Methode Electronics Inc (MEI) 2012 Q1 法說會逐字稿

Welcome to the Methode Electronics fiscal 2012 first quarter earnings presentation. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. This conference call does contain certain forward-looking statements which reflect Management's expectations regarding future events and operating performances and speak only as of the date hereof. These forward-looking statements are subject to the Safe Harbor protection provided under the Securities laws. Methode undertakes no duty to update any forward-looking statements to conform the statement to actual results or changes in Methode's expectations on a quarterly basis or otherwise.

The forward-looking statements in this conference call involve a number of risks and uncertainties. The factors that could cause actual results to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission, such as our annual and quarterly report. Such factors may include, without limitation, the following dependence on a small number of large customers, including 2 large Automotive customers. Dependence on the Automotive, appliance, computer and communications industries. Further downturns in the Automotive industry, or the bankruptcy of certain Automotive customers. Automotive program launches may be delayed or have lower than anticipated volumes. Ability to compete effectively, customary risks related to conducting global operations, dependence on the availability and price of raw materials. Dependence on our supply chain. Ability to keep pace with rapid technological changes. Ability to avoid design or manufacturing defects. Ability to protect our intellectual property. Ability to withstand price pressure.

The usage of a significant amount of our cash and resources to launch new North American Automotive programs. Location of a significant amount of cash outside of the US. Currency fluctuations. Ability to successfully benefit from acquisitions and divestitures. Ability to withstand business interruptions. Unfavorable tax laws. Ability to implement and profit from newly acquired technology and the future trading price of our stock. It is now my pleasure to introduce your host, Don Duda, President and CEO of Methode Electronics. Thank you. Mr Duda, you may begin.

Thank you, Christine and good morning everyone. Thank you for joining us today for our fiscal 2012 first quarter financial results conference call. I am joined today by Doug Koman, Chief Financial Officer, and Ron Tsoumas, Controller. Both Doug and I have comments and afterwards we will be pleased to take your questions.

Our 2 business segments that showed year-over-year higher sales in the fourth quarter of 2011, namely Automotive and Power Products, continued to experience revenue improvement in the first quarter of fiscal 2012. These results reflect the impact of our new product introductions and higher market penetration. On a consolidated basis, net sales grew nearly 12% to $111 million, driven by organic growth in our North American and Asian Automotive business units, improved safety radio remote control sales in both Europe and Asia and increased Power Product demand in North America as well as Asia. We continued to rebuild Methode's revenue from a 6-year low of $378 million in fiscal 2010, despite the reduction of legacy Automotive products and the unplanned loss of the Delphi business. On the earnings front, we posted net income of $1.5 million or $0.04 per share, compared to $4.1 million or $0.11 per share in the first quarter of fiscal 2011. As we detailed in the press release this morning, there were a number of items which negatively affected our net income. Doug will address each of these in more detail in a few minutes.

However, I'd like to discuss the 2 major items that have impacted our results. First, costs related to the vendor production and delivery issues as well as costs related to the design, development and launch of 2 large Automotive programs and secondly, the new product development expenses in our Power Products segment. In total, these costs lowered our first quarter net income by approximately $2.4 million or $0.06 per share. Let me address these items. As we announced in our release this morning, we intend to acquire an injection molding and painting operation. This acquisition will be a key step in mitigating the vendor production and delivery issues. As we discussed last quarter, the vertical integration of these critical processes is expected to reduce costs, improve quality and mitigate certain supply risks experienced during the past few quarters. We intend to close the acquisition in September and complete the integration of the operation by the end of fiscal 2012. That being said, we anticipate the vendor production and delivery issues will impact net income by approximately $2 million for the remainder of fiscal 2012. The $1.2 million cost related to the design, development and launch of 2 large Automotive programs are for the additional T-76 business in North America which will launch in the second half of this fiscal year and represents about half of the cost, and for the General Motors Center Console program which will launch in the fourth quarter of fiscal 2013 and represents the other half of the expense in the quarter.

We anticipate that design, development and launch costs for these Automotive programs will be approximately $1.8 million for the balance of fiscal 2012. We are, however, anticipating revenue of $5 million to $7 million from the North American T-76 program in the second half of this fiscal year, ramping to $18 million to $20 million in fiscal 2013. The launch of this program was delayed about 6 months by our customer. As for the General Motors program, we anticipate revenue of $5 million to $8 million in fourth quarter of fiscal 2013, ramping to approximately $100 million in fiscal 2014. Together, these 2 programs will improve our North American Automotive sales 4-fold by fiscal 2014. In our Power Products segment, development costs for the Eetrex onboard integrated power unit was approximately $0.6 million for the first quarter and is estimated to be $1.4 million for the remainder of fiscal 2012. You may recall this unit is for a pure electric truck and is anticipated to launch in the fourth quarter of this fiscal year with revenue of approximately $0.5 million. This launch was also delayed. More importantly, this investment will result in a suite of products applicable to a wide variety of applications ranging from eVans to stationary Power Systems.

For the first quarter, consolidated gross margins were 18.1%, compared to 19.7% a year ago. As I just discussed, vendor production and delivery issues as well as the higher design, development and engineering costs negatively impacted the results. As I've stated in the past, we see the opportunity for meaningful improvement in our margins once the vertical integration project is complete and we reach full launch of the aforementioned programs.

Turning to a review of our individual segments. In the first quarter, Automotive segment net sales increased over 25% due to higher sales from the MyFord Touch center console program. As well as in our transmission lead frame and steering angle sensor products. Automotive segment gross margins decreased in the first quarter, impacted by the vendor issues and costs related to the launch of the 2 large Automotive programs. Additionally, the majority of the increase in sales is from the Ford center console program, which is not only experiencing a supplier issue but currently carries a higher prime cost which reduces the program's overall margin. The higher prime is due to the high purchase content, which will be mitigated by the vertical integration of the molding and painting processes I discussed earlier.

Again, our target gross margin for Automotive is in the low to mid-20%s. Interconnect sales decreased over 6% in first quarter compared to last year, attributable to mainly lower appliance sales in North America as well as the sale of Optokon, the small fiber optic business in the Czech Republic. These lower sales were partially offset by increased sales of safety remote control products in Europe and in Asia. As we mentioned last quarter, we anticipate reduced appliance sales will continue through fiscal 2012. Despite lower business levels, Interconnect margins in the first quarter improved over the first quarter of last year, due primarily to a favorable sales mix. Our Power Products segment also improved sales, up 11% in the first quarter. Power Products gross margin decreased in the first quarter, mainly due to product development costs for the onboard integrated power unit as well as business mix which consisted of more telecom business which has lower margin and less military and aerospace business which has higher margins. On the design wins and business development front we booked several smaller programs utilizing our core technologies, for approximately $6.5 million in average annual revenue which shores up our ongoing base business and as such, should not be added to our projections.

Finally, as we mentioned in our press release this morning, during the first quarter we saw the beginning of a slowdown in our European Automotive segment, likely the effect of the European debt crisis. Inline with these economic conditions we have implemented actions to reduce our selling, general and administrative expenses in Europe. We believe we will see a positive effect of about a $0.5 million of income from these actions on our results beginning in the fourth quarter of this fiscal year. As I've mentioned in previous calls, on our way to record revenue in fiscal 2014, some of our quarters are going to be choppy. However, we are moving closer to the launch of 2 significant Automotive programs with one launching in the second half of this fiscal year. Additionally we are close to resolving our vendor issue which will not only eliminate those costs but will also improve margins on our Ford product. While we anticipate volatility in our short-term margins and earnings through fiscal 2012 we will continue to take the necessary actions to meet or exceed our margin targets. Now, I'll turn the call over to Doug who will provide further detail on our financial results. Doug?

Good morning, everyone. Let me briefly review the results of our reporting segments. In Automotive, we had first quarter sales of $62.7 million, up from $50 million last year. North American sales were up 123% primarily due to the launch of the Ford center stack program. We also saw a 19% increase in sales in Asia, that's primarily related to increased sales of transmission lead frame and steering angle sensor products. The increase in Europe was primarily due to the strengthening of the Euro versus the USD. In the quarter, the currency translation increased foreign sales by approximately $2.6 million. In the first quarter, Automotive gross margins were $9.3 million, compared to $10.1 million last year. As a percentage of sales, gross margins decreased to 14.8% this quarter, compared to 20.2% last year. Gross margin percentage was negatively impacted by $1.2 million for costs related to design, development and launch of programs in North America. Also, $600,000 for costs related to vendor production and delivery issues.

We also had increased sales of product that currently has high prime cost due to the high purchased content. And lastly, we are starting to see higher utility costs in Malta due to increased cost of fuel used to generate electricity. Selling and administrative expense for Automotive in the quarter was $7.1 million, compared to $7.2 million in last year's quarter. As a percentage of sales, selling and administrative was 11.3%, compared to 14.4% last year. The current quarter we had lower Delphi legal expense by $600,000. However, this was offset by higher non-executive performance-based compensation. In the Interconnect segment we had sales of $32.4 million in the first quarter, which is down from $34.6 million last year. In North America, the decrease is due to weaker sales in the white goods market, partially offset by higher sales of data and safety radio remote control products. In Europe, we had higher sales of data and remote control product, partially offset by no optical sales due to the sale of Optokon in the fourth quarter of last year. Optokon was our Czech Republic optical business. The increase in Asia was due primarily to sales of remote control devices.

In the quarter, there was negligible currency translation effect on Interconnect segment sales. Gross margins for the Interconnect segment were $9.2 million, both this quarter and last quarter -- last year's quarter. As a percentage of sales, gross margin improved to 28.4% from 26.6% last year. The increase in gross margins as a percentage of sales is due primarily to a favorable change in the sales mix to a higher margin products. Selling and administrative expense was $4.9 million this quarter, compared to $5.4 million in last year's quarter. As a percentage of sales, selling and administrative was 15.1%, compared to 15.6% last year. The decrease is due to no selling and administrative expense for Optokon. This was partially offset by higher bad debt expense in the segment. Power Product segment sales were $12.8 million this year, compared to $11.5 million last year's quarter. We saw an increase in demand for bus part products in North America and Asia, and in Asia we saw increase for telecom business.

Gross margins in the Power Products segment were $2 million in the current quarter, compared to $2.3 million last year. As a percentage of sales, gross margins decreased to 15.6% in the quarter, compared to 20% last year. The percentage decrease is due to higher telecom sales which has a lower gross margins and the other industrial and -- then the other industrial and aerospace business as Don mentioned earlier. Also included in this, the gross margins, we had about $600,000 for design, development and engineering of the onboard charger for the electric truck.

Selling and administrative expense was $1.8 million, both this quarter and last year. As a percentage of sales, the -- it was 14.1% this year, compared to 15.7% last year. We had increased product development expense in North America which was offset by lower non-executive performance based compensation. The other segment had first quarter sales of $2.9 million. This is up slightly from $2.8 million last year. The increase is due to higher sales of the magnetic sensing products. The testing labs, which are also in this segment, were flat.

Gross margin was about $300,000 in the current quarter, compared to $100,000 last year. The increase is due to the higher sales and also a favorable mix of business in our magnetic sensing business. Selling and administrative expense was $1.3 million in the quarter for the other segment, compared to $700,000 last year. The increase is primarily due to higher performance based compensation and severance expense.

Before I turn it back to Don, I'd like to comment on the cash flow statement. You'll note that the increase in cash and cash equivalents is due to the $27 million borrowed under our credit facility. Over the last few years, we have seen a shift in earnings and cash generation, shifting from the US to our foreign operations. While we expect this trend to shift back as we launch new programs in the US, we will need to continue to borrow against the credit facility, especially for the vertical integration of paint and laser edged processes. In the meantime, we will continue to evaluate tax efficient ways to repatriate cash back to the US. Don, that concludes my remarks.

Thank you very much. Christine, we are ready to take questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) David Leiker, Robert W Baird.

I wanted to start just to put something in perspective, and I know there's seasonality in the business going from your fourth quarter to the first quarter. We look at that and the margins and you adjust for some of these extra costs that you're incurring right now. How would you say the performance of that sequentially was relative to what we've seen in past years?

In general, the fourth quarter is a better revenue quarter than the first.

Right.

Because of really, July. I would say that sales -- probably the past 2 years have been not as impacted by the seasonality as in the past.

Right.

I mean, still doing changeovers in July, but not -- it's not as significant, I think.

Okay. And then the European slowdown, that sounds a little different than what we've been seeing on the production rates have been pretty strong. What exposure do you have? What OEs are you primarily shipping to in the European market today? I know Ford is fairly large.

You've got Ford of Europe. You've got Volkswagen, Fiat, a little bit of Peugeot. Those would -- and then a couple of the premiums, Aston, I would say that would be the largest premium there.

Okay. So BMW and Mercedes which is really driving the upside volume--

There's almost nothing to Mercedes.

Okay, so the mix, so it's your customer mix there that --

and it's not -- it's enough for us to take note of and take some preemptive actions. We know that Malta has a number of launches coming up next fiscal year, so the revenues will increase. I don't want to be caught off guard there.

No, I understand. We've been cautious on Europe and have been surprised by the export volumes and the folks you're listing there, other than Volkswagen, really don't have a lot of export business so you're not benefiting from that. And then as we look at these items that you've listed in terms of impacting the numbers and you gave us some insights for the balance of the year as it relates to the launch costs of vendor production problems in the Power Products, the other items, those presumably are going to stay roughly at those levels or were there some -- is there some characterization we should look at in terms of what those numbers are going to look like going forward?

In particular, David, which --?

The compensation related ones, the non-executive performance bonuses and the stock awards.

Yes, I think going forward you won't see the -- it was just a comparing year over year, we had some anomalies that we don't expect to continue in the rest of the year. I think also, if you look at the -- we commented on the higher stock award amortization expense. It was Q2 of last year that those -- the new long-term incentive plan was awarded, so as we start looking at second quarter year over year, you shouldn't see that delta. So that one goes away. And obviously the other item that we mentioned that doesn't re-occur is in last year's quarter we benefited from some life insurance gain.

Right. Right. No, I was leaving that one aside. And then the last item and I'll circle back here, as we look at the onboard charger investment costs here in terms of engineering that, those numbers seem to be running higher than what I believe you were talking about last quarter on that. Is the scale of that getting larger, that the investment's becoming larger or do we just misunderstand that?

The overall opportunity is getting larger. The one particular win that we announced, I don't think that is getting larger from what we've announced in previous calls. That launch has been delayed. So I think what you're -- we are shipping product, not at the rate that we expected, so we're not absorbing those costs into cost of goods sold the way we had planned on. So yes, the costs are up. But I think more importantly, that's not a one-time product. That will result in a suite of products. That's applicable to a number of applications. So we're -- while we're not pleased that we're not at full launch yet and we're still incurring costs, we are pleased with the progress we've made technically.

What does that pipeline look for new awards on that charter going forward?

I don't -- I really don't want to say yet. We've had a lot of preliminary conversations with other OEs. To our knowledge, that's the only 10-kilowatt charger out there that is Automotive grade. But all of those I would say are -- I won't say embryonic, but enough that I don't really want to try to put dollars around it yet.

David, just to go back on the expense, keep in mind that our investment in Eetrex is now at 80%. So it started much lower and we were only picking up a lower percentage in prior quarters.

Oh, okay. That would make more sense then. Okay. And then Don, you said 10-kilowatt charger here. What are the other charger sizes? What's the size of the other chargers --

6-kilowatt, we've seen.

Does that cut that charge time in half?

Theoretically, yes. And this is going on an eVan. So the battery bank is also larger.

Jeremy Hellman, Divine Capital Markets.

A first question from me about the business that you're acquiring on the vertical integration, a couple questions on that. First off, is that a completely independent company where you're acquiring the totality of it or is that a division from someone or is it something else all together? And then secondly on that, you mentioned the need to add some additional equipment. Is that a function of increasing the capacity of that operation or just filling in some missing pieces?

I probably can answer the second one, but your first question, let us get that closed and we will do a release on it and answer those questions. I just -- uncomfortable giving too much information. We wanted to put it in the release because it's significant in that we're on our way to solving that problem and we're anticipating closing it very, very shortly here. I really can't provide too much detail until we close it. But to answer your second question, there is some additional capital that we're going to put in, mainly because of the type of painting we're going to be doing. It certainly makes our capital expenditure less and helps us with our timing but there is some equipment that still needs to be put in. That would be on the painting side.

Okay. And so the $27 million you drew on the revolver, is that going to be sufficient to close the transaction and also provide for the working capital needs you're anticipating or is that just a first tranche, if you will?

Yes, Jeremy, the debt should be sufficient, but again, as we roll out and acquire some new equipment to supplement the acquired equipment, we may have to increase the revolver. The revolver, though, really will be more of a function of our ability to bring back cash from offshore and we do have some vehicles that are in place right now to bring in some of that cash. So it will really be -- our borrowing will really just depend on our ability to get cash back offshore in a tax efficient manner. I want to bring it back and either use up our NOL or pay taxes on it. So that's driving it. Otherwise, though, this is something that if cash were all in the US, we would be able to handle that out of working capital and without borrowing.

Okay. One more from me. Just going back to the fiscal 2014 trajectory, just want to make sure I've got all the moving pieces coming and going correctly. You said once you get to fiscal 2014 the GM program should add an incremental $100 million in revenue and then the T-76, that's $18 million to $20 million annually, so if I kind of lump those 2 together, take the high side, that's $120 million fiscal 2014 relative to fiscal 2013. Want to make sure I'm right on that. And then second or kind of a second part of that then, are there any other programs that are going to be rolling off that will have a negative effect as we go from 2013 to 2014?

On the -- you're correct on the General Motors, that's a significant add to 2014. You subtract out what we had in the fourth quarter of 2013 which I think we said was around $8 million to $10 million in GM business. But T-76 is at full launch in 2013.

Right.

So I wouldn't add that to 2014.

Right.

-- it's incremental to us today. It's just not incremental to 2014.

Right, right, yes I see what you're saying.

I would refer back to the revenue model that we put out last fall that we will ultimately update here and that's where we're -- when we're talking about these launches, that's really what we're referring back to.

Right. There's a bigger thing that I wanted to make sure I understood, whether or not there were any other substantively sized platforms that essentially would be terminating or running down at the end of 2013. So if I say, okay, there is $100 million delta from 2013 to 2014, roughly, maybe subtract that, let's call it $90 million for a more conservative number, if there's a $90 million positive delta, are there any negative deltas of $10 million or $20 million due to an existing platform that is due to roll off then?

Good question. In those projections that we put out, we took all that into account. So the number that we show for 2014 which is 5 -- it's over $500 million, that takes into account anything that's rolling off.

(Operator Instructions) Follow-up, David Leiker, Robert W Baird.

Don, as we look at the MyFord Touch launch, you've got a couple of vehicles in production today. I don't think the second piece of that award is in production yet. Is that correct?

No, it's not.

Is the scale of that relative to the first one, are those relatively equal in terms of revenue? Or is there 1 larger than the other?

I would say that they're close to being equal.

Okay. And are you -- if you look at what your engineering costs are to bring that to market, other than the supplier issues you're dealing with, but just the engineering piece of it, did that pretty much flow the way that you expected it to?

How's that? The engineering?

Yes.

Absolutely. That was -- we had an issue with the vendor but the technology went exactly the way we wanted it.

And then my sense is that the take rates that Ford's seeing on that are pretty good. That would imply that your revenue off of that is running higher than what you originally thought. Is that accurate?

Yes, it is. And normally that's good news. But when you've got a supplier issue, that works the other way. But no, it is, it's running higher than planned.

And then are there -- is there any insights you can share as it relates to additional follow-on awards beyond those 2?

Nothing yet. Yes, I don't think there's anything we could talk about.

Are you aware of them awarding similar type technology to other suppliers at this stage yet?

No, no. There's been center console business that's been let to other competitors, but not that I know of with Touch.

Okay.

It would be a capacitance. We do know that the keyless entry is capacitance.

Right.

And that was let actually quite a while ago.

Right, right. More about the center stack, the Touch product on the center stack. And then as we look at the capital spending, we would have been thinking your capital spending would run $15 million, $20 million a year or so. It sounds like that number's going to step up. Can you give us some insight into where that number might end up running this year?

Yes, sure, David. Just leaving the vertical integration separate --

Right.

We're at a run rate right now of about $4.5 million. That's probably a good run rate for the full year because we are, in addition to our normal capital run rate, we're looking at bringing in a plating process into the Power Products group in North America. And then we're also looking at bringing in-house some stamping/plating in Asia and bring some product that's currently outsourced in-house.

That's for the T-76 business that I think you saw.

Right.

So with those two, we'll probably be closer to $19 million.

Okay. And then the vertical integration, I don't think -- have you put a number on what that's going to cost you?

I think roughly we might have mentioned a range. It depends on if we close the deal versus the transaction that Don talked about or we don't -- that could be anywhere from an additional, let's say $12 million to $17 million, depending on whether we are able to acquire this business or not.

And the business you're looking at what -- could you talk about what kind of products they're doing or what kind of business they're in today, I understand you want the process but it sounds like there's a revenue stream that comes along with that as well.

Yes, we really just can't talk about it now. First of all, the deal's not done so if it doesn't close, it doesn't close. And so it would be premature to give any details and as Don said, we will put out a release when we do close it and provide some information at that time.

Okay and then the last item here, you've been running margins other than this quarter and I think we have the adjusted the numbers, probably in that 4% to 6% EBIT range and I think when this is all up and running you should be running closer to a 10%-type EBIT margin. Is there some trajectory you can give us in terms of how we step up there? A couple of small steps and then it's a larger step in 2014 when all of this is launched. Is there any thoughts you can give us in that regard?

Well, you should see -- as we go through 2013, we should see some meaningful improvement. But 2014 is really the larger year because of the GM launch.

Right.

So if you --

I'm looking qualitatively. I'm not trying to pull numbers from you.

I don't think -- it is not a straight line to our margin projections. As I've said, we're going to have some choppy quarters. We're going to have some issues. These programs are large Automotive programs. T-76 goes in a transmission. You saw the line in Shanghai.

Right.

So we're going to have some issues as we go forward, but once you get to launch, you're absorbing a lot of the costs that we're detailing here. So if you overlay the launch with our numbers and so on, you'll see the trajectory. It's just -- do we solve the vendor issue by the end of the fourth quarter of this year or does it spill over in the first quarter? We want to get it behind us before we enter 2013. Could that impact first quarter of 2013? Yes, it could. We're not planning on that. This acquisition would certainly make that more likely because we don't have the greenfield.

But it sounds like some of this choppiness as you go through, some of these issues in launches and investments that, that choppiness in the numbers probably continues into the first half of calendar 2012. Do you think it carries into the second half of calendar 2012?

I know of nothing that would cause that.

Okay.

Okay? But I'm just cautiously optimistic because of the significant revenue ramp, which is -- that's all good news, but it's what I don't know that concerns me. But again, we know how to launch product. We know we're meeting the General Motors deliverables, our teams are doing, I think, an excellent job. The T-76 launch in Mexico has gone really ahead of schedule. The problem there is that our customer, who is also bringing up a plant, has been behind. So we certainly know how to launch these programs. It's just -- they're just big programs that can take some twists and turns. But once they're launched, they are launched.

Okay, and then the last item here, as the balance of the -- I think all your legacy products are pretty much rolled off but there's still some programs that go end of life. You're not really expecting any unusual costs as they go to end of life here, are you, over the next 18 -- 12 months, 18 months?

No, no. We've got some service business left and I think some Honda clock spring business and that's not notable.

Mr Duda, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Okay. Well, Christine, we'll thank everyone for joining us this morning and wish everyone a safe holiday.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.