Methode Electronics Inc (MEI) 2005 Q4 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Methode Electronics Incorporated fourth quarter fiscal 2005 results conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. 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 automotive, computer, and telecommunication industries such as general economic conditions, interest rates, consumer spending patterns, and technicological change.

Other factors which may result in material deferred results for future periods include market growth; operating costs; currency exchange rates and devaluations; 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 Donald Duda, Chief Executive Officer and President of Methode Electronics. Sir, you may begin your conference.

Thank you. Good morning, everyone. Thank you for joining us today for our fourth quarter and fiscal 2005 year end conference call. Most of you should have received our earnings results released earlier today. If not, you can obtain copies from the investor relations page of our website.

With me 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. He 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'll be pleased to take your questions.

First, let me take a moment to offer condolences to the family of Kevin Hayes, Methode's former CFO, who passed away in March after a brief illness. Kevin was with Methode for 28 years and helped guide Methode through the Stratos Spin-Off. He was a devoted Methode employee until his retirement in 2000. A friend to many of us, who will be missed.

Moving to our financial results, Methode completed its fourth quarter with sales of 115.6 million and net income of $9.7 million or $0.27 per share. Excluding the insurance gains discussed in our release sales as well as customer pooling, sales were 102.3 million with net income of 8.7 million $0.24 per share. This compared to last year's results of 96 million in sales and net income of 7.6 million or $0.21 per share. A 7% increase in sales and 14.5% increase in net income over the prior year's period.

For the 2005 fiscal year Methode reported net sales of 392.7 million and income of 25.5 million. Again, excluding the insurance gain and customer pooling, sales were 375.5 million with net income of 24.5 million or $0.68 per share. An 8% increase in sales and 6% increase in net income over the 2004 fiscal year adjusting for one-time expenses in 2004.

In automotive for the quarter Methode's European and automotive safety technology business units had solid increases in sales offsetting lower sales from our domestic automotive electronic controls unit. Overall in fiscal 2005 Methode's automotive business realized modest sales growth.

These businesses performed well despite the continuing demand to reduce selling prices and upward pressure on direct material costs. They operated in a difficult environment with reduced vehicle sales and market share loss by Methode's traditional north American OEMs. Our ongoing focus on lean manufacturing, automation and migration to lower cost manufacturing regions has helped us sustain our automotive businesses and the performance in what has been a challenging year for Detroit.

In our nonautomotive businesses, both for the quarter and full year, our dataMate business had significant revenue growth due primarily to sales of its RJ-45 copper transceiver which contributed sharply to income. This represents a turn around from 2003 when dataMATE posted a watch for the year. dataMATE has been successful in reinventing itself replacing it's terminator product with 1 gigabit copper transceivers and related peripherals. In the 2006 fiscal year, we are investing development monies to add 10 gigabit transceivers to the product line for release in 2007 when chip sets for these devices become available.

Our Network Bus power distribution business also produced double digit sales in income growth in the quarter and full year. It is important to note that these gains are without Joint Strike Fighter revenues which begin limited production in 2008.

To address the needs of its customers and avail itself of additional opportunities, Network Bus products is setting up manufacturing and distribution in Asia. Construction has commenced on the facility located just outside of Shanghai, China. We are waiting delivery of machinery and equipment that will allow Network Bus to mirror its North American product offering in China. The facility will be operational in the fourth quarter of this year, and we have already begun to solicit orders.

In March, we acquired Cableco Technologies providing synergistic opportunities for Network Bus in the power distribution market as Methode can now offer customers both bus bars and braided power distribution assemblies. Cableco will also bring the market, during the fiscal year, a power distribution rail for use in application requiring bulk interconnects or blimate (ph) connections within equipment racks.

Moving to fiscal 2006 Methode is forecasting net sales between 385 million and 400 million with net income in the range of $.056 to $0.63 per share. Automotive safety technology sales are expected to increase as automakers are required to meet the federal requirement to provide passive occupant protection for front passenger airbag deployment on all vehicles for the 2006 model year and beyond.

Network Bus anticipates continued growth from its domestic business with additional increases coming from Asia as well as its joint marketing capability gained from the Cableco acquisition. These increases will be significantly offset by negotiated price reductions and forecasted lower sales from Methode's traditional north American automotive OEMs, along with the Company's continued transition away from less profitable programs. Additional expenses are also anticipated from the China manufacturing initiative of Network Bus products and Methode will continue to expense the amortization of its stock-based compensation.

The first quarter of fiscal 2005 which includes July automotive model year changeover and related OEM plant shutdowns, Methode is projecting net sales of 85 million to 90 million with net income between $0.10 and $0.12 per share.

In fiscal 2006 Methode intends to increase research and development by approximately 3.2 million as we continue to develop products which provide a higher value proposition to our customers and open doors to new OEMs and tier one customers. We believe our strategy to explain globally and diversify our automotive base as well as expand outside of automotive will be achievable to the further development of leading edge technologies such as next generation craft sensing devices, impaired driver detection systems, and advanced haptics for touch feedback switching.

In keeping with that strategy, let me take a moment to discuss the press release we issued earlier this week announcing our license agreement with Immersion Corporation. For those of you not familiar with Immersion, they are developer and licensor of touch feedback technology or advanced haptics. Perhaps best known for the technology that enables BMW I-Drive.

The Immersion technology utilizes hardware and software to emulate, electronically, the tactile information through mechanical control such as pushing a button, clicking a computer mouse or pressing a membrane switch. For example, in the automobile, Immersion technology can provide tactile sensations noticeably absent in the current automotive center stack touch screen providing a more natural experience. Instead of just feeling the hard unresponsive surface of the screen, users perceive that buttons are being depressed and released just as mechanical buttons and switches react.

The same technology can be applied to a rotary knob providing the ability to change the touch and feel of that knob to the user. Tactile feelings of barriers, [INAUDIBLE], springs and many other sensations can be easily produced. Used in combination with sight and sound, these haptic effects can enhance productivity, safety, ergonomics, and user satisfaction in a variety of applications within the auto as well as on a number of other industrial and consumer products.

From a commercial standpoint in automotive, Methode believes that future sales with transnational OEMs will rely on this design enabling produce offerings such as touch feedback switching. Likewise, in nonautomotive markets, this new technology opens a universe of applications previously unavailable to Methode. At this point Doug will provide additional financial commentary.

Thank you, Don. Good morning, everyone. Don has already discussed the sales line so let me start by walking down the income statement and discussing the year-over-year change for some of the line items. For the fiscal year other income, that's the line that's just below net sales, is 1.7 million which is down from 2.1 million in fiscal 2004. This is due primarily to winding down of joint-venture that manufactures a multifunction switch for an automotive OEM, and also due to less design engineering fees at our European automotive businesses compared to last year.

We look at cost of products sold for the year. That improved to 78.1% of net sales compared to 80.2% last year. Primarily that is the result of lean manufacturing initiatives and the approvement -- would have been greater except for costs during the year related to the transfer of manufacturing from Singapore to China and expenses related to transferring automotive tooling from an insolvent molding supplier during the early part of fiscal 2005.

Fiscal 2004 cost in goods sold included 1.4 million for the closing of manufacturing facilities in Ireland and the U.K., this represented less than one half of 1% of net sales and would have resulted in a cost of products sold of about 79.8% for the fiscal year 2004. Selling and administrative expense for the fiscal year was 13% compared to 12.3 in fiscal 2004. This increase is primarily due to initiatives to comply with the requirements of Sarbanes-Oxley. Amortization of stock based compensation primarily restricted stock awards. Increased research and development spending primarily in automotive. Expanded sales presence for our domestic conductivity business and increased corporate governance costs.

Fiscal 2004 selling and administrative expense would have been 11.6% of net sales if the 2.6 million expense related to the elimination of our dual class structure were excluded. Interest net is up year-over-year due generally to higher cash balances and higher investment rates on those balances. Other income expense net included $1 million gain on life insurance policies on two former employees. This line item also includes foreign currency gains and losses and reflects a relatively more stable dollar this fiscal year versus last year, and the mitigating impact of currency hedging during the fiscal 2005 period.

The effective tax rate for fiscal 2005 increased to 33.6% from 31% in fiscal 2004 primarily because of the change in mix of taxable foreign and domestic income compared to last year and compared to what we had anticipated for fiscal 2005. In short we had less taxable income at our foreign operations with low statutory rates.

Balance sheet items worth noting, cash balance at year-end is $87.1 million as we continue to show strong cash provided by operating activities. If you look at last year's cash flow statement, you will note that there would have been an increase in cash last year of about $23.3 million if we had not incurred the 25.8 million cost to eliminate the class B common stock. So while we show strong increase in cash this year, last year's cash increase would have been at a similar build because of underlying strength of our operations.

Accounts receivable is flat year-over-year but turns for fiscal 2005 are at about six times or 61 days outstanding. This is slightly better than the 5.5 turns last year with 67 days outstanding. As mentioned in the press release, inventories are up year-over-year primarily due to the automotive businesses having built up additional in-process customer tooling projects, the acquisition of Cableco, and the expansion of business in China. Inventory turns are at about 7.4 times of cost of products sold or about 50 days onhand.

Other current assets are down because of the current portion of deferred income taxes is reduced by about a million and a half, and pre-paid expenses are down about 600,000. Good will is up due to a deferred purchase price payment due on the automotive safety technologies business and acquisition of Cableco.

Assets net is down because of scheduled amortization, not because of any asset impairments. Accounts payable is up primarily due to the increase in inventory. Other current liabilities is up primarily due to income taxes payable and increases in other accrued expenses. Other non-current liabilities is up due to increases in reserves for contingent liabilities and for deferred compensation.

Looking at the cash flow statement under operating activities the year-over-year change in other is primarily due to the increase in inventory. Capital spending was 3.3 million in the quarter and 19 million for the year compared to last year's 6 million in the quarter and 19.3 million for the full year.

Let me close with just a few indicators in ratios. EBITDA was at 19.4 million for the quarter, 58.9 million for the year which is 15% of net sales. Return on equity for the fiscal year was at 9.6%. Working capital is 140 million, 53 million if you exclude cash. And our free cash flow is 27.9 million for the year. Don, that concludes my remarks.

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

[ OPERATOR INSTRUCTIONS ] Our first question is coming from Kevin Sarsany of Langdenberg and Company. Sir, please state your question.

Hi, can you hear me?

Yes.

Very good. I was wondering if you could at all quantify on your guidance what you're seeing, what you expect in the North American production vehicle levels, pricing or pricing trends and what your expectations are for the programs that you seem to be walking away from.

Okay. Let me take the last question first. Our criteria for walking away from a program is we cannot anywhere in the world meet the minimum margin goals. While we lowered our targets for automotive, if we can't see our way clear to make margins either through automation or in Mexico or in China, then we will take a pass on that business and that primarily has been in the multifunction area.

It's very competitive. Multifunctions have 60-80 parts fairly complicated. A lot of risk in that. If there's a problem with the multifunction switch, it's almost an automatic recall. So there's a fair amount of liability so if we can't see good margin on those programs that's where we'll walk away. And the reason for that is to chase that business, it chews up your engineering time. It's 18-24 months to bring the things to market using your engineers for efforts that really aren't going to improve your bottom line. That's the criteria there.

Would you say the number of programs that you're walking away from is relatively stable increasing or declining? You've been talking about walking away from programs for a while, which is a smart thing to do if you can't get the margins, but would you say that number of programs is --

I would say it's declined. There have been some, I guess, stabilization in that area. A lot of carryover going on and we happen to be supplying that product right now and that has benefited us on the negative carryover and negotiating a price reduction.

I would say in general it's been better. I don't see it getting worse. In terms of domestic volume, that is a bit of a wild-card and what is going to happen with Ford, or trade in general, Ford just lowered its earnings on Tuesday. We feel we've taken those volume reductions into account in our guidance and we'll just have to see how the year goes.

Is pricing getting any worse or is it pretty much the standard, I think it's 1- 5%ish?

GM announced they wanted about 20% over three years, something like that. So from that standpoint I can't say it's getting any better. Our price negotiations were as vigorous as they were last year. I don't think necessarily any worse. I think we ended up about where we wanted to. But auto's tough.

But you seem to be doing pretty good on the gross margin line, which is another question. How do I look at the paid tooling. It basically comes with no margin so if I exclude it from the top and the cogs, looks like your gross profit margin in the quarter was pretty solid. Is that how I should look at that paid tooling?

Right. It's basically a push, Kevin. There might be some slight margin profit or loss but basically a push so if you take up from the top line you should pull it out of the cost for products sold.

And with that said, it looks like your gross margin was mid-25% kind of figure, which is very good. In fact, probably an all-time high since you guys have been managing the business.

Looking to your guidance, your top line is a little bit lower than what I was expecting but understandable given what's going on in North America. But your EPS guidance is below consensus and my figures. What else is going on that the gross profit -- profitability, which I assume is pretty sustainable, given what you guys have been doing in the face of raw material costs that seem to be moderating; what's going on in between the gross profit line and operating income line?

Several things. R&D, increasing R&D spend and we think that's absolutely obligatory, so that's having an effect. There is, simply, lower volume that is going to go through our domestic facilities in auto as a result of what we've talked about in Detroit. All the lean manufacturing of the world, if you're not getting volume from your suppliers, it isn't going to help you. Price downs are certainly a factor. That takes from the top line and falls right through to your bottom line.

A year ago we decided to expense, move to restricted stocks so that's an expense that increases each year.

On the RSJs we started in 2005 so we really had the first layer of RSJs coming through. That cost us just about $0.03 per share. And with the actions that the Board is going to take this year, that'll be the second layer of RSJs, so we'll probably see an additional $0.02 or maybe about $0.05 in stock based compensation amortization in 2006.

And my last question, I appreciate you taking these questions. Could you give any indication on your new programs, your net new programs that are coming online for 2006 and compare that to last year?

We actually have more launches this year than last year. We've got 60 new launches. 60, 6-0. We exclude carryover or replacements because that's keeping your revenue line somewhat constant so we're only talking about new programs.

And what was that last year?

We'd have to look that up.

It was around 50.

We can look that up for you.

I appreciate it.

And to give you color on that. 19 launches at ASC, there's 21 in Europe, 18 at automotive safety technologies, and two in China for a total of 60.

Okay. I'll get back in queue. My only other question was Europe and looked like it performed pretty well. Maybe somebody else wants to ask that question.

Thanks.

Thank you. Our next question is coming from Mr. David Leiker of Robert W. Baird. Sir, please state your question.

Good morning.

Good morning, David.

I want to talk a little bit about on the revenue side. Can you give us some sort of ballpark of the size of AST today versus last year?

If we're looking for the full year AST has grown 72%. They're at about 26 million for the year coming off of about 27 million last year.

And what would you expect that to do here in '06?

For the budget I think we're showing another 10 million in growth.

And does that level off at that pace or can you still grow from that?

We can still grow.

Yes, there's '07 growth and '08 and '09. Right now our flattening out with some slight increase, but almost too soon to tell. A lot depends on how Delphi holds its market share which right now it appears that they will through '09, '10.

And the business that you're exiting, what's the scale of that? What's the revenue impact from that?

Let's say 8-10 million, David.

Is that a relatively consistent number over the last couple of years and going forward?

I'd want to verify that, but I would say that's about right.

And then the tooling number, what do you have embedded in that for your '06 number?

I think we're looking at about 7 million for next year.

What was the reason it jumped so much in Q4?

The reason it jumped in Q4 quite honestly, is that there's a lot of work involved to bring all -- do all of the final accounting to get the bill out and record the sale. And with those same people being busy with 404 initiatives we got a late start on that project this year. We normally would have liked to see that more readily throughout year.

But it's still somewhat the wage we were looking for. You have to fee-fab, and then the automakers take their time since it's your money.

But we typically have -- we established the goal a couple years ago to get that tooling done within, I think it's 60-90 days afterwards and we did not hit that goal this year.

And so your full year tooling number was around 17 million?

17.2.

And that was up pretty meaningfully from '04. Full year to full year? Is that some sort of indication of the pace of new business that you launch in '06? Is that what you're driving at?

Probably.

So when you look at 17 million dropping to 7 million, does that mean the incremental growth the following year is less?

Probably more of an indication instead of customer funded tooling see some of that gets pushed to, the supplier, paid for more of the tooling.

Okay.

And I think that 7 million number we probably need to scrub a little more.

And still going to be weighted to the second half of the year?

Yes, right.

And then one last thing here is, we look at your full year guidance and you just take the mid points of the Q on a full year and take out the insurance gains, it's about an $0.08 a share decline and there's two pennys here in the first quarter. Is that two pennys a quarter year-over-year decline something that we should expect or is the quarterly weighting of that something different?

It shouldn't be pretty much over each quarter.

I'm talking about the year-over-year change. The $0.08 delta for the full year and it's $0.02 in Q1. Is it Q2 in each of Q2, 3 and 4? Or is there some different skewing of that quarterly?

We haven't looked at it by quarter but there probably is a little bit of skewing but I can't give you an answer by that right now, David.

What do you think your tax rate is, or what do you think you're going to be accruing for a tax rate?

We're looking at it because of what happened this year. I think going forward we're still comfortable with about a 31% rate. What we had this year were just some things that we didn't anticipate and so we had shifting of income and some changes in carrying value of some of the deferred taxed assets that we had. And so we ended up with the higher effective tax rate this year. But as far as our guidance we're incorporating about a 31% rate.

Okay, great. Thank you.

Thank you. Again, ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad at this time.

Our next question, again, is coming from Mr. Kevin Sarsany of Langenberg and Company. Sir, please state your question.

Europe.

It's still there.

Yes, it's still there. But from what I've read, production levels over there have been flattish to down. On the call you said it increased. Is this new wins that are happening or what's going on there?

Wins from two years ago. Malta is growing, Scotland is growing.

Are there any specific OEMs that you can talk about?

I do have the one scheduled. But you're right. The European builds are flattening out. These are in no particular order. These are launches this fiscal year. We've got Jaguar, Volvo, Fiat, Alpha, Ford, Aston Martin, Mitsubishi and -- did I say Jaguar? Yes. Those are the European launches taking place really this summer through October.

And on the Network Bus business. You're building a plant, a facility in Asia, it seems like a big jump for a business that's been 15-ish million to date. What are the opportunities over there, and who are the customers and can you talk about that a little bit?

Sure. What we're doing with Network Bus -- and we have a Shanghai facility already where we moved our Singapore group there. This facility is very close to it within walking distance and so we're sharing a lot of the overhead there. But many of Network Busses customers like IBM, and it's got probably a Fortune Fifty list of customers, Cisco, are producing product over there and have been for a while and almost demanding that if you want to continue business with them you need to be there. The carrot is that we'll give you your own fair share of business if you set up shop. There's really an untapped market for Network Bus.

So it's just current customers you're migrating over there and hopefully increasing your volumes that you're currently already getting by shipping there.

Correct. And in contrast to automotive, the margins on that product are considerably greater so that you need as much revenues to have a significant effect on your P&L.

Okay. Thank you.

Our next question is coming from David Leiker of Robert W. Baird. Sir, please state your question.

I just want to follow up on a couple of things on the revenue side. A couple of moving pieces there, the tooling and exiting businesses and pricing on the negative side and growing your business in AST on the other side. Where do we hit inflection point that you start to put up some revenue numbers where you're growing at a reasonable pace faster than what the market is growing? When do those offsets disappear?

I would say it begins in '08 and very definitely in '09 and '10.

So on a net basis you would expect relatively flat build environment relatively flat revenue number?

We'll have some growth because we're continuing to win programs. And, as I said earlier, we're not shedding off programs -- that's probably tapered off, let's say it that way. So modest revenue growth. We have taken into account price downs.

What do those run on in that 3-4 range are you running?

If you were to look at our total automotive. I don't have it broken out domestic versus European, but it ran a point and a half. Across all of our auto business. Higher for Ford, less for the premium vehicles in Europe.

And the last thing here, can you give us a revenue breakdown of your segments? Do you have that available on your call here?

Sure, for 2005?

If you could do fourth quarter this year versus last year.

Sure. We looked at optical, Dave, that's up about 6% year-over-year to about, for the second 3.9 million in sales. We look at the other segment is up about 44%, that group includes the Network Bus, and that's at about 7.7 million for the fourth quarter. And if we look at -- automotive is up for the quarter about -- this has tooling in it so you'll probably want to adjust for it, but it's up about 15% quarter -- or last year's quarter to fourth quarter, to about 90 million. And in the nonautomotive, that's up about 11% to just about 14 million.

I don't have a calculator in front of me. What was does not work out to the auto end of revenue number for Q4 of last year?

Last year's automotive -- and, again, without adjusting for the tooling, is about 78.1 million last year.

So you're up about 3 million bucks ex-tooling. Thank you.

Gentlemen, at this time I'm showing no questions in queue.

Indeed we will conclude the call and wish everyone a pleasant and safe summer.

This does conclude today's teleconference. Thank you all for your participation.