Methode Electronics Inc (MEI) 2007 Q2 法說會逐字稿

Ladies and Gentlemen, welcome to the Methode Electronics Inc. second quarter 2007 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 press release stated December 7th, 2006, containing information from Methode's second quarter reporting period for the 2007 fiscal year and offering guidance for Methode's third quarter and full-year reporting periods for the 2007 fiscal year are forward-looking statements that are subject to certain risks and uncertainties. Methode's results will be subject to many of the same risks that apply to the automotive, computer and telecommunications industries, such as general economic conditions, interest rates, consumer spending patterns and technological change.

Other factors, which may result in materially different results include Delphi Corporation's bankruptcy petition; other significant customer bankruptcy filings; restructuring; operational improvement and cost reduction programs currently under review by Methode; the current microeconomic environment, including higher petroleum and copper prices affecting material and components used by Methode; potential manufacturing plant shutdowns by automotive customers and significant fluxuations in demands for certain automobile models. In addition, 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 Methode's Form 10-K and other reports filed with the Securities and Exchange Commission may also affect Methode's results.

The forward-looking statements in this press release are subject to the Safe Harbor protection provided under the securities law. All the information in this press release is as of December 7th, 2006. Methode undertakes no duty to update any forward-looking statements to conform the statement's actual results or changes in Methode's expectations.

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, Tina. Good morning, everyone. Thank you for joining us today for our fiscal 2007 second quarter financial results conference call. With me on the call is Doug Koman, our Chief Financial Officer; Bob Kuehnau, Methode's Treasurer and Controller; and Joey Iske, Director of Investor Relations. Both Doug and I have comments and afterwards, we will be pleased to take your questions.

Methode completed the second quarter of our 2007 fiscal year with net sales of $108.5 million and net income of $4.9 million or $0.13 per share, which exceeded our previous guidance. Contributing to the upside was better than expected sales and income from Methode's Power Distribution and Interconnect segments, as well as strong performance from our Malta and AST automotive businesses, which also exceeded expectations.

For the second quarter, our domestic automotive sales declined due to production cuts by Ford and DaimlerChrysler. As we have indicated in the past, Methode remains focused on reducing our dependency on any one automaker. Our book business for model year 2010 lowers our dependency with the Big Three to less than 50% of total automotive sales, from the current level of 71%.

In contrast during the quarter, our European automotive business reported increased sales with customers such as Volkswagen, Fiat Alfa, and Aston Martin. Based on our current book business, our European automotive business should represent approximately 36% of our total automotive sales by 2010, compared to its current level of 18%.

As indicated in our press release issued this morning, we are closing the Dumbarton, Scotland automotive facility and expect all product lines to have been moved to Malta by early next year. This corrective action will provide forward annual savings of approximately $2.5 million. The swift approval process by our customers to initiate the move is a testament to the reputation of our Malta operation and personnel. I believe it is also important to point out that the move is being coordinated in a manner to assure that the supply of parts to Methode's customers is unaffected. Some of the customers involved in this move include Rolls Royce, Jaguar, Porsche, Aston Martin and MercedesBenz. Product lines include [elac] modules, various ergonomic switches, such as steering wheel switches, cruise controls and switch banks, along with start/stop buttons and integrated center stack units. Malta is able to absorb the Scotland operation without requiring additional space, as a result of space made available through the plant's various lean manufacturing initiatives.

Our China automotive plant has crossed into profitability as new GM platforms are coming online and factory inefficiencies are being addressed. As with all of our current GM business manufacturing of China, we continue to monitor the automaker's sales, inventory levels, and production schedules very closely. In the quarter, we gained new business in China from Mitsubishi for our paddle shifter assembly to be included on four different platforms in model year 2008.

Sales in the Interconnect segment remained relatively flat in the second quarter compared to a year ago. While sales gains have be sporadic for the segment over the past five years, we are optimistic that key products in the segment are in growth phases. Our PC and ExpressCard frame kits are establishing new business with leading global OEMs, plus our Gigabit suite of transceiver products could also drive revenue growth in the coming years. The introduction of RFID technology into our data center product offering provides businesses with a low-cost solution to manage and track their assets, while providing Methode a competitive edge.

Our Power Distribution segment increased sales 75% in the second quarter over the second quarter of last year, and 21% sequentially over the first quarter of this fiscal year. For the second quarter, sales as a percentage of total Methode revenues for the Power Segment was 11% compared to 6% in the second quarter of the previous fiscal year. The Power Distribution operation in China is gaining new business and was profitable in the second quarter, less than a year after it commenced operations. Across all products in the segment, new business remains strong in the telecommunications, transportation, industrial, and defense markets.

In other business, our Torque Sensor product line is steadily gaining recognition for the unique capabilities the technology offers product design engineers. Business has been gained in several industries such as aerospace, agriculture, and off-road. As an indication of the added value that the Torque Sensor product offers, one of our newest customers, a large provider of industrial equipment, has now included our Torque Sensor on its entire product line. Their new product roll-out exceeded their sales projections as the Torque Sensor is providing them a competitive edge. As a result of this impressive first showing, the customer is increasing its anticipated annual usage by 20%. While these new business wins and new market penetrations are exciting for us, it is still important to note that the Torque Sensing business remains in its infancy and no significant income contribution is anticipated for another three years.

Moving on to the business outlook, Methode expects to achieve sales between $102 and $107 million and earnings per share in the range of $0.06 to $0.09 in the quarter ending January 31st, 2007, which is the third quarter of our 2007 fiscal year. Methode reiterates its previously announced guidance for sales between $420 and $435 million and earnings per share between $0.40 and $0.48 for the full fiscal year ending April 30th, 2007. This estimated earnings per share range for the 2007 full fiscal year includes the announced business reorganization charge of $0.06 to $0.08 per share for the Dumbarton, Scotland plant closure and product transfer to Malta. It is anticipated that the majority of this expense will be incurred in the third quarter with final costs to be incurred in the fourth quarter of the 2007 fiscal year.

Before I turn the call over to Doug, I'd like to thank everyone who attended our Investor Day, held on November 9th. We were very pleased with the attendance and the high interest shown by the investment community. If you have additional questions from the information discussed that day, please feel free to contact Joey.

At this time, I'll turn the call over to Doug for his financial commentary. Doug?

Thank you, Don. Let me start with the sales activity for our four reporting segments, and then I'll walk through the financial highlights included with our earnings release. All sales numbers that I discuss will exclude customer paid tooling sales, which were approximately $400,000 in both the current quarter and for the six-month period, compared to $5.2 million in last year's second quarter and $5.9 million in last year's six-month period.

The Automotive segment had second quarter net sales of $76 million compared to $84.3 million last year, that's a 9.8% decrease in automotive product sales. For the six-month period, the Automotive segment had net sales of $150.1 million compared to $152.4 million last year, a 1.5% decrease in automotive product sales. The decrease is primarily due to the steep decline in production from our North American automotive customers, partially offset by improved sales in our Europe and China operations.

The Interconnect segment had net sales of $18.1 million in the second quarter, down slightly from $18.3 million last year. For the six-month period, the segment had net sales of $35.9 million compared to $34.9 million last year, that's a 2.9% increase in product sales year-over-year. The increase here is primarily from the sales of fiberoptic connecters and patchcords in Europe and sales from our European connector distribution channel.

The Power Distribution segment was up year-over-year with sales of $12 million in the current quarter, compared to $6.9 million last year; and sales of $22 million in the six-month period compared to last year's $13.7 million. The increase is primarily due to increased demand for our high current flexible cabling systems and bus bar product sales, primarily to two large domestic OEMs for computer peripheral and transportation applications. We also had increased bus bar sales from our Power Distribution operation in Shanghai, that opened in late fiscal 2006.

The other segment had net sales of $2 million in the current quarter compared to $1.6 million last year; and for the six-month period, $3.7 million compared to last year's $3.3 million. The increase is due to higher sales of torque sensing products and penetration of new markets for our testing laboratories.

Continuing down the income statement; we have a decrease in other income for the quarter, $251,000 compared to $333,000 last year. And for the six-month period, it decreased to $335,000 from $557,000 last year. The decrease is primarily due to less design engineering fees at our European automotive businesses.

Cost of products sold for the quarter was 82.2% of net sales, this compares to 80.3% last year. The increase is primarily due to volume reductions from production cutbacks and extended temporary plant shutdowns by our North American automotive customers, price reductions from North American OEMs for our legacy automotive products, increasing material costs, primarily copper, precious metals, and petroleum-based products. And cost of goods sold continues to be impacted by automotive launch issues and production inefficiencies in Scotland, which has resulted in our decision to transfer all production to Malta.

Selling and administrative expense in the quarter was 12.2% of net sales compared to 13 .8% last year. For the six-month period, selling and administrative was 12.7% compared to 13.6% last year. Last year's second quarter included a $3.2 million bad debt provision related to Delphi's bankruptcy. Excluding the Delphi charge, which represented 2.7% in last year's second quarter and 1.5% in the six-month period, we would have seen a -- an increase in selling and administrative expense year-over-year, primarily related to the amortization of stock-based compensation.

Interest income was $904,000 for the quarter compared to $507,000 in last year's quarter, and $1.7 million in the current six-month period compared to $1 million last year. This is primarily the result of higher interest rates on cash investments. The change in other net is primarily the impact of currency fluxuations at our foreign operations.

The effective tax rate in the quarter was 34.3%, compared to 32.9% last year; and was 35.8% for the current six-month period compared to 32% last year. This reflects the establishment in the current fiscal year of a valuation allowance for potentially non-deductible compensation.

We now move to the balance sheet. I'll discuss cash when we get to the cash flow statement. Accounts receivable are $66.4 million, down from $74.2 million at the end of fiscal 2006, this is primarily the result of decreased sales from the automotive segment and sale of 4.6 million of pre-positioned Delphi receivables for $3.1 million which occurred in the first quarter of this fiscal year.

Inventory is $47.9 million, up from $45.7 million at year end. This is primarily to support increased business in the Power Distribution segment, large buildup of work-in-progress for a large data center cabling installation, and increased shipping volumes to North American hubs from our Shanghai operation related to Automotive and Power Distribution segments.

Other current assets are at $13.6 million, down from $19.7 million at year-end. This is due to the refund of the temporary withholding taxes in Germany, associated with our foreign cash repatriation in fiscal 2006.

Property, plant, and equipment is at $86.1 million, down from $90.5 million, primarily due to depreciation expense exceeding capital expenditures in the six-month period.

Capital spending is down to due general belt-tightening, especially regarding North American automotive, and last year's period included significant spending as we were bringing Shanghai up to speed for Power Distribution. Goodwill is at $30.1 million, that is up from $28.9 million at year end. This is related to an earn-out payment related to Cableco acquisition.

Intangible assets are $15.3, down from the $17.5 million at year end. This is just due to a normal amortization, no impairments. Other assets are relatively unchanged compared to year-end.

Accounts payable are $32.3 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. Other current liabilities are $31.4 million, down from $32.6 million at year-end, Primarily due to the final deferred purchase price payment for the acquisition of the passive occupant detection business. Other liabilities are flat compared to year end.

On the cash flow statement; the six-month year-over-year increase in cash provided by operating activities is primarily due to working capital account changes, primarily accounts payable, accounts receivable and inventory, the refund of the temporary German withholding tax is related to the cash repatriation, and proceeds from the sale of Delphi receivables in fiscal 2007. The reduction in cash used in investing activities is primarily the result of less capital spending compared to last year, a smaller and final deferred purchase price payment on our weight sensor business, and last year's six-month period included technology license payments, where we had none in the current period.

The increase in cash used in financing activities is primarily due to the open market purchase of about 205,000 shares for an average price of $9.33 under our stock repurchase program.

Don, that concludes my remarks.

Thank you, Doug. Tina, we are ready to take questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is from Tyson Bauer with Wealth Monitors Inc.

Good morning, gentlemen.

Good morning.

Couple of quick questions. Obviously, this is our first conference call, so we're pleased with -- performing well, at least the first quarter out, here. The currency translation effect, can you get into that as we've seen the Euro strengthening? And as more of your business seems to be migrating across the pond?

Yes, the largest exposure that we see there is to -- is in Malta. And there is a good portion of their business that is sold back into North America. So they have a significant amount of sales in U.S. dollars and obviously, they're buying at a -- and paying for labor and material at the local currency.

Okay. The -- give us a little color on -- when we report the domestic automotive loss, how much of that is production-related verses permanent losses or plan attrition on your part on calling some unprofitable lines or business with certain customers?

Loss of -- ?

Well, as the domestic revenues in the auto sector have come down, how much of that is purely because of the reduced production levels from the domestic OEMs? Verses either permanent losses that you, say, lost a contract to somebody else or otherwise, and certain lines or revenues that you called because they just weren't profitable?

We're talking about the current quarter and the current six-month period. I think most of that is attributal to just the OEM decline in production volume. There wouldn't be -- as of yet, there wouldn't be a significant impact on that from our decision to not -- renew business or bid on the replacement business.

Okay. And the last question from me and I'll be done. Do you provide the margins for the segments for the quarter?

We will be filing our Q later today. And there will be information in the Q that provides a little more detail.

Okay. Thanks a lot, gentlemen.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Gentlemen, there appear to be no further questions.

Tina, then we will conclude the call and wish everyone a very pleasant day. Thank you for listening.

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