to the prior year was paid. [indiscernible] there's about 1.7 million (indiscernible) something reflected in the balance sheet for payment subsequent to year end.

That Ireland and UK facility from a modeling perspective? Does that move numbers around at all in terms of revenue or earnings -- it sounds like it's a little bit of a positive to the earnings line?

What was your question again, David?

The Ireland and UK facility closing? What kind of impact does that have on the revenue line and then it sounds like it's somewhat additive to earnings.

It will be added to earnings and if we just look at -- Ireland, we're closing the manufacturing. But we're going to still be operating a sales and distribution operation through there so I don't want to just give you the total of those numbers but -- the impact is probably maybe 6 to 7 -- maybe 6 million a year, given where -- what we've seen so far this year.

For both of the operations? (indiscernible) The royalty income? I know it's $600,000 or so?

Yes -- the other income?

Is that a sustainable number?

We also, in that number, it's not just the royalties if you look at the nine-month number it is up considerably. But we've got reimbursement for some design engineering that we do at primarily at our Scotland automotive facility and joint venture income runs through there. Additionally we do have royalties and I guess license fees that are in there, also.

So, from a modeling perspective it sounds like the 600 is little bit on the high side of what the run rate [indiscernible] (MULTIPLE SPEAKERS)

-- if you're looking at royalties but also joint venture [indiscernible]. [inaudible] [indiscernible] [inaudible] [indiscernible]

Where did you finish on an actual share count?

You mean as the results of the ... ?

What's position shares outstanding at the end of the quarter? Actual number?

Do we have the actual number Bob. We've got the [indiscernible] (MULTIPLE SPEAKERS) [indiscernible] [inaudible]

I am looking for the actual.

It's a little over 35 million.

While you're looking for that [indiscernible] margin side...

It's actually 35 9.

35 9. Great. On margins did you implement manufacturing how much of those cost savings are you going to be able to keep yourself as opposed to [indiscernible] your customer?

And I am sure I want to answer that.

Let me ask it this way. As we look forward to the margin trend and margins have been trending higher here both because of the costs that you take on in this business -- also, the mix is getting better -- would you expect mix to be a bigger drive of margins going forward or cost reduction efforts?

I don't want to answer that off the cuff because next year we've got significant ramp up with AST which is of course higher margin business and latter portion of our three-year plan many of our lean manufacturing initiatives as well as our Flex Sell kick in so it's kind of a mixed bag. We can probably provide you with a percentage at some point here but I don't want to answer that off the cuff.

Okay, I will hop off and come back if there's no one else.

[Operator Instructions].

Annemarie, if there are no other questions, we will conclude the call and thank everyone for listening.

Actually I am showing another follow up call. From Mr. Leiker.

Two last questions. Your revenues look like they're going to be down about $10 million this year and if it's up about 10 million so $20 million negative delta. Can you kind of reconcile that a little bit for us?

That's fairly easy [indiscernible] reduced business at Chrysler.

Also affecting that, David, is we are probably going to do about half I think the tooling yet [indiscernible]

What's the normal number we should use for tooling?

I wish I could tell you. Last year we had 22 for the full year we thought we would have about 15. We actually have 15 plugged into our guidance but I don't note that we will actually get that much pushed out. Just a combination of we need to get a lot of things prepared and that we also need to have the OEMs cooperates so we can get that paid.

Would you expect that to be around 15.

Actually looking forward I mean, I would expect that number to be less than 10 million going forward on an annual basis.

And then, one last question. Don, you had talked about acquisitions and kind of diversifying your business and technology in nonautomotive. Can you give us some sense of how far from your core product offering you would go and kind of fill in a little bit of color there what you may be looking for?

Sure, I don't think we will go too far afield -- I think it's important to acquire business that you certainly understand so we wouldn't acquire a software company that we don't understand but I don't know that we would understand the managing of that type of backpack company. We're primarily looking in the automotive switch market that's interesting to us. We certainly have the wherewithal to manage those companies that [indiscernible] support them if you can manufacture non automotive on automotive switches at automotive quality and pricing we certainly feel that's an area we could participate in. In the sensor market both in auto and nonautomotive very interesting -- those are the two areas we've given our associates guidance in looking for possible acquisitions.

We have no other questions at this time.

All right, Annemarie, we will conclude the call. We thank everyone for listening and wish everyone a pleasant day. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.