Methode Electronics Inc (MEI) 2007 Q4 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Methode Electronics fourth-quarter and year-end 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 dated July 12, 2007 containing information on Methode's fourth-quarter and year-end reporting periods for fiscal 2007 and offering guidance for its 2008 fiscal year 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, telecommunication and appliance industries 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 significant customer bankruptcy filings, restructuring, operational improvement and cost reduction programs currently under review by Methode, the current macroeconomic environment including higher petroleum and copper prices affecting material components by Methode, potential manufacturing plant closures by automotive customers, potential strikes at automotive customers and significant fluctuations in the demand for certain automobile models.

In addition market growth operating costs, currency exchange rates and devaluations, delay 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 Commissions 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 in this press release are subject to the Safe Harbor protection provided under the securities laws.

All information in this press release is as of July 12, 2007. Methode undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations on a quarterly basis or otherwise. Thank you.

It is now my pleasure to introduce your host, Mr. Don Duda, President and CEO from Methode Electronics. Thank you. Mr. Duda, you may begin.

Thank you, Everett. Good morning, everyone. Thank you for joining us today for our fourth-quarter and 2007 fiscal year-end financial results conference call. I am joined today by Doug Koman, Chief Financial Officer and Joey Iske, Director of Investor Relations. Also with us today is [Ron Zumas], Methode's Controller. Ron has been with Methode Electronics for 23 years and has assumed the Controller role effective with the retirement of Bob Kuehnau.

Before I begin, I would like to take a moment to thank Bob for his 22 years of dedicated service to Methode Electronics. He will certainly be missed but we wish Bob and his family the very best.

Both Doug and I have comments today and afterwards we will be pleased to take your questions.

Methode completed its fourth quarter with sales of $130.9 million and net income of $12.1 million or $0.33 per share. This compares to last year's fourth quarter results of $116.3 million in sales and net income of $4.3 million or $0.12 per share. If we exclude the fourth quarter fiscal 2006 tax charge of $4.5 million or $0.12 per share from the repatriation of $38.1 million of foreign earnings to the US, and the $0.02 per share charge for the reduced bad debt provision for the sale of claims against Delphi due to that bankruptcy, Methode would have achieved $0.22 per share in last year's fourth quarter.

Methode achieved better-than-expected sales and profits in the fourth quarter compared to previous guidance. Although Methode's US automotive business levels were down year over year, their sales and profits performance was much better than expected in the fourth quarter.

Growth in the interconnect segment pushed sales above expected levels due to increased sales in China and the inclusion of TouchSensor for two months in the quarter. In addition, increased demand for power distribution products also provided better-than-expected results.

For the full 2007 fiscal year, Methode reported net sales of $448.4 million and net income of $26.1 million or earnings of $0.71 per diluted share. This compares with 2006 fiscal sales results of $421.6 million and net income of $17 million or $0.47 per share. As discussed in our press release excluding the previously mentioned tax charge and a $2.3 million Delphi bad debt charge, Methode would have achieved fiscal 2006 net income of $0.63 per share. Doug will provide a more detailed discussion of the quarter full-year financials later in this call.

At this point, I would like to move forward to discuss our business. In automotive there were several events this past year that bear discussion. First, we closed our automotive manufacturing facility in Scotland moving production to Malta. Not only will this move increase operational efficiencies, it also allows Methode to take advantage of investment tax credits earned in Malta.

Secondly, we are again named a GM supplier of the year which is a testament to our automotive group's ability to launch and manage large volume programs worldwide. Globally, automotive launched 48 new programs throughout the year for such OEMs as GM, Fiat Alpha, Ford, Honda and Volvo.

And finally to improve margins, we began an upgrade on our Malta manufacturing facility to modernize and expand our injection molding operations as well as add paint and laser etched capabilities.

As expected, auto sales in our European and Asian regions increased during the year helping to offset the sales decline from the struggling Detroit automakers. New automotive contracts awarded during 2007 fiscal year will provide approximately 64 million in new sales over the three-year period beginning with fiscal 2009 with the majority manufactured outside the United States. You may find interesting a commercial that Mitsubishi recently aired for its new Outlander showing Methode's transmission paddle shifter located behind the steering wheel. This product is currently being produced in our Shanghai plant.

Challenges will persist in our automotive segment over the next few years. Let me take a minute to put Methode's US-based automotive business decline into perspective. During the past five fiscal years from fiscal 2003 through fiscal 2007, Methode's US legacy auto sales have declined 25% and profits have reduced by a staggering 110%. This is a direct result of lower OEM production volumes, unrecovered raw material price increases, contractual price decreases to the OEMs, as well as Methode's decision not to continue or pursue certain unprofitable programs.

Recent data indicates the combined US market share for GM, Ford and Chrysler year to date is at 52%. This is below last year's forecasted market share of almost 54%. This market share erosion has had and will continue to have an impact on Methode's domestic automotive business. We remain extremely cautious on the outlook for US auto demand as Ford and Chrysler still comprise a significant portion of our automotive sales for fiscal 2008.

I believe Methode in spite of this has done a good job of increasing our sales and our earnings positions through this upheaval. We are pleased that our European and Asian automotive businesses are growing. Our AST business experienced solid growth in earnings during much of this period and our non-automotive groups have expanded their businesses and are continuing to seek ways to grow sales and profits.

That said, automotive will remain an important part of our global business mix as we develop advanced products based on patented technologies such as our MDI sensing and TouchSensor solid-state switching capabilities.

Moving to Methode's interconnect segment, net sales increased 43.5% in the fourth quarter of fiscal 2007 compared to last year's fourth-quarter results. This increase is due to the inclusion of two months revenue from the TouchSensor acquisition, increased fiber-optic sales, and several new programs for our PC and ExpressCard packaging. The interconnect segment launched several new PC card and ExpressCard programs during the past few months with more scheduled in fiscal 2008.

The segment secured a new FCC mandated cable card program from a major multinational OEM. It is anticipated that Methode will supply a significant percentage of the card packaging and connectors that will be used with home cable television boxes. In addition, wireless Internet PC and ExpressCards remain in strong demand worldwide with no slowdown in sight. Nearly all of our PC and ExpressCard packaging programs are now being manufactured in our Shanghai facility.

A key challenge for this business moving forward will be to combat increased competition as customers seek to add second sources. Sales for our 1 gigabit copper transceiver product remain strong during fiscal 2007 although below previous levels as several competitors have now entered the market. We anticipate our 10 gigabit transceiver product to be ready for customer qualification testing during fiscal 2008. Methode expects to be the first to market with this new transceiver.

The Czech Republic has been updating its communications infrastructure. Methode's fiber-optic business was actively involved in this initiative throughout fiscal 2007 growing both sales and profits. We anticipate sales in this market to remain steady to slightly down in fiscal 2008 compared to the fiscal 2007 level. Similarly, our fiber optics business in the US posted a very strong year in both sales and profits. However, our projections for fiscal 2008 see a decline in sales and resulting income. We are taking the necessary steps to combat this decline and expect the business to return to a growth state near the end of this fiscal year.

Our TouchSensor business is actively launching several new programs. In addition, they are working with our automotive lean manufacturing experts on process improvements and have secured additional space to complete their busy launch schedule for this year. We will gain a full year of sales and profits from this group in fiscal 2008 and anticipate additional growth from this year's multiple launches in fiscal 2009 and 2010 as production volumes are fully realized.

Also in our interconnect segment, our connector product team was awarded a significant piece of business from a major automotive OEM for a highly engineered insert molded lead frame assembly. The product will be located in the harsh environment of an automatic transmission. This program will run across several platforms and is expected to produce in excess of $40 million in sales over the next five years commencing with the 2009 fiscal year. We congratulate both our interconnect and automotive teams who worked diligently over the last 18 months doing this program. Production volumes will be manufactured in our Shanghai facility.

The power distribution segment completed its best year during fiscal 2007 with sales growth of almost 40% and solid double-digit profits. Also a number of new programs were secured. We are currently producing bus bar prototypes for both the Boeing 787 and Airbus A380 aircrafts. We anticipate providing a total of 47 bus bars for each build of these two aircrafts as they begin reaching customers next year.

In addition, the Joint Strike Fighter that we are also providing several bus bars for commenced its inaugural flight in December of 2006. Initial production still remains scheduled for 2009 with full production by 2013.

Our bus bar business in China also had a strong growth during fiscal 2007 and we expect them to continue solid double-digit growth in the coming year.

We had significant power distribution sales in fiscal 2007. However as some bus bar programs are coming to an end of their lives in fiscal 2008, in fact one major program was scheduled to end in 2007 but was extended contributing to the upside in sales for fiscal 2007. For fiscal 2008, we expect revenues and profits to be down compared to the higher figures produced in fiscal 2007. However, several military and aerospace programs along with new computer and telecommunication design ins are moving forward with anticipated launch dates in fiscal 2009.

We also anticipate entering the European market this fiscal year. As such we remain very optimistic about the future of this segment and fully expect it will continue to be a major contributor to Methode sales and profits. In fact, we awarded the network bus team the William Jay McGinley Award of Excellence. You may recall that Mr. McGinley was Methode's founder. This award is presented when a business unit reaches a significant new milestone making a major contribution to top and bottom line results. We congratulate our network bus unit on a fine year and look forward to their future contributions to Methode's results.

Overall, the power distribution segment represented 9.6% of total fiscal 2007 sales compared to 7.3% in fiscal 2006 and 5.1% in fiscal 2005. Our Magna-Lastic devices business, or MDI, spent fiscal 2007 developing not only a solid customer base but our engineers and physicists continue to develop a patented portfolio of applications for this technology. Originally conceived solely for torque sensing, we now have a measurement platform that includes not only torque but linear position, angle, speed and weight. This robust portfolio solutions far outweighs our earlier expectations. While still in its R&D phase, we expect that MDI will make solid contributions to Methode's earnings in the coming two to four years.

We held two new events at Methode during fiscal 2007 that are worth mentioning. In November we hosted our first investor day. This day was well attended by the investment community who had an opportunity to hear from the management of each of our key business units. Each business discussed its technology, products and business development plans. We believe this day was highly successful in dispelling the former notion that we are merely an automotive supplier.

We will again host this event in Chicago in early November. Joey will be sending out invitations to our investor base but feel free to contact her to assure your invitation.

Secondly, we held our first internal technology review in Chicago. This event brought together Methode's key engineers, physicists and management from around the globe to present and discuss Methode's technologies in depth. Again, a very successful two days in establishing a common dialog and knowledge base on essentials our technologies process. Our technical teams were very excited in learning about all the technologies that Methode has to offer as well as an opportunity to meet our Board of Directors who were also in attendance.

Moving to guidance, because of the volatility of the US automotive market and in particular the unpredictable sales of the Company's two largest automotive customers, Methode is discontinuing its practice of providing quarterly sales and earnings per share guidance. Methode anticipates sales for the 2008 fiscal year to be between $455 million and $475 million with earnings per share between $0.65 and $0.75.

At this point, I will turn the call over to Doug for his financial review.

Thank you, Don. Let me start with net sales activity for our reporting segments. The automotive segment had fourth quarter net sales of $93.3 million compared to the $86.7 million last year. That is a 7.6% increase in automotive sales. In the quarter we had increased sales from Europe and Shanghai that exceeded the decrease in North America sales.

For the fiscal year, the automotive segment had net sales of $315.7 million this year which is the same as we reported last year. For the fiscal year as in the quarter, the automotive segment had sales gains in Europe and Shanghai that offset the decline in production by our North American automotive OEMs.

The interconnect segment had net sales of $26.2 million in the fourth quarter which is up from $18.2 million last year. This increase is primarily attributable to sales from TouchSensor which was acquired on March 1, 2007. For the fiscal year, the interconnect segment had net sales of $82.1 million compared to $68.2 million last year. That is a 20.4% increase in sales year over year. Contributing to this increase in this segment were sales of TouchSensor product, sales of fiber-optic connectors and patch cords in Europe, fiber-optic data center installations, improved sales from our European connector distribution channel and increased sales of PC Card and ExpressCard products.

Power distribution segment sales were flat in the quarter with sales of $9.6 million this year and last year and the power segment had sales of $43 million in the current fiscal year compared to $30.9 million last year. That is a 39% increase. The increase is primarily due to increased demand for high current flexible cabling systems and bus bar product sales primarily to two large OEMs; one for computer peripheral application, the other a transportation application.

We also had increased bus bar sales from the power distribution operation in Shanghai that opened in late fiscal 2006. In fiscal 2006, we had no power distribution sales out of Shanghai.

The other segment had fourth quarter sales of $1.9 million in the current quarter compared to $1.8 million last year's quarter and had full-year sales of $7.6 million in the current period compared to $6.8 million last year. The increase is primarily due to higher sales of torque sensing related products this technology has been designed into new industrial and consumer applications.

If you will turn to the financial highlights in the earnings release, I will walk you down the rest of the income statement. We have an increase in other income for the quarter to $0.6 million compared to the $0.4 million last year and for the fiscal year, other income increased to $1.6 million from $1.1 million last year. The increase is primarily due to higher royalty and joint venture income and increased design engineering fees at our European automotive business.

Cost of products sold for the quarter was up at $101.4 million compared to $91 million last year but as a percentage of net sales was reduced to 77.4% compared to a 78.2% last year. The primary reason for the improvement in the quarter is that our Shanghai facility operated profitably where last year it was in startup mode and throwing off losses.

For the fiscal year, cost of products sold was at $359.9 million compared to $336.4 million last year and was also up as a percentage of net sales at 80.3% compared to 79.8% last year. The slippage on the percentage is primarily due to volume reductions due to cutbacks by our North American automotive customers, price reductions from North American OEMs for our legacy automotive products, and increased year-over-year material costs primarily copper, precious metals and petroleum-based products and other raw material.

We had a small restructuring charge of $0.2 million in the quarter relating to transferring manufacturing out of Scotland to Malta. For the fiscal year the charge was slightly over $2 million.

Selling and administrative expense in the quarter was $15.3 million, up from $12.9 million last year. As a percentage of net sales, this was also up at 11.7% this year compared to 11.1% last year. The current quarter had increased expense for stock-based compensation because of the increase in Methode's stock price in the quarter and since fiscal 2007 was the first year to reflect three annual grants of performance based restricted stock awards that have three-year vesting periods. Additionally in last year's fourth quarter, we benefited from a reduction in bad debt expense due to the assignment of bankruptcy claims against Delphi automotive.

For the fiscal year, selling and administrative was $55.3 million which is just about flat with last year's $55.6 million. However as a percentage of net sales, selling and administrative expense was down to 12.3% compared to 13.2% last year. Selling and administrative for the fiscal year had increased for stock-based compensation expense based on adoption of FAS 123(R), the increase in the stock price during the year, and again, because this was the first year that reflects the three tranches of restricted stock awards.

Additionally, last year's selling and administrative expense included $3.2 million of bad debt charge related to Delphi's bankruptcy. That particular charge represented just about 1% of sales in last year's fiscal year.

Interest income net was $0.7 million for the quarter compared to $0.5 million in last year's quarter and $3.4 million in the current fiscal year compared to $2.1 million last year. This is primarily the result of higher interest rates and higher average cash balances.

The change in other net was about a $0.7 million negative swing in the quarter but was a push for the full year. This is primarily the impact of currency fluctuations at our foreign operations, mainly sales in US dollars and euros that create exchange rate sensitivity.

The effective tax rate in the quarter was extremely low, 18.2% compared to last year's extremely high percentage of 68.1%. For the full year, the tax rate was 27.4% for the -- compared to last year's full-year tax rate of 47.3%. The lower rate is primarily due to increased sales and profits in Malta that has a lower statutory tax rate than we have in the US and also the fact that we had the increased profits and sales in China where we have been granted a tax holiday.

The rate was additionally impacted by the utilization of investment tax credits in Malta due to the scheduled increase in the statutory rate. The rate in Malta is scheduled to increase from the current 5% to 15% in 2008, So even though it is a significant rate increase, it is still much lower than in the US and additionally, we do have tax credits that we now have the ability to recognize basically because of the increase in the tax rate.

We also have been able to recognize more of the tax credits because of the fact that we have transferred manufacturing from Scotland to Malta so that gives us the ability to recognize more of the tax credits that have been previously generated.

Now looking at the balance sheet, cash is down primarily because of the TouchSensor acquisition but I will comment on cash in more detail when I get to the cash flow statement.

The accounts receivable balance is $79.2 million, up from $74.2 million at the fiscal year-end, 2006 fiscal year-end. This is primarily the result of increased sales primarily in the automotive and interconnect segments in the fourth quarter and also we added TouchSensor receivables.

Inventory is $54.5 million, up from $45.7 million at year-end. While automotive segment inventories are down, the increase in inventories is primarily to support improved business in the power distribution and interconnect segments. TouchSensor inventory was added in the fourth quarter and we also saw increased shipping volumes to North American hubs out of our Shanghai operation related to automotive and power distribution segments. That also had an impact on the inventory.

Other current assets are $15.7 million, down from $19.7 million last year. This is primarily due to refund of temporary withholding taxes in Germany associated with our foreign cash repatriation in fiscal 2006. Property plant and equipment is at $86.9 million which is down from $90.5 million last year. While we picked up PP&E with the TouchSensor acquisition, this was offset by depreciation expense exceeding capital expenditures in the fiscal year. Capital spending in fiscal 2007 was lower primarily due to the decrease in new automotive business in North America.

Goodwill is at $51.5 million. This is up from $28.9 million at year-end. This is related to the TouchSensor acquisition and we also had an earnout payment related to the Cableco acquisition which also increased goodwill.

Intangible assets are $43.7 million, up from $17.5 million at year-end. Again this is primarily due to TouchSensor. Other assets increased to $20.2 million from $16.4 million at year-end. This is due to an increase in deferred tax assets and increase in the cash surrender value on company-owned life insurance related to our deferred compensation plans.

Accounts payable are relatively flat year-over-year at $41 million this year versus $41.6 million last year. Other current liabilities are $31.4 million which is down from -- or up from $32.6 million at year-end. This is primarily due to income taxes payable. And other non-current liabilities are $15.1 million which is up from $8.7 million. This is again related to increased employee deferred compensation.

On the cash flow statement, the year-over-year increase in cash provided by operating activities is primarily due to working capital account changes. Also the refund in 2007 of temporary German withholding taxes related to the cash repatriation in 2006 and also the proceeds from the sale of Delphi receivables in the first quarter of fiscal 2007.

The increase in cash used in investing activities is primarily due to the acquisition of TouchSensor partially offset by less capital spending this year compared to last year. And also we had reduced technology license payments in the current period versus last year. And finally, the decrease in cash used in financing activities is due primarily from -- due to the proceeds from the exercise of stock options offset by open market purchases of about 206,000 shares in the second quarter for an average price of -- at an average price of $9.33. This was under our stock repurchase plan.

Don, that concludes my remarks.

Thank you very much, Doug. Everett, we are prepared to take questions.

(OPERATOR INSTRUCTIONS). Kevin Sarsany, Next Generation Research.

Hi, can you hear me?

Yes, we can, Kevin.

Good. Is there any way you can quantify the contribution from TouchSensor for the quarter? On the revenue side?

On the revenue side, Kevin, we are going to file our 10-K a little bit later on today and in the K, we do disclose that the sales for the two months for TouchSensor was $7.1 million.

7.1. And remind me what their profitability profile is like?

I think what we told you the last time was that we obviously aren't going to give specific information but we did say that the -- their return on sales would obviously be better than what Methode does -- has been doing on a consolidated basis.

And I guess you talked about Chrysler and Ford, Europe and Asia in the auto. What was Chrysler and Ford down on the revenue side?

Year over year?

I am just trying to get a feel for how the auto business cumulatively is performing excluding Chrysler and Ford.

Kevin, I don't know that we have got the -- again, we are going to file our K and we do -- I can give you some as a percentage of sales and you can do the math. We just don't have the --. But in the current year, Ford represented about 27.3% and Chrysler represented 16.5%. Last year -- let me just make sure I have got -- and last year Ford was 27.5% and Chrysler was 21.1%.

And I guess you talked about pruning. Is there any way you can quantify how much you pruned in the quarter?

I think that would be -- in the quarter, I think that would be very difficult to comment on.

Let me -- what I am trying to get at here I guess is just to come out --

No not in the quarter.

Not in the quarter, there wouldn't have been much. I mean --

It seems like organic growth has picked up excluding Chrysler, Ford and that is kind of what I'm trying to get at. And you know, I think then I look at your margins and they are very impressive especially on an incremental margin basis. So what -- it was a good quarter. So.

I think if you look at the numbers, the decline in year-over-year numbers from Ford and Chrysler -- we would have to give you a percentage of how much of that is pruning and just how much of that is really just volume. But I don't know that we are prepared to do that. That is probably something we can provide you but the exact split we would have to look at.

And I guess a couple of years ago you put in lean and flexible manufacturing in your plants I believe in North America and you were talking about rolling it out worldwide. Have you done that already?

We have done that in Mexico and I would say that our Mexico operations are on par with our US automotive operations and they are lean implementation and we have done that in Shanghai as well. And they are probably a year, year and a half behind where the other plants are. And we are also in the process of doing that at TST.

All right. So there is still things on the come that once we start seeing revenue growth picking up and you know I mean put this out there -- I mean the margin improvement has been impressive anytime you have shown decent revenue growth that we could see possibly even better?

Yes and I should also add that our multi-team is implementing lean practices and I would say they are probably at the same stage as our Asian operations.

Okay. And on the power distribution side, you talked about competition. I mean power distribution has been a pretty good growth driver. Is there any reason to be worried here?

No, we anticipated -- the one major program which Power Distribution had for a number of years was a computer program that went into [play]. It was supposed to go into play in 2007 and got extended so that provided some of that upside. And that wasn't lost business; the manufacturer didn't use bus bars in their new configuration. So that was anticipated and that was a major piece of business.

But we just had a review of their opportunities and programs for the next three years and I was quite pleased with what we saw. I am not concerned about it. They are coming off of a great year and not every year is going to be 40% growth. So I am not concerned.

Okay and last question and I will step back. Any unpaid tooling?

Yes the tooling is going to be less of a factor, Kevin, because of the change we made at the beginning of this fiscal year and we basically are now amortizing or recognizing the tooling sales and cost of tooling over the life of the product. So going forward, you're not going to see significant swings probably year-over-year as we have had in the past. But you know, we did have tooling in the year that probably was about $3.6 million total.

For the full year?

Yes.

Okay. All right. Thank you.

Thank you.

David Leiker, Robert W. Baird.

Good morning everybody.

Good morning, David.

How much was currency a contributor to revenue in the quarter?

Hold on. David, I was prepared for your question and then I have got to find my notes. I think in the full year, it was $5.6 million reduction in sales and for the quarter it was 2.9 million.

Positive or negative?

Sales were reduced.

Reduced?

Yes. So for the quarter and the full year, those were both reductions to sales.

It sounds like -- what was the tooling number you just said it was for the year? $3 million?

3. (inaudible)

Weren't you like 1 million, 1.5 million through the first three quarters?

Yes, I think that's right. I think we picked up maybe about $2 million in the fourth quarter.

Okay. You gave the revenue mix numbers obviously Chrysler numbers down more than Ford. What about your total automotive number for '07?

You are talking about --?

Auto as a percent of revenue.

As a percentage of revenue, it was -- I have got 70.4%.

And is that including tooling or excluding?

That would include the tooling.

And so the offset to that with the Chrysler down 5 points, what was the -- where were your gains? What was larger for you in the year?

In Europe and Asia.

Europe and Asia? Did GM number change a whole lot?

Yes, that would be the Asian gain.

Right.

There was some Mitsubishi in there but --

Okay.

But year over year would have been the GM launches.

Realizing you are going to file your K later and we are trying to dig through these numbers here during the day, is there any way you could give us some sort of discussion or quantify the segment profits for the quarter for us?

Yes, we could. We can give you -- I am looking at our -- the segment footnotes. So on a pretax number for automotive, we are at $29.3 million. For interconnect we are at 9.3. Power is 8.8 and the other segment had a loss of call it $300,000. And then [it should] let up the differences just on unallocated corporate expense when you roll that to the total pretax.

So it looks like in the fourth quarter your automotive segment profits were flat year over year?

Let's see for -- I am actually showing them up a little bit. Probably I am showing up for the fourth quarter actually automotive is up about 14%.

Okay. What is the swing in the performance and the profits to the auto business here in this quarter that we haven't seen in previous quarters?

Just the increase in business in Europe and Shanghai is just throwing off better margins than we see in North America.

Business mix.

Okay. TouchSensor, it looks like you put that in interconnect?

That's correct.

And then Don, you had talked about the legacy auto business being down 25%. What portion of that legacy -- what portion of that revenue base are you throwing into that as legacy auto? Is that just the GM and Ford business? Is that the big three exposure?

In legacy, it would be Chrysler and Ford and then actually very little GM because all the GM business that has been booked has been FOB Shanghai. But I put in ergo switches, multifunction switches. And then of course if you are shipping Malta functions, you are also for the most part shipping clack springs with them. So the traditional products have come out of our [Malta] and Golden facilities.

So it is that revenue base that you are talking about there right now? What is the size of that legacy business?

Around 110 million.

Around 110. And you said that is down 25% over three years?

No, over five years.

Is that a business that is on its way toward zero at some point?

I don't want to say for sure but it is a business that we have identified at least -- for at least domestically that we have chosen not to participate in for profit reasons. It could change. I don't want to say in absolute but we have -- we reviewed our ability to make improved margins on those products and have decided at least in recent years that that is not something we want to put our energies towards.

No, I think that makes a lot of sense. As that business rolls off, does it roll off kind of smoothly or is there a big chunk or two that we need to be aware of in any particular year? Like the Chrysler minivan for example this fall?

I think we have said that we will be down to --.

Like 50 million in total or so?

Less than that in Chrysler by the end of fiscal '08 or '09 -- $25 million.

That must be the minivan rolling off, right?

Chrysler drops considerably faster than Ford. In fact, we launched programs for Ford last year.

(Inaudible question - microphone inaccessible).

And then when I refer to Ford, I speak of Ford domestic.

North America, right.

Ford Europe, we still continue to grow with.

No, I understand that. And what are the actions that you can take to offset the profit impact of that, roll off that business as the utilization falls and you wind it down? What are you doing to help minimize the impact of that?

Well, we unfortunately had to do another reduction in force in our Carthage and Golden plants in March. So we continue to decrease our overhead as we wind down those programs. On the other hand, there is a certain infrastructure required to produce safety products for the automakers. The box springs and the multifunction switches are mission-critical, so there is only so much you can do.

Okay. And as the seat sensor business winds down, how quickly -- is that a six or seven-year time frame for that to wind down, or does it happen more quickly?

That is hard to say because you really have to look at what technologies that are being deployed. You know, the airbags, some of the airbag technology may displace it, but there has been some issues with that. So it is hard to predict what the decline rate will be. And then also Methode is developing its own replacement technology. So in an ideal world, one will replace the other. That is just -- it's technology dependent because the regulation stays in place.

But there is nothing really scheduled at this point that that starts to roll off; it is just that that technology is going to be replaced with something. Is that fair?

Something, yes, that's correct.

And then the last thing is --.

But I would also add that clock springs were predicted to be replaced 10 years ago.

Yes. Oh, I know. The last thing is that as you guys go through and transform the business model, which you are doing a very good job of doing, at what point do we get to some sort of prospect on the horizon that you guys can earn some day $1 a share in earnings? Is that on a two-year time horizon; is that four years out; is that five? Can you give us some sense on what we should be expecting for that?

You are asking me to give guidance.

Well, let me ask you this. I will just ask -- well, go ahead.

The quarter demonstrates, when Methode has its operations moving in the right direction, what kind of earnings it can produce. We still have another two years of what I will call adjustment in auto. You just can't exit automotive programs overnight. So, I mean, I don't want to say when we get to $1, but I think if you look at this quarter end you look at what Methode's non-automotive businesses can do, we need our distribution to continue to grow. We need MDI.

We have spent a fair amount of R&D money there. We have got a number of very good programs, but they're all in their prototyping stage. So it is really dependent upon when those things come onstream.

And the volatility of the US auto market makes it hard to predict what will happen in what is still a big portion of our business.

What is the reason that the profitability we saw here in this quarter isn't sustainable then because obviously to do what you were talking about for '08 versus '07 means that sales -- you are relatively flat to up a little bit and you are going to have some --.

You have got still a decline in automotive and automotive businesses if you are in supply business, volume is very, very important. There is not significant margins so the difference between breakeven and posting a loss is you know a couple of percent drop in volume. And you saw that with the numbers we gave you over five years. So that has a significant impact.

Bus bar is going to have less sales and profits and as I said to Kevin, I am not particularly concerned about that but that is an event that affects '08. Our fiber-optic business -- that in many quarters the programs are booked or the sales are booked, built, shipped and invoiced in a given quarter so that is very difficult to predict. And they had a very good year at both the Czech Republic and our domestic business had excellent years. And we're not forecasting that is going to repeat. Could it? Yes but the bookings don't indicate at least right now that they would.

Okay. Well thank you for your time. You guys are doing a great job in kind of changing the business around. So keep it up.

Thank you very much.

[Giresh Nayir], Thomas Weisel International.

Good morning, gentlemen. Can you hear me?

Yes, we can.

First of all, congratulations on a great quarter.

Thank you.

I have a couple of questions. Firstly I would like to ask you, could you break down sales by geography?

You know we can if -- we will have that information coming out in the 10-K a little bit later today. But I think I can give you -- and that will have the comparative information but just for the fiscal '07, the US was $305 million; Asia-Pacific was $30 million; Malta was $75 million and then the rest of Europe excluding Malta was $38 million.

Okay. Thank you. And if I was to look at your outlook and the gross margin, what would be the margin levers at the gross margin level and at the operating margin level? I know the product mix is one. What other if you were to look at what would be the levers for margin?

We were having a little bit of difficulty hearing you but (inaudible) to question is what are the drivers to the gross margin?

Exactly, yes. What are the drivers for margin, gross margin as well as operating margin going forward?

Certainly mix and I would also add that as I said earlier to David, the volumes in automotive will dictate a lot as to what happens in our domestic business. And that still is 70% of the business so I'm sure volume will affect certain margins.

Material prices.

Yes, material price increases. But I mean in volume and mix would be the critical ones.

Okay. And in terms of SG&A, I mean is there anything more coming from any benefits more coming from the shift to Malta, the transition to lean manufacturing playing out in the next year, the next fiscal?

I think we have included that in the guidance we have provided this morning. We do look at -- we have capacity in the Malta plant. So to the degree we book more European business, we would anticipate that we would see more flow through from putting more business through that facility. And also we continue with lean there. We continue with an upgrade of its manufacturing capabilities.

Okay. And would you be able to tell me who are your competitors in the three segments? I mean for the automotive, for interconnects and for power distribution?

In auto it depends on the product but if you look at multifunction switches which are your turn signal switches and in certain cases headlights switches, that would be [Elfs], Delphi, [Pastel], to name some of the bigger ones. I'm sure I'm leaving somebody out. The ergo switches, the on/off switches that list is -- there's probably 35 different people that do those type of switches. But when I refer to our legacy products, the competitors I gave you, those would be the ones there.

Power distribution, [Rodgers] is involved in that. There is a myriad of smaller, smaller and probably less than $5 million in revenue but niche type businesses that we compete with. [Eldray], is a competitor on the East Coast also has a plant I believe in France.

On the Cableco side, I think it would be -- we've got a wide variety of different competitors. In interconnect again, that is a big -- it's very large people in that. The [Amps], the [Molexes] and the [Amphenols], we tend to try to do more niche type business and application specific. But we of course do bump into those larger players. And then in the second and third tier interconnect guys again 35, 40 different people.

Okay. I guess that is all I have. Thanks.

Thank you.

[Tom Fogerty], [Mark Hampton].

Good morning.

Good morning.

Could you tell me what you expect in terms of tax rate and CapEx for next year?

I think the -- again, it depends on the mix but we will probably be below 30% for an effective tax rate for next year. And then capital spending should be a little bit higher next year just because we do have some planned projects especially in Malta. So I think we are probably comfortable just say we will be maybe in the 15 to $17 million range on capital.

And of that CapEx, how much would you characterize as expansion and how much would be just maintenance?

It's hard to call it maintenance because most of our capital especially in automotive you are investing it for the life of the production run. So it is only there for four or five years as opposed to we are not that capital-intensive with long-lived assets. And so we don't have that maintenance feature. So I don't know that I can give you a good split. I would say most of it is to support new business.

I would agree with that.

Fair enough. Thanks very much.

Kevin Sarsany, Next Generation Research.

Hey guys, sorry about that. I forgot to ask this last question. But touching on it, can you talk about your anticipation for new programs the amount this year?

Just -- I'm not sure I understand the question.

Well I am just wondering what your new program outlook for this fiscal year -- how does it look and --?

Are you talking across the board, Kevin?

Yes. I mean you talked about new programs last year at 45. Is it an equal number, higher, a little bit lower? Obviously the mix of the size of each program is different but -- because these are the programs that are going to ramp up over the next three, five, seven years so you had a great 2006. But each year you are going to have to keep doing the new programs to lay out this investment thesis I would assume.

That's correct. I can tell you where we anticipate -- I don't want to try to quantify what programs we are going after because you have got a bucket of opportunities and not all of them flow through the final and come out the end. So that is -- but I can tell you where we expect programs to be booked. I did detail some of the bus bar opportunities. We will see again through the year we will see them booking more programs. Those programs tend to take 18 to 24 months before you see them into production.

We are looking at a better booking year in Europe from an automotive standpoint. We are also looking at entering the European market for bus bars. We have been actively pursuing accounts there for the last probably six to 12 months. Very little in the domestic automotive. You may see some carryover of programs and that is kind of a mixed bag.

TST will continue to book additional programs as their technology becomes more prevalent in the market and they have also got a number of launches that will come to fruition towards the end of the year and support the '09 numbers. What am I leaving out from a --?

TouchSensor again if you're talking about just year-over-year opportunities that's --

And then more for the two to three to four years out would be MDI and that they have we also had a detailed review with them recently. They have an impressive list of customers and opportunities -- namebrand customers that you know you can feel confident that most of the programs are [gold] programs. They will continue to add to their portfolio of opportunities.

Okay. And when you talk about domestic auto, does that include Honda? As you are talking about very little in North America or domestic I think you mentioned.

That's a good point. I would -- there are programs we are pursuing with Honda. I would probably exclude them from our earlier statement. Yes, we are pursuing opportunities with them.

All right. Very good. Thank you.

Thank you.

Ladies and gentlemen, there are no further questions at this time.

Well then Everett, we will conclude the call and wish everybody a very pleasant day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.