Methode Electronics Inc (MEI) 2004 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter, and year-end fiscal 2004 Methode Electronics conference call. My name is Amanda, and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time in the call, you require assistance, please key star, followed by zero, and a coordinator will be happy to 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 telecommunication industries, such as general economic conditions, interest rates, consumer spending patterns, and technological change. Other factors which may result in materially deferred results for 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 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 securities laws. I will now turn the conference call over to Mr. Donald Duda, President of Methode Electronics. Sir, you may begin your conference.

Thank you, Amanda. Good morning, everyone. Thank you for joining us today. Most of you should have received our earnings results released earlier today. If not, you can obtain a copy from the investor relations page on our web site. With me today is Doug Koman Chief Financial Officer and Bob Kuehnau, 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 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 its fourth quarter with sales 6% higher at 99.7 million, compared to last year's results of 94.1 million. Excluding customer paid tooling, product sales increased 10.5% over the year ago period. Net income increased 11%, to 7.5 million, from 6.7 million last year. This represents a 13% increase in earnings per share, to 21 cents from 18 cents in the fourth quarter of last year. These increases were primarily from our automotive safety technologies group, AST, which supplies heat sensors for passive occupant detection, coupled with solid automotive sales in Europe as well as increases in our Network Bus power distribution business. On the year-over-year basis, our worldwide automotive business grew 10%, excluding tooling sales. Again, this increase was primarily the result of our AST business and European automotive sales.

As expected, revenue came in lower in our U.S. automotive operations, as we continue to experience softer production schedules from our traditional North American OEMs, coupled with our strategic plan to reduce our exposure to certain low profit programs. Methode's total sales in fiscal 2004, again, excluding customer tooling grew 2% over last year. As mentioned on previous calls, the transition to lean manufacturing processes in our factories continue. In fact, due much in part to the tremendous effort of our Illinois automotive facilities, and the progress in lean manufacturing, Methode was awarded its first contract with a major Japanese OEM and is expected to launch this business in the 2006 model year. As we have demonstrated in the past with Ford and DiamlerChrysler, we'll be using this design win to prove ourselves and our capabilities to garner more business from this important customer.

Methode continues to seek out research and develop new technologies this year has been no exception. Our automotive group is providing a major European manufacturer a sub assembly which includes a torque sensor for use in their electric power steering system. This unit, which was initially introduced in 2004, is an integral part of the new electric power steering system that replaces the typical hydraulic steering used in today's automobiles. More recently we have invested in patented sensing technologies pertaining to driver fatigue sensing and crash sensing, both in the automotive safety field. As they products advance in their development cycles we will update you on their progress and OEM acceptance. Our Network Bus business unit, which designs and manufactures power distribution products, also realized year-over-year growth of approximately 28%. This growth is the direct result of design wins on high-end server products and next generation main frames, as well as an increase in defense spending.

Our non-automotive electronic businesses experienced additional pricing pressures, along with continued customer migration to low-cost Asian suppliers. We closed our Ireland manufacturing facility that was predominantly producing labor-insensitive high-speed copper cables. In the fourth quarter we also completed the closing of our UK fiber optic manufacturing operation. As we transfer production from our Singapore facility and begin manufacturing in Shanghai, China facility later this summer, we anticipate renewed business opportunities. The first products to be manufactured in this new plant will be our standard connector products such as pinheaders and IC sockets. We will also begin production for one of our General Motors programs this fall with that business expected to increase next year. We continue to focus our corporate efforts on acquisitions, and are currently working with several outside groups to acquire companies that offer specific value as well as new technologies to Methode.

Moving to corporate governance, as a result of the elimination of our dual class stock structure in January, we elected four new members to our board of directors at the end of fiscal 2004. On June 18th, Methode's board elected two additional independent members. They are Isabelle Goosen, currently Vice President of Finance and Administration for the Chicago Symphony Orchestra, and Dr. Darren Dawson, Professor in the Electrical and Computer Engineering Department at Clemson University. Isabelle brings to Methode extensive experience in budgeting and planning, cost control, treasury management and corporate governance. Darren has an exceptional background in engineering and [leafto] robotics and mechtronics laboratory at Clemson. Clemson is home to the new 400 acre international center for automotive research, with announced partnership plans with companies such as BMW, IBM and Microsoft. We welcome these new members to our board.

Three of Methode's long-standing board members announced their retirements to coincide with this year's annual meeting on September 14th. Two of these board members are William Croft and George Wright. Mr. Croft has been on Methode's board for 29 years and Mr. Wright has been on the board for 36 years. We thank them for the loyal and distinguished service to Methode. William Jensen, who after 42 years with Methode Electronics is stepping down as Chairman of the Board. Mr. Jensen came out of retirement in 2001 after the passing of the company's founder and steered the company through a difficult transition. We thank him for his dedication and unwavering devotion to the men and women of Methode, its customers and its shareholders.

For fiscal 2005, Methode is forecasting net sales between 370 million, and 385 million, with net income in the range of 65 to 72 cents per share. The company expects to realize increased business from its Network Bus unit as a result of additional orders from the computer and military industries. The automotive safety technology business is expected to increase as auto makers ramp to meet the federal requirement to provide passive, occupant detection for front passenger airbag deployment on all vehicles by model year 2006. These increases will be partially offset by expected pricing pressures and potential lower sales for Methode's traditional North American automotive OEMs as we continue to transition away from less profitable programs. We also anticipate weaker U.S. sales and comodotized electronic components; however, again, as production in China ramps up, it will help to boost sales in Asia, thus slowing the decline of business from customers expressly seeking the lowest cost provider. For first quarter of fiscal year 2005, which includes the July automotive model year changeover and related OEM plant shutdowns Methode is projecting net sales of 80 to 85 million with net income between 12 and 14 cents per share. At this point, Doug will provide additional financial commentary.

Thank you, Don. Good morning, everyone. I would like to first run through some of the noise that we have in the fourth quarter and the fiscal year. In the fourth quarter, we expensed 800,000 in connection with the denial of insurance coverage for certain settlement costs related to the class A shareholder lawsuit. While we disagree with the underwriter's interpretation of the policy, and do intend to vigorous pursue reimbursement of this expenditure, accounting rules do not allow us to record this amount as a receivable. This item reduced net income by half a million dollars or one cent per share in the quarter. Therefore, for the fiscal year, we incurred a total cost of $3.8 million to eliminate Methode's dual class structure, settle the class A shareholder lawsuit, and to fend off the hostile tender offer for the class B stock by Dura. So for the year the effect on net income was 2.6 million or 7 cents per share. In fourth quarter, we also recorded a benefit from reducing tax reserves for certain contingencies we no longer considered necessary. The net income effect was a benefit of approximately 400,000 or 1 cent per share.

In the third quarter, we reported a $1.3 million or 4 cent per share charge for closing manufacturing in Ireland. And in the fourth quarter, we provided an additional $600,000 pretax for closing our UK manufacturing facility. The UK facility would have affected net income in the quarter by about 300,000, but was substantially offset by the effect that actual costs of closing the Ireland facility, being lower than originally estimated. Therefore, the total cost of closing both the Ireland and UK manufacturing facilities in fiscal 2004, was 4 cents per share. And the effect on fourth quarter results was not material at all.

Moving to our segments, within our electronic segment, our automotive businesses had fourth quarter net sales of 78.1 million compared to last years fourth quarter of 70.9. When customer tooling sales are factored out, fourth quarter automotive sales were 74.6 million in 2004 compared to 63.9 million in 2003. For the fiscal year, the automotive businesses had sales of 270.6 million, which were flat compared to 270.5 million last year. However, adjusting for customer tooling automotive sales were 59.9 million in 2004, compared to 247.9 million in 2003. That is a 5% increase in automotive product sales year-over-year. And this is due primarily to increased sales at automotive safety technologies unit and gains in our European automotive businesses. Again, as Don mentioned, some of this was offset, however, by the lower domestic unit production at our traditional North American customers.

The non-automotive businesses in the electronics segment continued to experience price pressure and business loss to China manufacturers. This is what gave rise to our decision to close the manufacturing facilities in Ireland and the UK in the second half of 2004. The non-automotive businesses had net sales of 12.6 million in the fourth quarter of fiscal 2004 compared to 12.8 million in fiscal 2003. For the fiscal year sales were 49.2 million, down from 56.6 million last year.

The optical segment had decreased sales in the fourth quarter of 3.6 million versus 4.5 million in fiscal 2003. While we do not expect these businesses -- while we do expect these businesses to show modest improvement, many sales are for capital improvement projects and the timing of these is controlled somewhat by the customer's capital budgets. For fiscal year, the optical segment sales decreased to 1.8 million this year, versus 18.7 million last year. In this group, the commodity products we continue to see customer pricing pressure, and increase competition for manufacturers in lower cost labor markets.

The other segment had fourth quarter sales of 5.3 million, versus 5.8 million last year While the year-over-year comparison is down, last year's fourth quarter reflected the initial strengthening in our Network Bus power distribution business. For the fiscal year sales for the other segment were 20.9 million, versus 17.2 million last year. Again, the primary reason for the full-year increase in this segment was the program wins at our Network Bus unit.

We move to the income statement, for the fiscal year, other income is up due to increased design engineering fees in Europe in 2004, and in 2003, we had a negative effect from our joint venture operation with GRW. At the interest income line, that is down primarily because of the $6 million note receivable from the McGinley family trusts that bore a 5.25% interest rate that was repaid in the first quarter of fiscal 2004. For the fiscal year selling and administrative expense increased primarily due to the costs related to Methode's dual class structure being eliminated, settlement of the shareholder lawsuit, and the hostile tender offer by Dura. It was also affected by the increased amortization expense relating to our automotive safety technologies and KBA acquisitions. For the 2004 fiscal year, depreciation was 16.9 million, amortization was 3.9 million. Earnings before interest, taxes, depreciation and amorltization for the fiscal year, was 48.3 million, if you factor out the costs related to the class B transaction.

Moving to the balance sheet, we had capital spending that was 19.3 million in the year, our accounts receivable are up, year-over-year, primarily because of payment terms to our automotive customers falling just after our 2004 year end. This was partially offset by the -- by the $4 million increase in accounts payable, and a $2.7 million reduction in inventory. Cash was down only 2.5 million, from the 2003 year-end, and that's in spite of the fact that we paid 25.8 million to repurchase the class B shares and incurred significant legal and banker fees to do that. Other assets are down 7.7 million from year end -- last year's year end. This this is primarily due to payment of the principle and interest on the $6 million note due from the McGinley family trust. And lastly, the increase in other current liabilities and the reduction in other liabilities are substantially reclassifying obligations from non-current to current. Don, that concludes my remarks.

Thanks, Doug. Amanda, we are ready to take questions.

Ladies and gentlemen if you you wish to ask a question, please key star followed by one on your touch-tone telephone. To withdrawal your question from the queue, please key star followed by two. Again that's star one to begin. And your first question comes from David Leiker of Robert W. Baird.

Good morning.

Good morning, David.

A couple of items under revenue line I want to dig through. What was the impact of currency first off?

You know, again, David, I think you asked that the last time. We don't have that calculated, but it is not a -- a -- probably a significant item for us compared to other suppliers because of the amount of US dollar sales that we have overseas, especially in Malta.

Okay.

But when we do get our arms around that, we can -- we can always get back to you.

That changed with Malta going into EU?

Not -- not that we noticed yet, no.

Was there any impact on the revenue line from acquisitions or is KBA already in there last year.

KBA would not affect the sales line.

Okay.

Yeah, because I mean KBA would have emissions but in the consolidation we --

The intercompany they would go away.

Right.

Talk about exiting some low-margin product lines and vehicle offerings. Can you talk about that a little bit more of what you are doing and timing wise where you are in that process?

Exiting lower profit lines, is that the question, David?

Yeah. More color on that.

I really don't decide to, you know, give the programs back to the auto makers. So you have to run them to end of life.

Right.

But our choice has been where we do not -- or can't see the margin improvement that we want so we either simply don't bid or bid at the margins that we would expect and that tends to prune out the low margin products. You just don't get the replacement business.

Right.

And that's a, you know, three or four year transition. Again, you don't give the product back. I suppose you could transfer it. But we've chosen not to do that. We just hold our line on our pricing guidelines.

That's not to say that we won't take a program at lower margin, as long as we can see our way to getting it to our standard margin. So we're not as strict to hold to, you know, exact margins. We will take some risks but at a certain point, if it's below our threshold of pain, we won't take the business.

When did you start pruning those products out of there, that it impacted the revenue line?

I think we started to do that very early on in really the beginning in 2001 as the auto makers got more aggressive on pricing, we became more careful on looking at the profit and developed the miles for that versus just simply growing the top line. That was also one of the reasons why we acquired ACI, which it became AST, which allowed us the leeway to do that.

Right. But what's the magnitude of the impact it's having on the revenue line?

I don't know how specific I want to be, David, because that -- some of that is competitive data. In -- let's say in fiscal 2004 -- and again this was offset by gains at AST and other areas, it probably affected our domestic units by 10 to, say, 13 million dollars of revenue.

Okay. And is that a number that you -- you think grows from there or that gets smaller?

It grows through '06 model year and then starts to taper off. And, again, Methode will continue to grow because of other business gains.

Sure. Sure. I just don't recall, you know, talking about that type of a number. Does it get north of $20 million?

I don't believe so, no. And the reason we do that is you expend -- I mean as you know -- a tremendous amount of energy in engineering whether you are bringing a -- a high-margin product to -- to launch or low margin and it's bang for the buck. I would much rather go after -- grow the top line a little bit slower and have good healthy programs in are factors it doesn't make sense to us to do the other.

No, I agree. You are doing the right thing and you need to allocate your resources to where you get the best return. I don't view that as a negative.

We also at the same time, and as you know, we have become more competitive through our lean manufacturing, through additional vertical integration, through Mexico, through China, so -- and we knew in 2000 when we also had to lower our costs.

Right. Right. And then lastly you had mentioned new business, with a Japanese auto maker. Is that incremental to what you have talked about before?

No, it's not.

Okay. Great.

That's was more of a year-end summary.

Okay. Great. Thank you.

Thank you, David.

And now Mr. Greg Ramsey of [line interference-inaudible] Grace and Zolo.

Good morning. My question is regarding your new facility in China. You talked during the call about closing facilities in Europe, and also opening one in China. When does it start production? And what is the -- what will be the significance in terms of revenues and margins for you guys once it's ramped? Thank you.

The plant is currently open and staffed. We are in the process of transferring production lines and machinery from Singapore. That's a fairly long process through the Chinese customs that will continue into September, where we will begin manufacturing current products that are manufactured in Singapore, will be manufactured in China at that point. That's a -- about $12 million in sales from that group, and then we've already done some preliminary launch on our G.M. business, which was GM T201. That business will begin its first production early next year and ultimately ramp over a three-year period to about 8 million. And we anticipate in the next 18 months, that plan will be approximately 20 million in sales, with a throw to current Singapore income of about five points.

Okay. Thank you.

You're welcome.

Ladies and gentlemen, as a reminder it is star one for questions. You do have a follow-up question from David Leiker of Robert W Baird.

Hello again.

Hello, David.

You ended up coming in above where -- your guidance, I think both the revenue line but certainly the EPS line. What were some of the key factors behind that?

Part of it was the -- the benefit that we saw from the -- looking at our tax reserves, and I'm not sure what other benefit we had in there that -- actually I guess the other item is that in our guidance we bought -- it goes back to -- to the U.K and Ireland closings. You know, initially we -- when we announced the closings we said that was going to be about -- I think we said 2.5 million at the pretax level and that number was -- was high and so we actually almost got both of them closed for the -- the estimates that we had on Ireland alone. Plus we had -- we did not think that we were going to have a -- a tax benefit at the UK facility, and as it turned out we were able to utilize a carryback. So the -- the cost, I think initially we were looking at about 7 cents for closing those two facilities, we ended up closing them for about 4 cents. So between that 3 cents and the penny for the tax, you know there's about 4 cents there that I think if you are looking at last quarter what we were projecting, wasn't there.

And the working capital number, how much -- the -- the receivable number, is that a change in the -- in the payment terms and that's a --

No, it's because the due date fell on a Saturday and so the -- the cash didn't come in until the next month.

Okay. And is that something year end to year end?

It just depends on, yeah, when the year end falls and so we just got this unfavorable comparison because of that.

What was the size of that number that fell a day later?

8 million.

About 8 million is a good number.

So you would have had basically a $16 million positive swing in working capital from a year ago, what you did last year in the April quarter.

Yeah, if you factor in the other accounts.

Okay. That's -- it -- is that a -- when you make that adjustment is that level of workable sustainable going forward?

I don't know if it's going to be -- to make that kind of improvement, I would say no. I mean, we're -- one thing we do, David is we do watch the balance sheet closely, and we do try to manage where we do have the opportunities. So I think the only thing I can say is that we're going to get the best number we can shake out of it.

I mean, the numbers -- making that adjustment, the numbers look pretty good the way they are. Do you have any more what I would classify as footprint actions, moving plans, closing plants, planned over the next 12 to 18 months? Are those pretty much behind you?

I never say never, but we have no current plans. That doesn't mean that something won't occur that mid-year or something that causes us to adjust our thinking.

And then --

What we've done by having these plants in China and Mexico is we built in flexibility so we do have an issue, whether it be pricing or something else, that we can adjust for it fairly rapidly.

Okay. And then the last thing here, as we head into the model year change, anything meaningful you can talk about in terms of new business that you have picked up or anything that might be rolling off?

We've -- we've picked up a lot of smaller programs, you know, $3 million-type programs, speed controls, you know, keyless entry, various hidden switches. Nothing that, you know would be a $10 or 20 million single piece of business. I can tell you that on a worldwide basis, we will be launching 26 -- or are in the process of launching 26 programs, three of them are deemed to be replacements. One carryover and then two transfers where we're bringing in production lines from competitors who, perhaps, ran into some difficulty on where we are picking up those lines.

So it looks like there's 20 new programs then?

Correct.

And --

But, again, those are not -- they are not $20 million production lines. It's a lot of smaller switches.

And -- I mean the number we kind of have plugged in here, that could be 30, 35 million of incremental revenue across all of those items that you have mentioned?

I don't know that I can answer that. It's something we can get back to you on. I don't have -- I have the launches I don't have it broken out by dollar amount, but that's something we can provide you.

And then the last piece here is, if you look at that 20 new programs, how does that compare to what you had a year ago, if you recall?

Two years ago, it was down from a year ago, it's up. You may recall in early on, when Doug and I joined Methode, we had some significant launch problems that were affecting the P&L and a lot of that had to do with we were just weren't ready for all of those launches of it's probably less than a couple of years ago but it's up over last year and it's also up in our -- in Europe over a year ago. I don't have the comparison, though.

Okay. And then just final comment, just like to see double digit operating margin.

Agreed!

Thank you.

Great, thank you.

And that does conclude your questions.

Very good. Thank you, Amanda and thank everyone for listening. Have a pleasant and safe 4th of July.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude your program. Have a wonderful day.