Methode Electronics Inc (MEI) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Methode Electronics Incorporated first-quarter fiscal-year 2006 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) 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 industries, such as general economic conditions, interest rates, consumer spending patterns, and technological change. Other factors which may result in materially different results for future periods include market growth, operating costs, currency exchange rates, evaluation 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, 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 first-quarter fiscal 2006 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 on our website. With me are 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 the first quarter of our 2006 fiscal year with net sales of 94 million and net income of 4.7 million or $0.13 per share. This compares to last year's results of 85 million in net sales and net income of 4.6 million or $0.13 per share, a 10.8% increase in sales and a 2.5% increase in net income over the prior year's period.

In our Electronics segment, our 1-gigabit copper transceiver continued to receive a consistent order flow, providing solid sales in the first quarter. Also, PCMCIA cards for use in laptop computers, or more commonly referred to as PC cards, continue to sell well. We have recently announced our new line of express card packages and connectors. The express card technology is a smaller card developed as a next-generation PC card by the PCMCIA standards organization, and will be featured in newer computers as the industry phases out the larger, slower cards. The new express card supports the PCI express interface with a transfer rate of up to 500 megabits per second, compared to the old PC card with transfer rates of 10 megabits per second.

Our Shanghai facility continues to develop their infrastructure to accommodate new business. As an example they will supply connectors for our express cards as the market evolves to the new standards. In addition, they're currently running three automotive lines and anticipating have a few more as production of the GMT900 platform progresses.

Recently, we added to the management structure in China by appointing Mark Davis (ph) to be general manager of Methode's connector operations in Shanghai in addition to his current role managing our connector operations stateside. Also, Shang Jang (ph) has joined the Company as general manager of the Shanghai plant. Shang has held various senior management positions in Shanghai with companies such as Delphi Automotive Systems, Whirlpool, and Xerox. We congratulate both gentlemen on their appointments and welcome Shang to our organization.

In addition to existing business, Methode launched approximately 43 new automotive programs in the first quarter, including a new steering angle sensor for Chrysler and a clock spring on the Honda Civic in the U.S. We also maintained a busy launch schedule for our sensing pads used in the passenger occupant detection system for air bag deployment.

In Europe, we launched cruise and Bluetooth controls for Aston Martin; navigation and steering controls for GM Brazil; steering wheel controls for the DaimlerChrysler B class; TipTronic controls for shift by wire technology on the DaimlerChrysler M class; and several IP switches on the new Fiat Alfa. This business represents approximately $17 million in annual business at Codevyons (ph) as included in our previous guidance.

During the first quarter in Europe we have been awarded new annual business of approximately $6 million directly from Audi and Volkswagen, and received an award as a Tier 2 supplier to a Japanese automaker. Products include hidden switches for brake and reverse lights and a new product to sense four-wheel-drive engagement. These awards represent significant customers for our Malta operation as well as an entirely new product in the drive type sensor. We congratulate our European team on these important sales wins.

In the manufacturing area, offsetting Methode's lean manufacturing benefits for the quarter, several business units experienced the effect of rising material costs. Increases were most notable on petroleum-based products such as silicone, urethane, and other resins, as well as a significant rise in the cost of copper. As an example, our power distribution business has reported that copper high-grade peaked in mid-August at $1.80 per pound, compared to approximately $1.25 per pound in the year-ago period. We anticipate additional material increases as the effect of hurricane Katrina ripples through the economy.

Increased inventories were mainly the result of preparing for automotive production line moves to Mexico, as well as a twofold increase in vehicle program launches during the first quarter compared to last year. It is expected that this inventory will flow through into sales as we progress through the launch season and complete our Mexico line shifts by the end of this fiscal year.

Our other business segment produced sales increases from power distribution products, shipped to large technology OEMs who increased orders in the first quarter. This business segment included its first full quarter of sales from the Cableco acquisition. Our Cableco product line move to Mexico is near completion, and we anticipate this business to contribute to earnings in the third quarter of this fiscal year.

The network (ph) about to start up in China remains on track. Currently they are providing prototype designs to both U.S. companies conducting business in China as well as the Chinese Telecommunications Company.

Looking at our second quarter, Methode expects to achieve second-quarter fiscal 2006 sales between 102 and $107 million, and earnings per share in the range of $0.17 to $0.19. The Company is maintaining its previously announced sales guidance for fiscal year 2006 of between 385 and $400 million, with net income in the range of $0.56 to $0.63 per share. At this point I will turn the call over to Doug for his financial review. Doug?

Thank you, Don. Let me start with the sales activity for our three segments. All net sales numbers will exclude customer tooling sales, which were about 700,000 in the current quarter compared to approximately 300,000 last year.

Our automotive businesses within the Electronics segment had first-quarter net sales of 69 million compared to last year's 64.8 million, a 6.5% increase in automotive sales year-over-year. The improvement is primarily due to increased sensor sales and new launches at our European automotive businesses, which was offset by reduced sales due to price concessions to our traditional North American OEM customers.

The nonautomotive businesses in the Electronics segment had first-quarter net sales of 11.8 million, up from 10.8 million in fiscal 2004. As Don mentioned earlier, this improvement is primarily the result of increased prototype sales of express card related products and sales of 1-gigabit copper transceivers. The other businesses in this group were flat year-over-year.

The businesses in our Optical segment had sales of 4.1 million compared to 3.8 million last year. This is primarily due to improved sales of telecommunication products in Eastern Europe.

The Other segment had first-quarter sales of 8.3 million compared to 5.4 million last year. In this segment we had new sales from the Cableco Technologies acquisition, increased organic sales of power distribution products, and improved sales from our testing labs, in part due to expanding the service offering to include x-ray analysis and water testing.

Now let's look at the year-over-year changes for the line items on the consolidated income statement. Other income is 225,000, which is down from 655,000 last year. This is primarily due to lower design engineering fees booked at our European automotive businesses compared to last year.

Cost of products sold for the quarter was 79.7% of net sales. This is the same percentage as last year; however, there are some dynamics behind this. Direct material costs as a percentage of sales are up 3% year-over-year, primarily due to the copper and various petroleum-based product increases. This is offset by the effects of the improvements from the lean manufacturing initiatives that were initiated throughout fiscal 2005. This resulted in direct labor and factory overhead being down 3% as a percentage of sales.

Looking at selling and administrative, this was 13.7% of net sales compared to 13.4% last year. This increase is primarily due to the fact that we are into our second year of restricted stock awards, and therefore we are incurring another layer of stock award amortization. We also had increased amortization of intangible assets, which is primarily related to recently acquired technology licenses.

Interest net is up about 400,000 year-over-year. This is generally due to average higher cash balances and higher investment rates on those balances. Other income reflects net foreign currency losses in the quarter compared to last year's FX gain.

Looking at the balance sheet, Accounts Receivable is down slightly from year-end, but would have been lower yet due to the decreased sales in the first quarter compared to the fourth quarter. What we had is the timing of some payments from a large automotive customer that resulted in receiving only two payments in the quarter rather than the usual three. We received that third payment for 5.6 million on the second business day of the second quarter.

Turns for the quarter are at about 6 times, or 61 days outstanding. This is slightly better than the 5.9 turns and 62 days last year. As mentioned in the press release, inventories are up over year-end primarily due to higher initial inventory to support 43 new automotive launches; the buildup of finished goods inventory for select automotive product lines being transferred to Mexico; and we had more customer tooling projects in-process compared to year-end. Inventory turns are at about 6.6 times cost of products sold or 55 days on hand.

Other current assets are up 1.1 million due to prepaid insurance. Goodwill is up due to accrued contingent purchase price obligations on the seat sensor business. Intangible assets are up because of the technology licenses signed this quarter. Accounts Payable is down because we ended the quarter on a large disbursement cycle, and also because our Shanghai operation made payment on some cattle (ph) equipment received before year-end. Other current liabilities are down primarily due to the deferred purchase price on our seat sensor business and reduced income taxes payable. Other liabilities showed no material change from year-end.

On the cash-flow statement, the change in cash provided by operating activities is primarily due to the working capital account changes, primarily Accounts Payable, Accounts Receivable, and inventory, which we have already covered. The change in cash used in investing activities is due to a deferred purchase price payment on the seat sensor business and upfront payment on the technology licenses.

Under financing activities the line item titled Repurchase of Common Stock is for the repurchase of a portion of the stock issued to the sellers of Cableco Technologies and stock repurchased from employees to cover the tax withholding due on restricted stock awards that vested in the quarter. Don, that concludes my remarks.

Thank you, Doug. We should probably point out that the large payment from the automotive customer was not late; it was just simply the way the their --

Just the payment cycle that they were on.

Okay. We're ready to take questions.

(OPERATOR INSTRUCTIONS) Kevin Sarsany with Foresight Research.

A couple of housekeeping. What was the revenue for AST?

Sure, hold on a minute. In the quarter, the revenue for AST was 13.9 million.

Okay. What was the contribution from Cableco in the quarter?

Cableco for the quarter is probably not contributing -- if you're talking about sales --.

Yes.

Less than 2 million.

Okay. I guess you mentioned in your prepared remarks that the 17 million I believe in Europe was already in your estimate. Was the Audi and the Volkswagen 6 million you mentioned also in the previous estimates?

For the year, no. Because that will launch beginning -- some of that will launch next year through '09.

Okay. So that is new. You beat the numbers, the midpoint by about 7-ish million; so it's about 13. I am just wondering why you kept your full-year guidance the same. Are you seeing something at Detroit? In fact could you talk about the volumes from Detroit in combination?

I think what happened during the quarter was with the employee pricing discounts that everyone has enacted, that pulled some business into the first quarter. Whether that is going to carry through -- I realize some of them have extended it now -- whether that's going to carry through in the second and third quarters, I doubt that will be as brisk as it has been. So there were orders pulled forward and that is why we maintained our guidance.

You mentioned price. I think you mentioned it last quarter. You talked about it being I believe 1% to 3%. Has that changed at all?

It has not changed. I can say the pricing pressures have continued to increase, because again because of the family pricing or the employee pricing that they are offering. So they are looking to make up that money. So the pressure is there. We have not granted any additional price decreases, no.

Okay. Okay, that's it, thanks.

(OPERATOR INSTRUCTIONS) Laura Thurow with Robert W. Baird.

I just wanted to follow-up on the question about revenue pulled ahead due to the employee pricing. Where are you seeing higher build rates? I don't know if you can talk about that at all.

I think it had the most effect, because the seat sensor goes across a lot of companies and platforms, so it has the most effect on the AST and the most effect on the business we have with GM through AST, which again goes through Delphi, but it was pulled through because they started the program first. Probably the least effect was with Ford.

Okay, great. Thanks. Then another follow-up on the comment about the less than 2 million revenue from Cableco. Did you say that you had that in your numbers for the full quarter? Is that a good run rate quarterly going forward?

Yes, because when we acquired Cableco, Laura, we indicated that the trailing revenues for the company were about 6.5 million. So while we expect better things going forward, as we are just getting off the ground we're at about that run rate. Actually a little bit better.

We are also in the process of -- actually concluding the process of transfer manufacturing to Mexico.

Okay. I just wanted to ask you a question about the sensor for the occupant detection. We saw an article in the Automotive News a couple weeks ago that talked about a Japanese supplier supplying some of these sensors. Are you giving that sensor to someone other than Delphi? Or is that Delphi losing share in the market? Any kind of color you could provide on that.

I saw that article. I don't believe Delphi is losing share. There is competing technology out there. But we are supplying that sensor solely to Delphi for their system. But there are competing technologies. But also Delphi has picked up business. I don't think in this quarter, I think in previous quarters, where other systems have had difficulties. So theirs is still the predominant system.

Okay. Do you have any sense of the share split, Delphi versus others, as we go towards (multiple speakers)?

I am not sure I want to speculate on that. It is significant.

Okay. Just looking at the numbers in the second half guidance, implied guidance versus the first half, down a bit on the earnings line. As I look at the last couple years it has been kind of -- second half has been kind of flat to modestly above the first. Is that just -- is there something different in the seasonality going on? Or is that the pull ahead of some of the sales from the employee pricing?

A little pull ahead and we have also got the month of December in there, in that second quarter.

With the shutdown?

Third quarter, excuse me. That's third quarter.

I'm sorry; I don't know what you mean by month of December. Just normal seasonality of was there something last year?

(inaudible) third. I would say it is normal seasonality and we do believe that they have pulled orders into the second quarter.

Got it; okay. Thanks. Lastly, I just wanted to ask about your revenue growth as you see it. Last quarter and then this quarter again, double-digit revenue growth. Obviously a lot of new product launches. Yet for the full-year guidance, just kind of plus or minus 2% year-over-year. Is there something different going on going forward than we have seen in the last two quarters? Is it again seasonality?

I don't know that I would say there's anything different going on. I don't know that there was anything unique going on or different from last year's quarter.

Okay, just the way the numbers flow when the new business comes online?

Yes.

Okay. That's all I have for now. Thanks a lot.

(OPERATOR INSTRUCTIONS) Kevin Sarsany with Foresight Research.

I couldn't get enough. Quick question on the European market. What are you seeing there? I am hearing builds are down about 3% to 5%.

I would agree with that. We are not a predominant player in Europe, so there is room for us to grow at the expense of our competitors. The Volkswagen business was at the expense of a competitor. So I don't know that that necessarily relates directly to us. But it has -- our business with Jaguar is down. Business Aston Martin is up, but the volumes there are not necessarily significant. So it is having an effect; but I think it is being offset by the fact that we have over the years won additional business.

Okay. Can you talk about the Honda Civic program? Where you are, where you expect, and kind of comment if you can kind of broadly. You have talked about the Honda Civic business being an entree into other Japanese OEMs. You have mentioned a new Japanese supplier. So could you kind of put that in how well you are doing, where you see it going, and also kind of is that getting some attention from Japanese providers? And how are you trying to accelerate that?

Sure. We are in full launch now on the Honda Civic. That is actually I think why we could actually be specific on the vehicle. Honda has been very pleased. They have been in the plant as recently as a month ago. Pleased with the launch. That should allow us to carry over to additional products; and generally when they bring out a new supplier they do a dual sourcing strategy. We originally picked up the Honda business because one of their other suppliers had fallen out.

They will almost do an 80/20, thereabouts, split; 20% to Methode, 80% to the first supplier; and then gradually increase that and carry us over onto additional platforms as they are comfortable with us. So we have had to, in the last two years, from maybe 18 months from announcing that business, we have had to prove ourselves. I would say we are coming to the end of that proving cycle. We probably have another six months or so to go. Then we should be eligible for additional business, not just in clock springs but in others.

Penetrating additional Japanese suppliers, they either have to have had a problem with one of their suppliers of clock springs or multifunctions or some of our traditional products. Or, and more likely, it is going to be that we have to penetrate them with new products, such as the technology we talked about with Immersion in a press release a couple of months ago. So that takes a little bit longer. I think we have discussed that in the past.

Then the business we talked about being a Tier 2, and that is in Europe, our -- the terms of the contract don't allow us to at this point to discuss that much. Other than I can say it is not Honda. So we are pleased with that entree, even at a Tier 2.

Your comment about for Honda, the other supplier falling out, and then your comment about getting new business from the Japanese OEMs, and probably can't replace somebody, probably with new product; what happened with Honda and this supplier? Was it just something other than having the right product at the right time and meeting their needs? Or was it more some other relationship fall through?

Probably all of the above, and I don't know that it's appropriate for me to explain who that was. But there was a window of opportunity that opened up and Methode was there to take advantage of it. Again, if you were to look at a Toyota, which has brought many of its traditional Japanese players to the U.S. with them, if we were going to penetrate them on our traditional products you would almost have to have that happen. So more likely in a Toyota, it is going to be new products that we introduce that they want to put on their platforms.

Your comment about Katrina and the effect on raw material prices and that; are you implying that you expect gross margins to go down sequentially next quarter? Or where do you see that playing out?

We're comfortable with the guidance that we are provided in the second quarter. But I don't think anyone knows what the full effects are going to be, mainly petroleum-based products, on the full year, on anybody's fiscal year. It is too soon to tell. So we make mention of it. It is going to put pressure on molding resins, for sure. The refineries, they're going to put a lot of emphasis on producing gasoline; so it's going to have an effect. Whether it is -- how dramatic it is I think that remains to be seen. Like I said we are comfortable, though, with our guidance so far.

All right, thank you.

Laura Thurow with Robert W. Baird.

I just wanted to follow up. Can you talk a little bit again about the Audi Volkswagen business that you won in the quarter? I missed a little bit of the detail. You said that is hidden switches for brake lights and what else is that?

Brake and -- brake switch and brake light. Those are both hidden switches out of Malta. We're replacing, at least in Volkswagen, we are replacing someone. I won't say it is cross-platform on VW, but let's say it is close. (multiple speakers) $6 million in business is important, but what is even, I think, more significant is the fact that it is Volkswagen and it is Audi. Those are -- we have done some business with Audi. We have not done anything with Volkswagen, so that is significant for Malta.

Okay. Great, thank you.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference back over to your host to conclude.

I think we will wish everyone a safe and pleasant Labor Day weekend and good day. Thank you.

Thank you. This concludes today's conference. Thank you all for your participation.