Methode Electronics Inc (MEI) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Methode Electronics Incorporated Third Quarter Fiscal 2005 Results Conference Call. At this time, all parties are in a listen-only mode and a question and answer session will follow the presentation.

As a reminder, this conference is being recorded. 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 industry, 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 the Safe Harbor protection provided under these securities laws. I will now turn the conference over to Mr. Donald Duda, President and Chief Executive Officer.

Good morning everyone, thank you for joining us. Today I'm joined by Doug Koman our CFO, Bob Kuehnau, our Treasurer and Controller and Joey Iske, Director of Investor Relations. Both Doug and I have comments today and afterwards, we will be pleased to take your questions.

In the third quarter of Methode's 2005 fiscal year, we are reporting a year-over-year 8% increase in net sales excluding tooling sales. We also increased earnings per share 0.01 compared to last year's third quarter excluding the 3.1 million or 0.08 charge taken last year for the elimination of our dual-class stock structure and our facility closings.

For the first nine months of this fiscal year, Methode increased earnings 0.02 per share over the prior year's period, again, excluding last year's third quarter charge. During the quarter, we received solid contributions from our non-automotive businesses as well as from our automotive safety technology group, AST.

Methode's dataMate business, although starting from a smaller revenue base than some of Methode's larger businesses, and at over 60% to the top line this quarter over last year. Moreover, they were a key contributor to income, helping to offset the reduced sales and income from Methode's traditional U.S. automotive OEMs.

The RJ45 copper transceiver continues to be well-accepted in the market and dataMate retained sole source supplier status with a strong OEM. As a natural complement to the copper transceiver line, dataMate is beginning to market the fineban (ph) cable assemblies that provide transfer rates over copper cable of 10 gigabits per second for applications in both Telcom and Datacom. Based on dataMate's reputation, we anticipate that this product will be well-received and become an instant contributor to fiscal year '06.

Network Bus products again increased their top line. This quarter, the division produced a 24% increase from the year ago period. As the Chinese continue to evolve the telecommunications infrastructure, Network Bus is increasing its involvement in China.

It is anticipated that China will begin to issue 3G licenses to several telecommunications companies during this calendar year. This will stimulate the requirement for electrical bus bars used in these types of systems. Many of Network Bus's customers are moving to Asia and are looking for Methode to become a solid supplier in that region of the world.

As an update to one of Network Bus's larger, long-term programs, it was recently announced that the bill for the Joint Strike Fighter has been reduced over the life of the project. This will have limited impact on our original projections as we were conservative in our original estimates of sales of approximately 2.4 million beginning in fiscal 2010.

Our Connector Products group realized lower sales year-over-year, but posted improved earnings as a result of their cost reduction efforts. We are pleased to announced we hired a new Vice President of our Interconnect group, Paul Whybrow. Paul replaces Jim McQuillan who retired from Methode in January. Paul comes to Methode with over 30 years of experience in the electronics industry, 25 of which have been involved in P&L responsibility in the United Kingdom, the Far East and the United States, with such companies as Amphenol and Berg Electronics.

Paul is working with his team to redesign our global strategy for Interconnect Products. We look forward to his team's future contributions. We want to take this opportunity to thank Jim McQuillan for his many years of service to Methode Electronics and wish him well in his retirement.

On the automotive side, AST continues its growth as a result of NHTSA's regulation requiring passenger occupant detection system, or PODS as it's known, be installed in 65% of new cars sold in the U.S. Next year the requirement is 100% of all vehicles sold in the U.S.

In addition, AST has just signed a three-year extension of its agreement with Delphi, as Delphi's exclusive supplier for the seat sensor used in their PODS system. Also, in automotive, we are in the process of developing a switch bank for General Motors GMT-900 program. This switch will launch this summer in our Shanghai facility for the '06 model year.

This business, when originally booked, was approximately 8 million. Methode has continued to work with GM engineering, which has resulted in Methode being sourced on additional vehicle lines. This will increase our annual sales from this product to 11 million for model year '07.

In the new product area, Methode developed for Mitsubishi and is producing an electronic steering angle sensor located on the steering column near the clock spring. This product first launched on '04 models. We are currently in the process of designing a similar sensor for Chrysler and Ford with launches in the '06 and '07 model years.

Electronic steering angle sensors are used to enable the operation of the vehicle stability control features and in some cases may be used as an input to other vehicle subsystems such as electrically assisted steering and the new adaptive headlight features. We currently expect annual revenue on this new business to be about 5 million and anticipate sales to increase as electronic stability control becomes more standard on the auto.

Our lean manufacturing initiatives continue. This quarter, we began training personnel at our Connector Product and Network Bus groups and our Carthage and Golden facilities, we are approximately 80% complete, and are 60% through the process at our two Mexico facilities. These programs are extremely important as they help to offset price reductions required by the automotive OEMs. They also shorten manufacturing lead times and serve to improve product quality.

In the area of our own supplier lean manufacturing initiatives, our progress has been slow, hampering our own supplier price reduction efforts. This represents an opportunity for improvement in fiscal year '06.

Looking forward, Methode is expecting to achieve fiscal year 2005 sales results between 370 and 380 million. The company is modifying its earnings per share guidance for the full year to reflect higher than expected third-party Sarbanes-Oxley compliance costs. Fiscal year 2005 earnings per share are now expected to be in the range of 0.63 to 0.68. At this point, Doug will provide additional commentary.

Thanks Don. Good morning everyone. Let me start with sales activity for our three segments, all net sales numbers will exclude customer tooling. Our automotive businesses within the electronic segment have third quarter net sales of 67 million compared to last year's third quarter of 60.8 million. That's a 10% increase year-over-year.

For the nine month period, the automotive businesses had net sales of 206 million compared to 187 million in the last year. That also is a 10% increase year-over-year. The improvement is primarily due to increased seat sensor sales at our automotive safety technologies unit and new launches at our European automotive businesses.

The amount of automotive businesses in the electronics segment had third quarter net sales of 11.3 million, it's down slightly from 11.8 million last year. For the nine month period, the businesses had net sales of 34.3 million, which is just about flat compared to last year's 34.4 million. For both the quarter and nine months, we had increased sales of dataMate products, small form factor pluggable line of transceiver products.

The balances of the businesses in this group were down slightly year-over-year. It's worth noting that the non-automotive business units would have shown a slight improvement year-over-year if sales from our Ireland manufacturing facility that was closed in the third quarter of last year were excluded.

Last year's Ireland sales were about 400,000 in the third quarter and about 1.3 million year-to-date. The businesses in our optical segment had sales in the quarter of 6.3 million compared to 5.6 million last year. For the nine month period, sales were 15.7 million compared to 14.4.

This year's nine month sales included 1.6 million for an infrastructure project that we consider to be a one- time event. Also, last year's sales included approximately 400,000 in the third quarter and approximately 1.8 million in the nine month period from our U.K. manufacturing facility that was closed in the fourth quarter of last year.

The bus bar operation and testing laboratories in our other segment had third quarter sales of 6 million, which is up about 900,000 from last year's quarter. For the nine months, sales were 17.4 million, that's up about 1.9 million from last year's period. This is attributable solely to increased bus bar sales as the laboratory showed a slight sales decline year-over-year.

Looking at other items on the income statement, other income, which is the line item just below net sales is down primarily due to the running down of a joint venture which manufacturers a multifunction switch for Chrysler. And due to less European automotive design engineering fees compared to last year.

Cost of products sold for the nine months improved to 78.5% of net sales from 80.6% last year, primarily the result of our lean manufacturing initiatives. It would have been greater except for costs related to the transfer of manufacturing from Singapore to China and expenses related to transferring some automotive tooling from an insolvent molder in the second quarter of this year.

Last year's cost of products sold included 1.2 million for the closing of manufacturing facilities in Ireland. That represented less a half a percent of net sales last year. Selling and administrative expense for the nine month period was 13.8% of net sales compared to 12.8% last year. This increase is primarily due to our initiatives to comply with the requirements of the Sarbanes-Oxley Act -- amortization of stock based compensation, primarily restricted stock awards -- expanded sales presence for our domestic connectivity business -- increased R&D spending, primarily automotive, and increased corporate governance costs.

Last year's selling and administrative expense would have been 11.7% of sales, yet the 2.9 million expense related to the elimination of our dual-class structure were excluded.

The other net line item reflects a relatively more stable dollar over this year's nine month period versus last year's nine months. And the favorable impact of currency hedging during the current nine month period.

Some balance sheet and cash flow items worth noting, our cash balance is at 81.3 million as we continued to show strong cash provided by our operating activities. If you look at last year's cash flow statement, you'll note that there would have been an increase in cash last year of about 16.1 million, yet the net cost of 19.8 million related to eliminating the dual full-class stock were excluded.

So, while we show a strong increase in cash this year versus last year, last year's cash would have been at a similar build because of the underlying strength of our operations.

Inventories are up from year-end for a few reasons. The automotive businesses have built up an additional 6.5 million of unbilled customer tooling. Automotive also continues to selectively build inventory in advance of taking down some lines to incorporate lean manufacturing initiatives. DataMate increased inventories to support the slightly longer lead times in increased sales for its small form factor pluggable copper transceivers. And, because of this inventory, turns are at about 7.6 times or about 48 days on hand.

Capital spending was 5.4 million in the quarter and 15.7 million for the nine month period. This compares to 5.9 million and 13.3 million for the quarter and nine months last year. The increase in capital spending this year is primarily due to program launches at our automotive safety technologies unit and our European automotive facilities.

For the full year, we expect capital spending to be in the $20 to $21 million range. Accounts receivable turns are at about 6.1 times or 60 days sales outstanding. This is slightly higher than our historical rate and is due to more sales in our European operations, where payment terms can be in excess of 60 days. EBITDA for the quarter was 13 million, and for the nine months was 39.5, which is 14.2% of net sales.

Don, that concludes my remarks.

Thank you Doug. Megan, I think we are ready to take questions.

Thank you, sir. Ladies and gentlemen, we will now be conducting the question and answer session. Our first question will be coming from Kevin Sarsany of Langenberg and Company.

Hi, can you hear me?

Yes.

Hi, I have a question on your guidance versus your third quarter performance. You came in about 7 million above your high-end of your third quarter previous guidance and your maintaining your full year revenue. Is there something going on, is this all related to North American vehicle production or could you help us out there?

You're saying that revenues are...?

In the third quarter, actually second quarter, your guidance for the third quarter was 80 to 85 million in revenue, you came in at 92. Obviously, you beat the numbers, but you're keeping your full-year guidance the same and I was just wondering if this was related to the automobile production, or if there is something that happened in the third quarter that isn't going to happen in the fourth quarter?

Kevin, this is Doug. I think the best way -- the answer to that is that the increase that we did see in the third quarter is related to automotive, primarily automotive, although some of the other business units did contribute.

And, our guidance for the full year is not being changed because, again, the - what we see -- the positive impact that we see in the third quarter, I think is -- we're tempering that against some of the news that we're hearing from Detroit -- with some of the OEMs there. So, as we look at the full year, we are just comfortable leaving our range where it's at.

Okay. And also, I didn't see anything in the press release or in your comments about the impact of foreign currency.

Sure. In the -- on the income statement, we -- under the other net -- let me see if I've got the right one...

I mean, aiding your revenues.

Oh, aiding the revenues. Sure. The -- for the 9 months, we probably had about 2.5 million favorable impact on -- from the currency.

Okay.

It was about 800,000 in the third quarter.

Okay. And in relationship to your two big customers, Chrysler and Ford, what would you estimate or know what their revenue contribution is? I think last year, both of them combined were about 60% or so. Where is that now?

I wouldn't think that has changed much, Kevin.

Okay. Okay, I guess my last question on the gross margin. It was higher than I expected. Could you kind of disaggregate the manufacturing efficiencies versus potentially mix? I think AST is a much higher gross margin business.

Yes, I mean - we haven't gone through and exploded that detail yet. But yes. Part of it would be coming from lean, obviously. Those initiatives continue and we do see improvement. And then, some of it is, again, mix as we do see some positive sales growth in -- coming from the AST business unit.

And, also the non-automotive business is such as dataMate, while their revenue is not as significant, their margins certainly are.

Okay.

That has an effect.

Okay. Well, I'll step back for now.

Thank you.

Thank you. Our next question will be coming from Keith Sugar (ph) of Robert W. Baird.

Hi, guys.

Good morning, Keith.

What was the change in working capital for the quarter?

Hold on -- I've got my cheat sheet here. The -- quarter-over-quarter, we had about a $5 million improvement in working capital.

Okay.

And going back to year-end, we're up about 18 million.

Okay. Cash increased by about 13 million sequentially. What's behind that increase? Is that all operating?

Right. In my comments, what I was trying to just point out that the -- we continue to generate cash, and if you just look at cash provided by operating activities, it was strong last year, it's strong this year. And, if you look at last year and back out -- the costs related to taking out the dual class, we would have been, again, we would have generated a lot of cash last year. So, there's -- between the two years, we just continue to see strong cash provided by operations.

And now at about more than $2 a share in cash, can you guys talk about any planned uses for that all?

I think, as we've said in the past, that preferred use of that cash is for accretive acquisitions and while we generally don't comment on any acquisition activity, we can reiterate that it's an integral part of our growth strategy as we move forward.

Okay. Now, the margins, you guys have seen a lot of improvement there. I think earlier a guy asked the question that it was from lean manufacturing. Do you expect that to jump up again in the fourth quarter, year over year?

That would depend a lot on mix. I wouldn't think so.

Okay.

I mean, the lean manufacturing that's in my commentary is very important. It would tend to offset the price reductions required by the automotive OEMs. So, you don't necessarily get a complete flow through to your income because of the price reductions.

Okay. And then, with the lower fourth quarter guidance, you had unanticipated Sarbanes-Oxley costs in the third quarter, but you still beat your previous guidance. Are you guys just trying to be conservative in the third quarter -- or the fourth quarter, rather?

The answer to that is no. I think we just take a very close read of the releases we have, the information -- the best information we have and I think, just being -- fourth quarter, with Sarbanes-Oxley is still a number that we're hoping we've got under control now, but we're finding out as we go, week to week, that this is just a lot of work to accomplish.

And, you're in the testing.

Yes. We're in the testing and that's one of the reasons for the increase in the cost is just the -- we had increased the scope, the testing is going has gone, probably, slower than we just thought it would go. And, so there's a lot of elements.

I think, just given the first year out of the box, nobody's really certain what the requirements are going to be. Everybody's doing -- going about this, being very cautious. And it might be a little overkill, but we all want to make sure we go through this process and come up fine. So, we're doing everything that we think is prudent to do.

I also think, Keith, since there's not a lot of good news coming out of Detroit recently, I don't know that you could say that we've been conservative. We've been consistent, I think, but based on the build schedules we're seeing, I think our guidance is, I would say, consistent with what we've done in the past.

Okay. Thanks a lot, guys.

(Operator Instructions) We do have a follow-up question coming from Kevin Sarsany of Langenberg & Company.

Hey, guys, sorry to make this call a little longer than ...

That's all right.

A couple of quick questions. On AST, you talked about this year, I think it's what the United States is requiring -- 65% of the cars to have the passenger airbag. Where -- are they doing 65 or are they at 50 or are they higher than 65?

And part of my question is, obviously, if they were at 65 this year and they go to 100 next year, you've got that nice increase. But if they're below it, you get a higher increase and so on and so on.

I don't know...that we can answer that right now.

Okay.

I believe that data may be available from NHTSA.

From who?

From - the National Highway ...

Okay.

Some of the auto-makers deployed the pipe system sooner and got credit towards their requirements.

Okay.

So, we'd really have to look at what NHTSA's current data is.

All right. So, possibly, the growth you're seen today is somewhat -- I wouldn't say normalized, but if they did it -- got to 65 a year ago, you're still seeing pretty good growth in AST.

That's correct.

Quick question on the Joint Strike Fighter. You were talking about revenue in 2010. Is that when it first comes in and what have -- what are the reductions that you were talking about?

That was a budget cut that the administration made.

Was it related to Joint Strike Fighter?

Yes.

Okay.

Yes.

And was it production level of airplanes, or some other aspect?

No, it was production level of airplanes. I don't know exactly what the reduction was. I did confirm with the GM of our Network Bus division, that he had been conservative in his original estimates.

Because generally, these programs aren't -- what they project originally is not how it ends up and Chris was conservative there. But that represents less airplanes being manufactured.

Do you have an idea of the percentage or any number of planes? And I think, originally, they were planning on 6,000.

We can get that for you.

Okay. I'd appreciate that. And 2010 is when the revenue actually starts coming in? It's not any sooner?

There's prototyping ...

Okay.

... but I wouldn't say that's significant.

Okay. On the cash flow statement, you had about 2.6, 2.7 million in acquisitions. What is that related to? Is that AST payments?

That's correct.

Okay. And last question on Sarbanes-Oxley -- 1.2 million in the third quarter. Is that about the right number going forward and what are the ongoing costs and what rolls off?

No, I wouldn't use the 1.2 in the quarter as a run rate. What we have there, though, is we just got a better handle on just the amount of work left to be done. We did incur a lot of -- we did perform a lot of work in the quarter. We also got a better handle on what the external auditor's piece of Sarbanes-Oxley was going to be, and so that's reflected in the number that we reported in the third quarter. So ...

Okay. Because you mentioned that the 1.2 is about 2 cents and you reduced your guidance related to Sarbanes-Oxley by about 2 cents.

Yes.

So, there's not a lot in the fourth quarter.

No, I wouldn't say there wouldn't be a lot in the fourth quarter, but as far as our guidance goes, we have reflected that in our guidance.

Okay. All right. That's it. Thanks, guys.

Thank you.

There are no further questions at this time, sir.

All right, Megan, then we'll wish everybody a pleasant day and sign off.

Thank you.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference. We'd like to thank you for your participation and ask that you disconnect you lines at this time. Have a wonderful day.