Methode Electronics Inc (MEI) 2007 Q1 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Methode Electronics Inc. first-quarter fiscal year 2007. 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.

Statements in this conference call on September 7, 2006 containing information on Methode's first-quarter and year-end reporting period for fiscal 2006 and offering guidance for its first-quarter and full-year reporting periods for fiscal 2007 are forward-looking statements that are subject to certain risks and uncertainties.

Our business is highly dependent upon three large automotive customers and specific makes and models of automobiles. The Company's results will be subject to many of the same risks that apply to the automotive, computer and telecommunications industry such as general economic conditions, interest rates, consumer spending patterns and technological changes. Other factors which may result in materially different results for future periods include Delphi Corporation's bankruptcy petition, other significant customer bankruptcy filings, restructuring, operational improvement in cost reduction programs currently under review by Methode, the current macroeconomic environment including higher petroleum and copper prices affecting material and components used by Methode, potential manufacturing plant shutdowns, my automotive customers, potential strikes at automotive customers and specific fluctuations and demands for certain automobile models.

In addition, market growth, operating cost, currency exchange rates and devaluations, delays in development production and marketing of new products and other factors set forth from time to time in our reports filed with the Securities and Exchange Commission impact our business. Any of these factors could cause our actual results to differ materially from those described in the forward-looking statements. The forward-looking statements on this conference call are subject to the Safe Harbor protection provided under the securities laws.

All information on this conference call it is as of September 7, 2006. Methode undertakes no duty to update any forward-looking statement to conform to statements, actual results or changes in the Company's expectations.

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

Thank you, Tina. Good morning everyone. Thank you for joining us today for our fiscal 2007 first-quarter financial results conference call. Today I'm joined by Doug Koman, Chief Financial Officer; Bob Kuehnau, Methode's 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.

Methode completed the first quarter of our 2007 fiscal year with net sales of $104 million and net income of $4.5 million, or $0.12 per share in line with our guidance. For the first quarter, sales in the automotive segment improved due to increased automotive switch sales in Europe; reaching anticipated production volumes in China for General Motors; and increased sales in the U.S. for our seat sensing pad used in a passive occupant detection system.

Other U.S. automotive sales in the first-quarter remained flat compared to last year's first-quarter. Methode launched 22 new automotive programs in the first quarter including programs in North America for steering wheel switches, steering angle sensors, ignition locks housings and clock springs across several platforms. We also launched a number of new programs for our sensing pad.

In Europe, launches included several hidden switches most notably one for Volkswagen, a relatively new customer for Methode in Europe. In China, we transferred our paddle switch line from our Scotland facility into our Shanghai operation. This switch is a techtronic transmission shift button located behind the steering wheel. The techtronic function allows the driver to override the automatic shift mode. The move to China will maximize our manufacturing efficiencies as this product is now shipped to Japan for vehicles sold on the Japanese and European markets. Also in China we launched steering wheel switches including cruise, remote radio and navigation switches for a vehicle to be sold in both the Asian and European markets.

In addition to launching several programs in the first quarter, Methode was awarded new automotive business. This business will total approximately $10 million in sales when it reaches full production. In the U.S. we were awarded steering wheel switch business across various platforms as well as our fourth Honda (indiscernible) program for the 2008 model year. We are pleased that our Honda business has grown steadily across several platforms over the past few years demonstrating the confidence this automaker has in Methode's capabilities.

In Europe we gained new business for techtronic transmission shift buttons earmarked for the 2007 model year. In addition, new business was gained for starter control units in 2008 and a pedal box switch in 2009. New business awarded in China includes hidden and ignition switches for the 2008 and 2009 model years.

Recently we promoted several key managers in our automotive segment; Tom Reynolds was promoted to senior vice president of our global automotive group. Tom has been with Methode for five years as vice president and general manager of the North American and Asian automotive operations. Tim Glandon, who has been in charge of our highly successful seat sensor business, AST, has been elevated to vice president and general manager of our North American automotive operations reporting to Tom Reynolds.

Ted Kill has rejoined Methode as our vice president of global automotive sales and marketing. Ted managed Methode's U.S. automotive operations in the '90s and was highly instrumental in the acquisition of Methode seat sensing business which became AST. With the growth of our global footprint we expect these changes to help unify our worldwide automotive operations as well as facilitate the sharing of best practices across all of our business units. Equally important it will present a global Methode to our automotive customers worldwide.

Turning to Methode's interconnect segment, this group has been actively engaged in preparing for the third generation, 3G, cellular technology rollout in China. This latest generation of mobile services will provide better quality voice and high-speed data access to the Internet and multimedia services. Currently Methode's Power Distribution and interconnect segments are quoting and developing prototypes for prominent multinational OEMs. Products such as Methode's bus bars add to the reliability of the distribution of power through routers and base stations while providing circuit protection.

On the receiving end, PC and ExpressCards will enable the new technology to transmit and download information at greater bandwidth and faster speed. You may find of interest an August 31st, 2006 Wall Street Journal article on NovAtel's laptop wireless broadband cards. Methode supplies the card casing and connectors discussed in this article.

In addition, we are supplying the packaging for a new ExpressCard mediate remote for Bluetooth enabled notebooks. This product will enhance presentations on a notebook by controlling a variety of software such as PowerPoint remotely from up to 30 feet away. This media remote fits in the laptop's ExpressCard slot for recharging and storage.

Sales and profits of our fiber optic products increased in both the U.S. and Europe. And our copper transceiver product also had top and bottom line increases for the quarter. Methode's Power Distribution business reported increases as several key industries we serve continue to generate consistent sales. For instance, telecommunication applications have grown at a steady pace as our multinational customers seek to establish an enhanced infrastructure elements are around the globe, including developing the 3G technology infrastructure in China which I mentioned earlier.

We have transferred several bus bar programs to our China facility. This not only builds up our Asian operation but also frees up manufacturing capacity in our domestic plant to support the U.S. marketplace. We continue to develop and ship prototype design applications for the domestic medical, aerospace and military markets. The ability to manufacture and ship on a global scale has positioned this business segment for steady profitable growth.

Looking forward, we continue to closely monitor the automotive OEM production levels and vehicle inventories especially due to the recent announcement by Ford to dramatically lower its production volume for the remainder of the year.

Looking at our second quarter, Methode expects to achieve second-quarter fiscal 2007 sales between 105 and $108 million and earnings per share in the range of $0.09 to $0.11. We are adjusting our full year sales down by $10 million. However, we are maintaining our full-year income guidance. Sales guidance for the 2007 fiscal year is between 420 and $435 million with net income in the range of $04.0 to $0.48 per share. The full-year earnings per share range includes the previously announced business reorganization charge of $0.06 to $0.08 we anticipated during the year.

At this point I'll turn the call over to Doug for his financial review.

Thank you, Don. Let me start with net sales activity for the four reporting segments. All sales numbers will exclude customer tooling sales which were negligible in the current quarter compared to about 700,000 last year. The automotive segment had first-quarter net sales of $74.1 million compared to $68.2 million last year, it's an 8.7% increase in automotive product sales year-over-year. The improvement is primarily due to increased weight sensing product sales and new launches in Europe and China. Sales to our traditional North American OEMs were relatively flat year-over-year.

The interconnect segment had net sales of $17.8 million in the first quarter. This is up from $16.6 million last year. This segment had increased sales of fiber optic connectors and patch cords in Europe, increased sales from our European connector distribution channel, increased domestic fiber-optic datacenter cabling installations, higher wide area network PC card packaging to mobile phone providers, and modest increased sales of the high-speed one gigabit copper transceivers. The balance of the businesses in this segment continue to experience sales declines because of the competitive pressures from low-cost Eastern European and Asian manufacturers.

The Power Distribution segment was up year-over-year with sales of $10 million in the current quarter compared to $6.8 million last year. The increase for the quarter is primarily due to increased demand for Power Distribution products primarily with two large domestic OEMs for computer peripheral and transportation applications. We also had increased sales from the new bus bar operation in Shanghai that opened in late fiscal 2006. The other segment had first-quarter sales of $1.7 million in both the current quarter and last year.

Continuing down the income statement, other income for the quarter was $184,000 compared to about $225,000 last year. This decrease is primarily due to less design engineering fees recognized at our European automotive business and lower domestic joint venture income as the joint venture product nears end of life.

Cost of product sold for the quarter was 81.1% of net sales compared to 80.1% last year. The increase is primarily due to price reductions from North American OEMs for our legacy automotive products, increased material costs primarily copper, various petroleum-based products and other precious metals, and automotive launch issues in Scotland and Shanghai.

Selling and administrative expense in the quarter was 13.3% of net sales which is the same as the first quarter last year. Interest net was $819,000 for the quarter compared to $500,000 last year. This is primarily the result of higher interest rates on short-term cash investments. Other net was a loss of $68,000 in the current quarter compared to $95,000 last year; both the current and last year's quarters reflect the impact of currency losses at our foreign operations.

The effective tax rate in the quarter was 37.3% compared to 31% last year. This reflects the establishment of a valuation allowance for potentially non-deductible stock-based compensation. Also on the income statement you'll see that we had a small cumulative effect for an accounting change related to 123(R), not a material amount but we disclosed it as a cumulative effect of an accounting change.

If we move to the balance sheet, accounts receivable are $60.8 million. This is down from $74.2 million at fiscal year end. This is primarily the result of decreased sales in the first quarter compared to the fourth quarter, primarily due to shutdowns in the automotive segment for summer vacations and model year changeovers. The reduction also reflects the sale of $4.6 million of pre-petition Delphi receivables for $3.1 million.

Inventory is $51 million. This is up from $45.7 million at year end. This is the result of our automotive operations in Malta and Scotland building inventory in anticipation of August vacation shutdowns. Scotland also built up inventory to avoid line stoppages at certain customers as they work through their process issues. Scotland also increased inventory to meet the higher sales scheduled for the second quarter.

We continue to build finished goods inventory banks in advance of transferring lines to Mexico here in the U.S. And we saw increased shipping volumes through the hub for General Motors from our Shanghai subsidiary.

Other current assets are $13.6 million. This is down from $19.7 million at year end due to refund of temporary withholding taxes in Germany associated with our cash repatriation in fiscal 2006 and the change in the current deferred tax assets primarily due to the sale of the Delphi receivables.

Property plant and equipment was $87.5 million down from $90.5 million at year end primarily due to depreciation expense exceeding capital expenditures in the quarter. Goodwill is unchanged from year end, intangible assets are $16.5 million down slightly from the year end $17.5 million. This is just due to normal amortization. Other assets are relatively unchanged compared to year end.

Accounts payable are $32 million down from $41.6 million at year end. This is similar to the reduction in accounts receivable in that it reflects the decrease in sales in the first quarter compared to the fourth quarter related to the shutdowns for the summer vacations and model year changeovers. We also experienced a large cash disbursement cycle right at the end of the first quarter.

Other current liabilities are $30.4 million down from $32.6 million at year end primarily the final deferred purchase price payment for the acquisition of the passive occupant weight sensing business. We also paid some estimated taxes in the quarter. Other liabilities are relatively flat compared to last year.

Moving to the cashflow statement. Increasing cash provided by operating activities is primarily due to net income, working capital account changes primarily accounts payable, accounts receivable and inventory. Also the refund of temporary German withholding taxes and proceeds from the sale of the Delphi receivables. The reduction in cash used in investing activities is primarily to the result of less capital spending compared to last year, a smaller and final deferred purchase price payment on the weight sensing business and last year's quarter included technology license payments where we had none in the current quarter.

The reduction in financing activities is due primarily to fewer options being exercised this year and last year's quarter included the repurchase of a portion of the stock issued to former owners of Cable Pro Technologies under the terms of the purchase agreement.

Don, that concludes my remarks.

Thank you, Doug. I have one additional comment before we take your questions. We have identified the date for our 2006 investor day. It will be held on Thursday, November 9 at our headquarters here in Chicago. Joey will be sending out invitations by mail in the next couple of weeks and will follow up by e-mail. For those of you planning to attend the Baird industrial conference on November 7 and 8, our event will be held the following day.

We look forward hosting the investor day and showcasing Methode's product technical capabilities in the breadth of our (technical difficulty) served.

Tina, we are ready to take questions.

(OPERATOR INSTRUCTIONS) David Leiker with Robert W. Baird.

Good morning all. I want to dig through a couple of revenue related questions. Is there a way you can give us a revenue breakdown by segment here in the quarter?

Yes, I just went to that, David.

Did you give the revenue number or just the percent change?

No, I gave the revenue numbers. But rather than repeating it I can get back to you off-line or that information will be in our Q which will be filed later today.

But Keith and David have it. I have been jumping off and on.

Okay. I covered it. They should have it.

Did I hear you say that currency was negligible impact?

Yes. It was about 400,000.

And the tooling number, I'm sure you gave that but just --?

In the current quarter it was really negligible, it was maybe about 30,000. Last year's quarter had about 700,000.

Why is it that the tooling number falls -- is that just a seasonal item in here?

Yes, traditionally the first quarter has been fairly light as far as closing out those projects.

And it is dependent upon when we'd be (inaudible).

What would you expect your tooling revenue number to be here in the fiscal year?

We're looking at probably 5 million.

The whole year?

Yes.

Why is it down so much from last year and a third of what it was two years ago?

What we're doing is we are going to be amortizing the sales and related costs over the life of the program, the related program. So going forward what you will see is a smaller number this year until we get to a normalized run rate again.

Obviously I don't understand the accounting how that flows through the income statement.

It has minimal effect on the income statement, David, because it is just basically about a breakeven operation on customer tooling. But it's just the recognition of the revenue and the cost over the life of the program that the tooling is related to.

I see, so it's a timing of both of those line items.

Correct.

Okay. I noticed a lot of new business here out in the '08, '09 time period. Is there anything meaningful that starts up before that?

I don't have the next year's launch schedule. We went through the ones we are launching now. Meaningful meaning?

You quantified some of them -- $10 million here or you know --.

-- just look at previously announced --

Do you have an aggregate number of what that totals this year and next year?

We probably can provide that. I don't have that.

We will follow up on that. On the other side is there anything that is running off for you, any programs that are running off?

There is always programs running off and we've --

That aren't being replaced.

Sure. We can provide you that but we said in the past that we are in runoffs in any program that -- the new program we couldn't realize profits we were looking for.

Where do you think the new business number exceeds the runoff number?

Now we will be getting into me providing fiscal '08 and '09 guidance and I'm not comfortable in doing that.

Okay. What kind of -- what are your expectations -- where are you on the ramping up of the AST business and the new business that they had at the time you bought it? What is the timing on that reaching that revenue threshold you're looking for?

We are there and I think we said in our last quarter's call that we will maintain that for the next couple of years.

And that is like a -- is that a $50 million number?

Is that what that was?

It's probably closer to 60. And, David, model year '06 was the year where 100% compliance with the [NHTSA] standard kicked in. So that is why we are going to be at -- that business will increase only if Delphi is able to increase their market share.

And do you have a sense of what share that market Delphi has?

They have not commented on it and we only speculate. So I don't think we want to do that.

Well, you know how many units are built. What percentage of that is the 16 million?

I don't know that we are allowed to comment on that based on our agreement with Delphi. But we have said that we think that they have a significant market share of (multiple speakers).

They definitely do.

Yes.

And at this point right now, you are not seeing any incremental growth in the AST business?

You know, we've seen some growth but we don't know if some of it might be pulled forward because of concerns with Delphi's situation that people might be building inventories. So it's hard to see what is going on there.

And are you aware at any of those pod systems that Delphi might have that aren't going to be renewed on the next generation vehicles over the next few years?

I would say we are. I don't know which ones offhand but we pretty much monitor where we are with launches and end of life with them.

So the $60 million number over the next two or three years it sounds like it's more likely to go down than up?

We didn't say that. We are just saying that it is going to be steady business and -- but it's not going to -- the swing is not going to be huge.

And one last item on AST. Did the probability of that business reach the level that you thought it was going to be at the time you purchased it?

We are very pleased with the performance of business and the performance of our manufacturing teams. I think we announced last quarter that they won a shingle prize for excellence in manufacturing. We are quite pleased.

Are you done with your earnout payments on that?

Yes, we made the final payment beginning of Q1.

Great, thank you very much.

(OPERATOR INSTRUCTIONS) Gentlemen, there are no further questions.

Tina, we will conclude the call and wish everyone a very pleasant day.

Thank you. This concludes today's conference call. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.