Methode Electronics Inc (MEI) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2005 Methode Electronics earnings conference call. My name is Carol, and I'll be your coordinator for 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 during the call you require assistance, please press star, followed by 0, and a coordinator will be happy to assist you. As a reminder, ladies and gentlemen, this conference is being recorded.

The Company has asked me to read the following statement: 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 and development, product 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 the Safe Harbor protection provided under these securities laws.

I will now turn the conference over to Mr. Donald Duda, President and CEO of Methode Electronics. Sir, you may begin your conference.

Thank you very much, Carol. 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 website. 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 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 first quarter of 2005 fiscal year with sales 9% higher at 85 million compared to last year's results of 78 million. Net income increased 7% to 4.6 million, or 13 cents per share from 4.3 million last year or 12 cents per share. Revenue increases were primarily from our North America and European automotive groups, which completed an impressive 22 program launches during the summer months of June and July. 2 additional launches consisted of replacement clock spring programs that included major redesigns. Although this is replacement business from an engineering and production standpoint, they are considered new programs.

While Methode's customer base remains concentrated in the traditional big 3, we are gaining ground with business from OEMs such as Audi, Hyundai, Jaguar, Land Rover, Mercedes, Nissan, and Volvo. Beginning in 2005, we will add Honda to this list. In addition to the automotive performance, our dataMate business had a strong quarter. While their traditional Terminator product nears end of life, the group has been successful in designing and winning business for a new RJ-45 small form-factor pluggable copper transceiver or SFP. This product enables high-speed 1 gigabit data transfers over existing copper infrastructure and accounted for the majority of the rise in this business, predominantly from increased orders from a large technology firm. This is very encouraging development and we congratulate our dataMate division on a successful launch.

Our Network Bus division is gearing up production in several new programs, with increased demand anticipated for the remainder of fiscal '05 supporting a slight upside to their budget. In addition, new quote [ph] opportunities continue to be presented to this group from sources including technology companies, military, and aerospace.

Our Shanghai, China facility has their automotive line operational and is in the qualification stage for General Motors. Our move from Singapore to Shanghai is in its third of 7 stages with the move scheduled to be completed by December. High-speed stamping presses, plastic injection molding machines and assembly equipment are being installed and customer process validation is taking place on products already transferred. We did incur some additional start-up costs in the first quarter of approximately 230,000 and anticipate a similar amount in our second quarter. That said, we believe it's important to adhere to our Greenfield strategy of developing capabilities in China on our own and not incur what could be more far-reaching complications in dealing with an unknown third party or joint venture.

The Compensation Committee of Methode's Board of Directors has made important changes to the bonus compensation program for senior executives. The program will move from a prior period income-based program to one that rewards achievement of specific performance criteria. Also, in lieu of stock options, the Compensation Committee granted restricted stock awards. A portion of these restricted stock awards for senior executives are subject to forfeiture if specific performance criteria is not achieved.

Looking ahead, Methode expects to achieve second quarter fiscal 2005 sales between 95 and 100 million and earnings per share in the range of 17 to 19 cents. The Company is maintaining its previously announced sales guidance for fiscal-year 2005 of between 370 and 385 million. To recognize the compensation cost of restricted stock awards granted in the first quarter, we are adjusting the high end of our previously announced full-year earnings guidance which was 65 to 72 cents, 2 cents on the high end. Our new guidance, including this adjustment, for our fiscal-year 2005 is for earnings between 65 and 70 cents per share. At this point Doug will provide us additional financial commentary.

Thank you, Don. Good morning, everyone. I'll start with sales activity for our 3 segments. Within the Electronics segment, our automotive businesses had first quarter net sales of 64.7 million compared to last year's first quarter of 58.3. This is an 11% increase in automotive sales year-over-year and is primarily due to increased sales at our Automotive Safety Technologies unit and at our European automotive businesses. The non-automotive businesses in the Electronics segment had net sales of 11 million in this first quarter. That compares to 10.4 million last year. This increase is due primarily to dataMate products launch of the RJ-45 small form pluggable that Don mentioned in his comments. The balance of this business, balance of the businesses in this group were down slightly year-over-year, but it's worth noting that last year's sales included sales of approximately 400,000 from our Ireland manufacturing facility that was closed in the third quarter of fiscal 2004.

The Optical segment had sales in the first quarter of 3.8 million which is the same as last year. Last year's sales included about 0.5 million for our U.K. manufacturing facility which was closed in the fourth quarter of last year. Remaining businesses in this segment did show modest improvement in the quarter. The other segment, which includes our bus bar operation and testing laboratories, had first quarter sales of 5.4 million. This also is the same as last year's quarter.

Looking at other items on the income statement, selling and administrative expense was 13.4% of net sales compared to 11.7% in fiscal 2004. The increase is primarily due to our initiatives to comply with the requirements of the Sarbanes-Oxley Act, increased research and development spending, start-up costs for the Shanghai manufacturing facility, the amortization of the restricted stock awards that were awarded during the first quarter, and costs related to converting the manufacturing facility in Ireland to a sales and distribution operation. We expect the run rate for selling and administrative for the full year to be somewhere between 12.5 to 13% of net sales. The other income line item improved because we had a modest exchange gain in fiscal 2005. This compares to a $600,000 loss in fiscal 2004.

Some balance sheet and cash flow items worth noting. The change in the accounts receivable balance is attributable to the lower sales activity in the first quarter compared to the fourth quarter of last year. Primarily this is due to automotive shutdowns related to model-year changeovers in the first quarter, then we end up collecting on the higher accounts receivable balance from the fourth quarter with less new receivables coming in. The same principle applies to the change in accounts payable.

Depreciation expense was 4.3 million and amortization was 1. -- was 1 million compared to 4 million of depreciation and 900,000 of amortization last year. Capital spending was 5.8 million in the first year, or in this first quarter, compared to last year's 3.7 million. This is due primarily to increased program launches at Automotive Safety Technologies and in Europe. For the full year we expect capital spending to be about 20 million. Earnings before interest, taxes, and depreciation and amortization for the quarter was 11.9 million. With those brief comments, Don, that concludes my remarks.

Thank you very much, Doug. Carol, we are ready to take questions.

Thank you very much, sir. Ladies and gentlemen, if you wish to ask a question at this time, please press star followed by 1 on your touchtone telephone. If your question has been answered and you wish to withdraw your registration, please press star followed by 2. One moment, please, gentlemen, while we compile a list of questions. Your first question comes to you from the line of David Leiker of Robert W. Baird. Your question, please.

Good morning.

Good morning, David.

You know, you have a litany costs in here that you ran through, Sarbanes-Oxley and R&D and restricted stock and Shanghai. In aggregate, how much do you think that totaled?

For those costs that was, David, in excess of a million dollars.

Okay. And what -- given your comment about where SG&A is as a percent of revenues, do some of those go away over the course of the year?

No, the Sarbanes-Oxley will be with us and, in fact, that's a number that I think as we've updated it again this quarter, have probably increased that expense slightly.

Okay.

And the amortization of the restricted stock will continue throughout the year. I think we also expect to continue in more aggressive R&D spending than we've seen in the past.

So what brings SG&A costs down as a percent of sales versus the first quarter?

I think -- well, there are a few items in there that I think will, you know, not be at the same rate full year as we've seen in the first quarter.

China.

Yeah, China start-up is a good example of that.

Okay. And your new -- your guidance here for the year, does that incorporate the production schedules that were released yesterday by GM and Ford, down 10% in the calendar fourth quarter?

Yes, it does.

It does?

Yes.

Yes.

And then lastly, when we look at the 22 new launches, can you give us some color on kind of the range of products that you have that you're launching, you know, particularly anything that's more leading edge technology?

Okay. Let me say 2 things. 1, we'll be presenting at Baird's Industrial Conference a complete matrix of all the products in the platform wins.

Okay.

And how that relates to our business through model-year '09 and then also we'll show what's going end of life.

Okay.

I'll go through some of them here. The majority of them are standard product and include, you know, steering wheel switches, clock springs, redundant radio controls and so on, and also the AST seat sensor. In Europe we've done -- we launched paddle switches for really shift by wire. That's also a steering wheel switch, it's behind the wheel, though.

Right.

Also an additional center console for Aston Martin for infotainment, and that includes Bluetooth. For Mercedes there's some in-car entertainment and also shift-by-wire controls. I think those would be the highlights of the newer products. The rest, as I said, would be our standard.

A real nice mix of, you know, beyond the traditional domestic OE's, this is probably the best mix of new business with those customers that you've had, is that fair?

Yes, that's fair. When we consider the foot in the door, we've got to get on a smaller program, then prove yourself. But it's a milestone to get in to those accounts.

If you totaled up the incremental revenue from this new business, what portion of that do you think are coming from those customers?

Again, I think I'd ask you to wait until we're at the conference.

Okay.

And then we'll present enough detail so you can see the ins and the outs.

David, no charge for plugging your conference.

I was going to say, thanks for the free advertising.

And I should point out that's going to be webcast.

And it's on November 9th and 10th. Thank you. I'll come back.

All right. Thanks, David.

As a reminder, ladies and gentlemen, to register a question, please key star 1. Gentlemen, your next question comes to you from the line of Kevin Sarsany of Langenberg. Your question, please.

Hey, guys. I was wondering about those of us who are not going to be at the Baird conference, but I guess I could get on the Internet. I was wondering, could you break out, in the auto piece, the North American, Europe, AST, and paid tooling contributions?

In the first quarter, Kevin, there was no tooling in either last year or this year in the quarter.

Okay. And AST, how was that? I guess what I'm driving at is North American auto, with the production levels and forecasts and all that. I'm just trying to get a feel for the health of the auto into your 4 segments.

We've typically not, I don't think, talked -- broke down North America versus Europe in any particular detail before so I think we'd rather --.

I think we can -- to give you flavor for the revenues, our traditional North American business, which is our clock springs and multifunction switches, steering wheel controls and so on, has held steady, it's been on its budget. We have taken into account production schedules out of Detroit. The increase has come from our AST division, which is the seat sensor.

And what --.

It's holding steady, the other one is growing. I think that's probably a good way of giving you some flavor.

Okay. And was there much pruning in the North American auto business?

In terms of programs going end of life?

Right. Right. You mentioned at last quarter about pruning. I can't remember the number, but -- hello?

I'm trying to think how to answer -- if we can answer that. I don't know that we have programs in the first quarter that went end of life. I think some of the pruning that we may be doing currently will not affect the revenues for a year or 2, possibly.

Okay.

Yeah, that's correct.

And one last quick question on the top line. In the "Other," network bus seems to be doing pretty well, and it being flat year-over-year does that mean the laboratories are not doing very well, or --?

Actually, all of the businesses in that particular segment were relatively flat year-over-year.

Okay.

But as Don mentioned in his comments, they are booking more business, and so that's encouraging. Plus, they've made improvements to their cost structure, and so we're seeing some benefit to the bottom line there.

Okay. And when do you expect the joint strike fighter productions to go into effect?

That, I don't think we can answer -- we can get back to you on that but -- I don't know the answer.

Yeah, I know I've got that information, I just don't have it with me, Kevin.

Okay. Thank you.

Thank you, Kevin.

Gentlemen, your next question comes to you as a follow-up question from David Leiker of Robert W. Baird. Please go ahead.

Hello again. As I do a contribution margin calculation it looks like it's a little bit below what you've done historically, you know, coming into the low 20% instead of above the 20%. Anything in particular going on in the gross profit line? Cost of goods sold?

No, cost of goods sold actually as a percentage was -- we saw an improvement there. Yeah.

If I look at the change in revenue, though, versus the change in gross profit, that contribution, incremental contribution margin, is coming in below what your historical levels were. It's kind of 18% in the quarter versus numbers that normally are 20 to 23%. And your gross profit margin, you know, including the other income down below, was actually down 20 basis points year-over-year.

I mean, I'm showing -- David, I'm showing just an improvement, percentage-wise, in our cost of goods sold, so I guess I just don't see what you're seeing there.

We'll follow up on that. Doug, I think you talked about the capital spending, you know, it's up pretty big year-over-year. I missed the commentary in terms of what's driving that.

We just had -- in the first quarter we just had more spending with respect to Automotive Safety Technologies and in Europe we had a little more capital spending. Some of that is just timing, because we were -- we were, you know, budgeting 20 million for the year, and we're still on budget with that. Some of it is just the timing of how it came through.

Okay. And then if we look at the change in cash, last year you had a $10 million headwind with buying back -- on a net basis buying back the stock and things like that. Cash this year, you know, improved only a little bit. It looks like there's a $6 or $7 million that would go into working capital relative to what you saw last year.

Yeah, which you can only improve that so much and eventually it's going to have to slow down, but, yeah, we made some big improvements last year.

Well, your receivables are up 1% year-over-year with revenues up 9%.

I'm sorry, what was that?

Your receivables are up 8% versus revenue up 9%, so days receivables had a pretty good jump there.

Uh-huh.

Anything behind that?

No, again, not -- not especially that concerns us.

Okay. Then the last one is, Don, can you talk a little bit more about what the specific performance items are for the compensation plan for the executive management as you go forward here?

I think I would refer you to the proxy. There's a fair amount of detail in that. I don't want to necessarily speak for the Compensation Committee. But, as I said --.

okay.

What we've done is, instead of have it purely profit based from a prior period, you have to meet your budget, and so the criteria is based on meeting your income and your budget on a quarterly basis, meeting your annual revenues, and then there's also some MBOs that are tied to it. But the big difference is that we're setting criteria that you need meet to obtain bonus monies versus simply looking at the prior period from a profit standpoint, and that's a big change for Methode.

Okay. Great.

And there's a fair amount of detail I think in the proxy.

I'll go check that, and I'll follow up if I need to.

Okay.

Thank you.

Gentlemen, your next question comes to you as another follow-up from Kevin Sarsany of Langenberg. Please go ahead.

Hi. This will be quick. Last question. Could you update us on your lean and flexible manufacturing initiatives, as well as some of the other cost reductions trying to in-source some of the activities as well as going to your suppliers and asking for price reductions?

Okay. I don't mean to plug David's conference again, but we will be talking about --.

I'm not going to be there.

But it will be webcast. But it is also a presentation that we use throughout the year for our investors.

Okay.

So you'll get a chance to see it, but we will be talking about our lean initiatives there. But to give you some background, we started really 2 years ago, about a 5-year journey.

Okay.

So each year we continue to look at such things as value stream mapping and continue to lower our inventory levels in the facilities. We're seeing the results of that again in reduced inventories, increased floor space. The initiatives with our suppliers, I'd say we're just really getting started in helping them be lean. Perhaps we were more old fashioned before and simply insisting on price reductions. We can only go so far with that, then you have to help them achieve additional cost savings. And we've just realigned some people in our automotive division to assist the suppliers in that. In fact, we held a 2-day seminar about a month ago down in Carthage for those suppliers, I think we had 25 suppliers attend that. We're probably in the second phase of working with our suppliers and continuing to get price reductions, although, again, you can't -- there's only so many 5% reductions you can get before you have to help them become better manufacturers.

Uh-huh. Now, if you were to quantify the 2 to 5-year journey, would it be incremental, wherever year you're in, so, you know, 1, 2, 3, 4, 5, you're getting nice efficiencies, or is it back-loaded as you get everything going and you're going to really start to see this in the fourth or fifth year?

That is difficult to answer because you -- it's masked also by price reductions we need to give to our customers. I think I've said, you know, you try to take 5% out of your costs each year and you end up giving 2 or 3% back to your customers, but it's not linear. But that's very difficult to quantify.

Okay. All right, that's it. Thanks.

Oh, and your question about joint strike fighter, it's at least 2 years out.

Okay. So 2007ish?

Correct. And if my general manager of that division gives me additional detail or corrects me, we'll get back to you on it, but we believe that's 2 years out, somewhat dependent on military spending.

Okay. Thank you.

Thank you.

Gentlemen, you have another follow-up question from David Leiker of Robert W. Baird. Please go ahead.

Yeah, just -- I want to talk about the guidance a little bit here. You essentially maintained your EPS guidance and you maintained your revenue guidance, and regarding those 2 items, are the production cuts that we're seeing here in third and fourth calendar quarters already in your revenue number when you gave that initially, or have there been some offsets that you've been pleasantly surprised by? And similar comment on the expenses. Were you anticipating those expenses, million dollar plus here in the quarter, at the time you gave your guidance or has there been something that's offset that since you gave that original guidance?

Let me talk about the revenue first. I'll let Doug talk about the income. We updated our forecast yesterday. So we're looking at our releases through the end of the year.

Okay.

We feel fairly confident that we've taken that into account in our revenue stream, particularly in -- again, our traditional business. We have had some upside from our non-automotive which has been what we talked about with dataMate, which is probably the first time in 3 or 4 years we've been able to say that. So from a revenue standpoint I think we're fairly confident. And we did give up -- it's a $15 million range.

Right.

And if you look at this quarter, we came in on the high end of our range.

Right.

So unless you tell me differently in November and December on what you think auto is going to be doing, I think we're fairly confident of our numbers there. And the auto inventory always bothers me.

Likewise. What about on the expense side?

Well, just talking guidance on the earnings per share, we took the top end down, David, primarily because of the restricted stock award amortization. That was something that we weren't factoring in when we gave guidance the last time, but we took a look at, again, all the information that we had available and felt we could still leave the bottom end of the range at 65 cents, but we did need to pull in that top end to at least allow for the restricted stock award amortization. That will be -- you know, that's probably 2 to 2.5 cents per share this year, at least.

So the Sarbanes-Oxley cost, R&D costs, the Shanghai start-up costs, those were all anticipated in your original guidance?

Right. Right. And we've tweaked those a little bit. Like I said, we've made some adjustments to what we thought those costs were going to be. But the reason for the change in guidance is primarily for the restricted stock.

Okay, great. Thank you.

And to give you some color on how we forecast. Each of our divisions reforecast, looks at their forecast for the given month and quarter and 1 quarter out every 2 weeks.

Okay.

So we're getting an update -- a lot of times there's no changes, but we get pretty good data from our divisions of where we stand.

Okay. Great. Thank you.

Thank you.

Ladies and gentlemen, this concludes the question and answer portion of today's presentation. I will now turn your call back to Methode Electronics' President and CEO, Don Duda, for his closing remarks. Sir?

Carol, thank you very much, and we will thank everyone for attending and have a very safe Labor Day holiday. Good day.

Thank you, gentlemen. Ladies and gentlemen, this concludes your presentation for today, and you may now disconnect. Have a great day.