Methode Electronics Inc (MEI) 2012 Q2 法說會逐字稿

Welcome to the Methode Electronics fiscal 2012 second quarter earnings conference call. 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 performance and speaks 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 reports. Such factors may include without limitations the following, dependence on a small number of large customers, including two 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; 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 technology 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 with 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, and good morning, everyone. Thank you for joining us today for our fiscal 2012 second 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'll be pleased to take your questions.

On a consolidated basis, net sales grew over 7% in the second quarter, and nearly 10% in the first half of fiscal 2012 compared to the same periods last year. The sales improvement was driven by organic growth in our North American and Asian automotive business units, as well as increased power product demand in North America as well as Asia. These results reflect the impact of our new product introductions and higher market penetration. Sales gains were partially offset by sales declines in our Interconnect segment, a direct result of continued softness in the appliance market. We posted second quarter net income of $0.3 million, or $0.01per share, compared to a loss of $0.5 million or $0.01 per share in the second quarter of last year.

For the first half of fiscal 2012, we had net income of $1.8 million, or $0.05 per share, compared to $3.6 million, or $0.10 per share in the comparable period last year. For both periods of fiscal 2012, net income was negatively impacted by foreign income taxes. In the fiscal 2012 second quarter, income tax expense increased $1.4 million, primarily related to income taxes on foreign profits, and a foreign dividend on monies we transferred out of China. Also impacting net income and gross margins in both periods were design, development and launch costs in both our Automotive and Power Products segments. Vendor production and delivery issues and increased sales of products with a higher prime cost further affected North American Automotive income. In total, the development and launch costs and vendor charges lowered our second quarter net income by approximately $2.3 million, or $0.06 per share, and lowered our gross margin by 2 percentage points.

Now, 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 a few major programs in fiscal 2014. Some additional detail on the major items that impacted our results. First, we incurred cost related to vendor production and delivery issue of $0.7 million in the second quarter. As we announced in September, we closed on the acquisition of an injection molding and painting operation in Monterrey, Mexico. This acquisition and the vertical integration of these critical processes will be a key step in mitigating the vendor issue. We anticipate investing approximately $7.4 million in additional capital to complete the vertical integration process and, again, we believe this vertical integration will not only enhance quality, mitigate supply risk, but also improve our gross margins on the production of center consoles.

We are on track and intend to 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 $1.3 million for the remainder of fiscal 2012. Secondly, as I discussed last quarter, our Ford center console program is not only experiencing a supplier issue but currently carries a higher prime cost which reduces the program's overall gross 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. Third, $1 million of costs are related to the design, development and launch of the General Motors center console program which will launch in the fourth quarter of fiscal 2013. For this program, we are anticipating revenue of approximately $9 million in the fourth quarter of fiscal 2013, ramping to approximately $100 million in fiscal 2014. We anticipate these launch costs will be approximately $2 million for the remainder of fiscal 2012.

Finally, in our Power Products segment. Development costs for Eetrex' on-board integrated power unit were approximately $0.6 million in the second quarter and are estimated are to be $1.2 million for the remainder of fiscal 2012. You may recall that this program is for a pure electric truck and is anticipated launch in the fourth quarter of this fiscal year with revenue above $0.5 million. More importantly, this investment will result in a suite of products applicable to a wide variety of applications ranging from Ebands to stationary power systems.

Turning to a review of our individual segments. In the second quarter, Automotive segment net sales increased almost 21%, and in the first half improved 23% due to higher sales from the Ford center console program, as well as from our transmission lead frame and steering angle sensor products. Advanced Molding and Decoration, our recent acquisition, contributed almost 44% of the North American Automotive sales increase in the second quarter and 30% of the North American Automotive sales increase in the first half. Automotive segment gross margins decreased in second quarter, impacted by the vendor issue, the higher prime costs for the Ford center console, and the cost related to the launch of GM center console program. Again, our target gross margin for Automotive is low- to mid-20%s.

Interconnect sales decreased over 13% in the second quarter and fell 10% in the first half compared to last year, attributable to mainly lower appliance sales in North America, as well as the sale of OPTOKON in April of this year. These lower sales were partially offset by increased sales of data and safety remote control products. As we mentioned last quarter, we anticipate reduced appliance sales will continue through fiscal 2012. Interconnect's gross margin fell in the second quarter and the first half due to lower sales for white goods, again, as a direct result of continued softening in the appliance market. Our Power Products segment had improved sales, up 14% in the second quarter and 12% in the first half. Power Products gross margins decreased in the second quarter and first half, mainly due to the development costs I discussed earlier, and, in fact, would have been over 23% for the second quarter if we exclude the development costs.

Moving to an update on our revenue projections. In November, we presented at the Baird Industrial Conference where we provided an updated revenue chart for fiscal 2012 through fiscal 2015. The presentation has been filed as an 8-K and is also available on the Investor Relations section of our website. I want to stress that the revenue charts represent booked and base business, not just revenue goals. It shows that Methode is poised to exceed its fiscal 2008 historical revenue high of $551 million in fiscal 2014.

So how are we going to move from fiscal 2011 revenues of $428 million to $555 million in fiscal 2014? Through all the awards we've announced in our quarterly conference calls. In the presentation we made in November, we summarized the major awards we've announced that are rebuilding Methode's revenue stream for fiscal 2013 and beyond. These awards are on top of our base business, of which I should point out about 2% to 4% goes end-of-life each year. As a review here, are the major awards for fiscal 2013 revenue, approximately $15 million from the second award of the Ford center console, approximately $9 million from the General Motors integrated center stack, approximately $14 million from Nissan-Renault busbars for electric vehicles, and approximately $15 million from the recent acquisition of the Monterrey, Mexico molder and decorative painter. For fiscal 2014 revenue, approximately $100 million from the General Motors integrated center stack, an additional $4 million from Nissan-Renault busbars for electric vehicles, approximately $8 million from Volkswagen ergonomic switches, and approximately $8 million from premium vehicle ergonomics, which is for Jaguar and McClaren.

Now let me summarize some of the design wins and business awards we received in the second quarter, which are included in the updated revenue chart. We booked an additional vehicle platform which will utilize a General Motors center stack we had previously announced for an additional $12 million in annual revenues for four years. The original program will launch in the fourth quarter of fiscal 2013, while this platform will be incremental to that beginning in fiscal 2015. Our Power Solutions Group has booked an award for an over-molded power bus bar for Magna E-car. Magna is supplying power electronic modules for electric vehicles. This program will launch in the fourth quarter of this fiscal year. The Group also booked laminated bus bars and power interconnects for Rockwell. This product also launches in the fourth quarter. Both customers are key accounts for us and we anticipate future bookings. Together these awards represent approximately $4 million in annual revenue and, again, have been included in the revenue chart. Program life is four to five years.

In summary, we continue to move closer to the launch of our automotive programs, with the additional T-76 program launching the second half of this fiscal year. Moreover, we are making significant progress on the vertical integration. Our awards and the vertical integration will not only lead to improved revenue, but also the margin improvements beginning in the fourth quarter of this fiscal year. Now I will turn the call over to Doug who will provide further details regarding our results. Doug?

Thanks, Don. Morning, everyone. I'm going to keep my comments brief today since we've provided sufficiently detailed information about the items affecting our consolidated and segment results in both the earnings release and the 10-Q. And many of those items were also covered in Don's remarks.

Again, just to restate for the second quarter we reported net income of $300,000 from $0.01 per share compared to a net less of $0.5 million or $0.01 per share in last year's quarter. One of the items that negatively affected the quarter was a $900,000 tax expense for a $17 million dividend paid from our China subsidiary to our Singapore subsidiary. We did this basically to reduce the amount of cash concentration in China, but we did need to record a tax expense for that event. On an earnings before income tax basis, the second quarter was very similar to the first quarter. The gross margin percent was 18.1% in Q1 and 18% in Q2.

Sequentially, we saw an improvement in SG&A as a percent of sales. Q1 was 16.8% and Q2 was 15.8%. This was due in part to the increase in sales, but also the first quarter had included severance costs that negatively impacted the first quarter SG&A percent by about 0.5%. For the six-month period, we reported net income of $1.8 million, or $0.05 per share. This compares to $3.6 million, or $0.10 per share in last year's six-month period. Again, the release goes into detailed information about the positives and negatives affecting the year-to-date consolidated segment results, so I won't repeat them here.

I would like to point out, however, that the first quarter's tax expense benefited from a $1.1 million grant received in Malta, so this nearly offsets the $900,000 tax expense recorded in the second quarter related to foreign tax dividend. Just looking at our credit facility. During the six-month period, we borrowed $36.5 million on that line. Currently, most of our cash is located outside the United States. While we expect to eventually generate cash in the US, primarily through future domestic operations, it will be necessary to continue to borrow from either our foreign affiliates or under the credit facility for the near term.

For the six-month period, we burned $18.4 million. This included $9.1 million on capital expenditures, $6.6 million for the acquisition of the Nypro assets, an additional $1.1 million additional investment in Eetrex to bring our ownership up to 90% with the balance coming from unfavorable working capital changes. During the six-month period, we recorded minimal foreign exchange loss, less than $200,000 even though the euro fluctuated about 12% during the six-month period. This was primarily due to a very careful cash management of our foreign currency assets and liabilities. Just finally on operating cash, during the first six months we generated $1.7 million cash from operating activities. However, this was $2.1 million less than last year, primarily due to lower net income, higher stock award amortization of $1.4 million, and $700,000 unfavorable working capital changes. So with that, Don, I'll conclude my remarks.

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

Thank you. (Operator Instructions) Thank you. Our first question is coming from David Leiker of Robert W. Baird.

Good morning. This is Joe on the line for David.

Good morning, Joe.

I'm just going to dig into some of the costs items during the quarter, and none of them are new, but I'm just going to try to get a sense of the cadence going forward. With the vendor supply and delivery costs, and you expect about $1.3 million in the second half, I'm just wondering, that's going to equal what you did in the first half and given you went out and acquired Nypro, is there something with that contractor, your agreement with the supplier, where those costs don't moderate through the second half of the year?

No. It's just our, the time to really set up the processes, gain approval from our customer and launch it.

Okay. And then --

So you can't, it's timing.

Yes. It's not turn key necessarily.

No. You wouldn't want, in automotive it's, it takes a while to move product around.

Okay.

You need a fair amount of approvals from the customer, so that takes time, but also we needed to buy additional equipment, have that delivered. Set it up. I can tell you that we ran our first parts, but that's just the start. We are on schedule, but I think we've said all along that won't abate itself until the end of the year.

Okay. And then on the launch and development costs for the GM program, by my calculation you're over $2 million on that, and you've been talking about $3 million for the year, so are you expecting a step down in those costs during the back half?

We've said, what, $2 million for the balance of the year?

Yes, yes.

No, that's going to continue up until launch. But that's anticipated in the guidance that we've given.

Okay. I was thinking it was $3 million for the year and you're already over $2 million.

Yes. I think we may have early on estimated it was $3 million, but I think it looks like it just might be a little bit higher than that. Like Don said, it's factored into our guidance.

Okay. And then on Eetrex, it looks like you're going to, when you're, all is said and done, at least what you've guided to, you're going to be close to $10 million in costs related to developing that charger, and right now you have one contract that's for $10 million and fully ramped, kind of fully launched annualized revenues, so I'm just wondering, do you have some kind of return expectation for the $10 million or so that you've invested in the product that we can maybe factor into maybe a revenue potential for this product?

I don't know that we're ready to discuss that yet. There's a number of opportunities we're pursuing. We haven't announced any new awards, so it would probably be premature to say too much about that. I did say it results in a suite of products from the charger to battery management to battery disconnect units. We're pursuing stationary power, we feel that is an excellent market for the technology. But at this point, I don't think we really want to outline all of that for, some for competitive reasons and some for customer confidentiality.

Okay. So maybe asked a different way. Do you have a threshold, like a return on capital threshold that you typically target when you're considering making a capital investment?

Yes, I think we've said that previously, Joe, that we, we target at least a 15% target on that, so.

Okay.

Yes, we wouldn't, we wouldn't have bought it if the charger was the only opportunity.

Yes.

And then one last one, and I'll hop back in the queue, do you have any visibility into when we might get a first glance at your product for GM, maybe at the auto show in January or some upcoming event?

I think after the, well, certainly by our March call, we'll be able to provide some detail there. I could not confirm for this call when GM might be showing that, so we're still, unable to discuss it, at least at this point, but I think we're getting pretty close.

Okay, and that additional platform that you picked up, that's going to be above and beyond the $100 million --

Correct. But in the chart that we showed at the Baird conference and then put out as an 8-K, that is included in there.

Okay. So it becomes incremental to the $100 million after the chart?

Correct.

Okay.

Yes. So that goes on from the '15 and beyond.

Got it. Thanks, guys. I'll hop back in queue.

Thank you, Joe.

Thank you. (Operator Instructions) Our next question is coming from Jeremy Hellman of Divine Capital Markets.

Morning, guys.

Morning, Jeremy.

Hey, just thinking about the tax line for the back half of the year, I'm looking at the fact that you still have growth over in Asia. Are you looking to be moving any more cash around that's going to result in any more probable dividend-related taxes in Asia?

Right now we don't have anything going on, but we do look at those opportunities. But right now we have other options that we're pursuing, and we may come back and visit that later on but not at the current time.

Okay. And then maybe another kind of related question, can you frame in some respects, either on a relative basis or percentage basis or otherwise, how much cash you have in Asia and Europe, respectively, maybe relative to North America or otherwise?

Yes, I think if you, if you look at our total cash outstanding, that's about $75 million. About 25% of that is in Asia, another 45% is in Europe, and then about, what is that, give me 10% left for North America. But in North America, that's where we have the bank borrowing, the $36 million bank borrowing.

Right. Have you looked into, and dare to say it, but taking out any kind of a line in Europe? Is that something that has been explored, and also, I guess, Asia for that matter, as well?

Not really, Jeremy, because that's where we have significant cash balances, and unless, getting back to your first suggestion, we're going to borrow money to make a dividend payment, we haven't looked at taking on debt offshore.

Okay. That's all for me. Thanks.

Thank you.

Thank you. Our next question is coming from the David Leiker of Robert W. Baird.

Hi. Just a few more quick ones for me. Doug, can you provide a dollar figure of what Nypro contributed during the quarter?

You mean as far as -- well --

Revenues.

On revenues? Yes, it's about $3.2 million.

Okay. And you're --

And that runs, because we said it would be about [$20 million to $23 million], I think, per, on an annual basis.

And it's my understanding that business is supplying non-automotive customers that you aren't necessarily going to maybe pursue in, over the long term?

I think we'll keep our options open there, because what it's doing for us right now is if covers overhead as we bring in the [K2x] product and the Ford and we do need to honor the agreements we have with those customers. So ultimately it probably becomes a pure in-house factory, but I think right now that's, customers are happy with us and we're happy with them, so I think we'll maintain the status quo until such time that that doesn't makes sense, and we'd maybe let those programs go end-of-life.

We also have the option of transferring them to Nypro if we want to, so I think we talked about that a little bit last quarter. It gives us some pretty good flexibility, and avoided a pure start-up of a decorative painter. While it will cost us about $0.02, I think what we've said over the next year, is that --

Yes. Yes, about that, yes, maybe --

That's considerably smaller than what it would cost us if we would have had to do a greenfield.

Do you get to keep the people and utilize the facility?

Absolutely. Train people. I've got parts sitting in front of me right now in the conference room that were molded by them first pass on the Ford D-car program, so we're very pleased with what that's done for us. And, again, we did pick up some customers. I think we said those customers are in, there's some appliance, a little medical.

Consumer products.

Consumer products.

And then my last one from, I'm just wondering with the new, with the incremental Ford business that's set to launch in fiscal '13, can you remind me how many models that's going to be with and I'm just framing this in the context that the initial models you are on, reception of those vehicles has been above and beyond, I think, expectation. Do you have any, if you glance into your crystal ball what kind of reception there might be for the new models that you're going to be on? I guess I'm wondering if there's potential upside to the CSM or IHS platform forecasts that would be contributing to the revenue projections you --

We won't know what our releases are going to be until really we move into probably January, so I don't think. We're still in our [GPAP] stage and preparing to launch. So we won't have releases from the customer for a little bit yet. That's probably a better question in March than now.

Yes.

Do you, do you know in absolute terms how many vehicles you're adding next year?

Well, yes, we can go to J.D. Powers data and get that. We have it, we don't have it now.

Not like, not in units, but like, you're going to be on the Edge or the Fiesta?

Yes. Joe, I think it's, check the presentation that we made at the conference. Because I know it's the Edge, the Taurus --

And then there's two Lincolns, I believe.

Yes. But it's in that presentation, Joe.

Okay. I'll go back and look at that. Thanks a lot.

Thank you.

Thank you. We have a follow-up question coming from Jeremy Hellman of Divine Capital Markets.

Hey, I just wanted to check that I'm remembering something with respect to the Nypro business, that $3.2 million, am I remembering it properly that the margins in that business were lower than you're kind of historical norms at the corporate level?

On the existing Nypro business?

Yes.

Yes.

Okay. And then just switching gears, we haven't talked about the white goods market at all, I guess, focusing more on the good stuff than the negative, but in speaking with the OEMs that you work with in the white goods area, what are you hearing about their channels? Are they relatively clear now? Just any kind of color on that would be helpful?

I don't know if we talked about it last quarter or not. Whirlpool is, has laid off additional people, is consolidating some plants. Right now it's a very tough market for our end customers. They're down, for us, they're down double-digit year over year. And they were down last year from the year before, so it's a significant lowered market, significantly lowered market.

That said, we continue to book programs with Whirlpool that ultimately should increase our business with them, but our existing business is considerably down, and that's going to continue through at least this fiscal year and very much tied to the housing market.

And there's also [a firm] on foreign competition today.

Right. I think we all expected that. I guess what I was getting at is if there are, if we finally get to a bottom or any slight turn up, just wanted to double check, as they go through their restructuring efforts whether that is still leaving them with excess inventory that is going to clear such that there's a lagging effect to where you see any real volume growth with them?

They have reduced inventory. I think some of that is still happening. Certainly from the Electrolux standpoint, I believe. They launched probably, they're suite of products here in the United States right at the very beginning of the recession. So I think both customers are still adjusting their inventory. So, yes, we'll have a lag, but I'm not so sure we're not seeing a bit of that now.

Okay. Thanks.

But in our planning, we're showing really no growth for those areas other than new programs that we'll book and we'll talk about those as we book them.

Okay. Thanks.

Thank you.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Thank you, Jackie. With that, we'll thank everyone for listening today and wish everyone a safe and joyous holiday season. Good day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.