Methode Electronics Inc (MEI) 2015 Q4 法說會逐字稿

Welcome to Methode Electronics' FY15 earnings conference call.

(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 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 confirm the statements to actual results or changes in Methode's expectations on a quarterly basis or otherwise.

Forward-looking statements in this conference call involve a number of risks and uncertainties. The factors that could cause these 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; investment in programs prior to the recognition of revenue; timing, quality and cost of new program launches; ability to withstand price pressure, including price concessions; dependence on our supply chain; dependence on the availability and price of raw materials; customary risks related to conducting global operations; currency fluctuations; income tax rate fluctuations; fluctuations in our gross margins; the recognition of goodwill impairment charges; ability to keep pace with rapid technological changes; location of a significant amount of cash outside of the US; ability to successfully benefit from acquisitions and divestitures; ability to avoid design or manufacturing defects; ability to protect our intellectual property; ability to compete effectively; ability to withstand business interruptions; a breach of our information technology systems; and costs and expenses due to regulations regarding conflict minerals.

It is now my pleasure to introduce your host, Don Duda, President and Chief Executive Officer of Methode Electronics.

Thank you, and good morning, everyone. Thank you for joining us today for our FY15 financial results conference call.

I'm joined today by Ron Tsoumas, our Controller and Treasurer. Doug Koman, our Chief Financial Officer, is unable to join us this morning due to a personal matter. Both Ron and I have comments, and afterwards, we'll be pleased to take your questions.

As we reported this morning, FY15 sales, income from operations, and earnings were the highest in our Company's history. Year over year, the strengthening of the US dollar compared to the euro had the effect of reducing that sales by $7.5 million, or 3.2%, in the fourth quarter of FY15, and by $10.9 million, or 1.7%, in the full year, the majority of which is related to our automotive business. As a result, year-over-year fourth-quarter sales grew 1%, and full-year sales grew 14%, driven mainly by higher North American Automotive and Power Products sales, partially offset by decreased Interface sales.

Fourth-quarter consolidated gross margins increased 380 basis points, and for the full year improved 450 basis points, driven mainly in both periods by manufacturing efficiencies, as well as increased volume at our lower-cost manufacturing facility in Egypt. As in the third quarter, favorable raw material commodity pricing in both the automotive and power products segments positively effected fourth-quarter margins.

For both periods, consolidated gross margins were negatively impacted by higher development costs in our Interface and other segments, specifically for our data group's 10-gig copper transceiver product and the Dabir Therapeutic Surface, and by pricing concessions in our Automotive segment. We are, however, very pleased with the efficiency with which all of our manufacturing facilities worldwide are operating, and I congratulate our teams on their continuous efforts to improve our manufacturing efficiency.

Year over year, fourth-quarter selling and administrative expenses as a percentage of revenues increased to 11.6% from 9.3%, and for the full year increased to 10.7% from 10.3%, in line with our guidance on last quarter's call. In both periods, selling and administrative expenses came in greater than the previous year, due mainly to higher long-term incentive plan compensation, bonus, wage, travel, legal and general expenses.

Excluding the impairment of goodwill and intangible asset charges for both FY15 and FY14, our fourth-quarter operating margin was 11.3%, compared to 9.8% last year, as income from operations improved 16.4% to nearly $25.6 million. On the same basis, for the full year operating margin increased to 14% from 9.7%, as income from operations grew 63.7% to $123.3 million.

GAAP earnings per share decreased in the fourth quarter to $0.68 from $1.25 last year, and full year increased, $2.57 compared to $2.51 last year. As noted in our earnings release, there were various items that impacted our GAAP results in both the fourth-quarter and full-year period.

Excluding these items, which include goodwill and intangible asset impairments, sales of businesses and investments, tax credits and valuation allowances, our fourth-quarter FY15 net income was $20.1 million, or $0.51 per share, compared to fourth-quarter FY14 net income of $14.6 million, or $0.38 per share. When excluding these items for the full-year periods, our FY15 net income was $94.6 million, or $2.41 per share, compared to FY14 net income of $62.6 million, or $1.64 per share.

As announced this morning, we are anticipating FY16 sales in the range of $830 million to $865 million, income from operations in the range of $108 million to $119 million, and earnings per share in the range of $2.07 to $2.22. Based on this guidance range, our FY16 operating margin target is in the 13% to 13.8% range. These guidance ranges are based upon management's expectations as of this date, and involve a number of risks and uncertainties, as detailed in our release.

The midpoint of our FY16 guidance anticipates lower PowerRail product sales of about $20 million. FY15 PowerRail sales came in approximately twice what we anticipated at the beginning of last year, as our big data customer accelerated the buildout of their data centers. While this had a very positive effect on FY15, it will have a negative impact on 2016.

FY16 sales guidance also anticipates sightly less Automotive segment sales year over year due to lower Ford sales of $30 million as a result of a roll-off of the center console program. However, we anticipate moderate growth in our Asian and European automotive businesses.

On the launch side, the Renault center console program is launching in our Egyptian manufacturing facility late in FY16 for approximately $3 million, ramping to $11 million in FY17. Also in late 2016, we are launching two more center console programs for General Motors, with average annual revenue of $30 million. One program ships to South America; the other is domestic. When we are able to, we will provide you with more details on these programs.

FY16 guidance also anticipates flat sales in the Interface segment. As a reminder, revenue from Trace Labs, which was sold at the beginning of the fourth quarter, represented approximately $5 million in FY15 sales. While FY16 guidance calls for lower revenue and earnings over 2015, we are targeting a five-year compounded annual growth rate for EBITDA in the range of 9% to 10%.

Now, turning to a review of our individual segments, compared to last year, Automotive segment net sales grew nominally in the fourth quarter, and 20% for the year, as a result of higher General Motors center console and linear position sensor products sales, which were partially offset by lower volume for the Ford center console, pricing concessions, lower transmission lead frame sales, and currency rate fluctuations, which impacted European sales.

Automotive gross margins improved to 25% in both the fourth quarter and full year, driven mainly by higher sales and the corresponding manufacturing efficiencies, increased volume at our lower-cost manufacturing facility in Egypt, and by favorable raw material commodity pricing, partially offset by pricing concessions. For our FY16, we are again targeting Automotive gross margins in the mid-20% range, with domestic margins in the teens, bolstered by higher international margins.

Moving to our Interface segment, fourth-quarter sales were virtually flat, but decreased 5% for the full year, driven mainly by lower North American appliance sales and lower overall radio remote control sales. As appliance customers migrate to more in-house design, in conjunction with the contract manufacturing model, we anticipated reduced demand for our Interface solutions as we finalized our long-range plan in the fourth quarter.

Based on this, we took a $11.1-million goodwill impairment charge related to TouchSensor. As I have mentioned in the past, we are refocusing our efforts on higher-margin user interface and sensor solutions in markets such as medical, vending, food service. This is consistent with a long-term strategy to direct our engineering resources to opportunities that meet our margin expectations.

We believe we will see some improvement at Hetronic in this fiscal year, or FY15, due to improved revenues, and cost savings from relocating manufacturing from the Philippines to Egypt, which has just been completed. Compared to FY14, Interface's gross margins declined in both periods, primarily due to unfavorable sales mix of data solution products and increased development costs for our 10-gig copper transceiver product. For FY16, we are targeting Interface gross margins in the range of 23% to 25%, which would place FY16 relatively flat with last year.

Moving to Power Products, which had its best year in its 30-year history -- I congratulate the team on this very noteworthy accomplishment. Year over year, sales improved over 16% in the fourth quarter and 18% for the year, driven mainly by higher datacom, busbar and cabling product demand. Year over year, Power Products gross margins improved to over 28% in the fourth quarter and over 32% for the year, due mainly to improved sales and the corresponding manufacturing efficiencies.

As I mentioned earlier, we anticipate lower year-over-year demand for this product in FY16. As such, for 2016 we are targeting Power Products gross margins in the range of 28% to 30%.

Now, an update on our new business awards, which, at full production, represent $32 million in new-book business. In our Automotive segment, we were awarded additional lead frame business with Ford. The original program was for their production requirements in China, and the additional platforms awarded from FY18 through 2021 are for North America, with average revenue of $4 million per year.

Additionally, our Automotive segment was awarded a center console program for Harman, with Subaru being the end customer. For this award for the Impreza, Methode will be tier 2 to Harman, who will provide the infotainment content through the server box, with Methode providing class-A center console modules. This award spans our FY17 through FY19, and represents $6 million in average annual revenue.

In our European operations, we were awarded additional business with Ford and McLaren for hidden and tailgate switch products. These programs begin in FY18, and run through 2021, and represent approximately $8 million in annual average revenue over each of the four years.

Our European operations were also awarded a multimedia system with Fiat Chrysler for approximately $4 million in average revenue, beginning in FY17, and running through 2021. This compact system allows for controlling several functions in the vehicle through a combination of touch pad, joystick and rotary technology.

Building on our success with Bosch eBikes, Methode will provide a torque sensor subassembly for a Japanese manufacturer, power modules to be exported to the European market for several eBike OEMs. This program will ramp in FY17 to average annual revenue of $10 million through FY21. This sensor utilizes Methode's highly patented magnetoelastic technology to provide rider-assist based on actual torque measured at the pedal box.

Moving to an update on Dabir Therapeutic Surfaces, as of last week, 341 cardiovascular operations and other surgical procedures have been performed, ranging from 4 to 20 hours in duration. Additionally, at our beta site, we have expanded into other operating rooms as well, surgical recovery areas, or what is referred to as MedSurg in the ICU. Additional surgical and MedSurg ICU product evaluations are also in progress at two other sites, with clinical success being reported. Additionally, several other hospitals throughout the country have expressed interest in both product evaluation and potential commercial implementation.

Channel-to-market development continues, with sales coverage now in 15 states, predominately east of the Mississippi, but also in Texas. The Dabir team continues its representative training and national recruiting. Finally, we are investigating the requirement for international sales expansion, as we anticipate meeting the requirements in this fiscal year for CE marking in Europe, which is similar to Underwriters Laboratories in the US. We continue to generate a great deal of interest from the medical community with this product; and at this point, feel adoption of this technology as a standard of care could become a reality.

In summary, Methode serves its customers by engineering and manufacturing complex solutions that improve our customers' competitive position. We participate in several growing end markets, and have the teams in place to continue Methode's long-term growth. Our portfolio of advanced technologies, combined with our global manufacturing capabilities, position us to capitalize on the tremendous number of opportunities we see ahead of us. We look forward to the future.

Now I will turn the call over to Ron, who will give us further details regarding our financial results.

Thank you, Don, and good morning, everyone. I have just a few brief comments on the quarter and full-year periods. As Don mentioned, our year-over-year fourth-quarter and full-year sales were negatively impacted by the translation of sales of foreign operations, mainly due to the strengthening of the USD, primarily against the euro. Additionally, other income/expense net, related to the effect of foreign currency, improved $800,000 for the full year.

Because we no longer had a net operating loss valuation allowance to shelter domestic book income in FY15, the full-year tax rate was 16.4%. If you adjust for the valuation allowance releases, totaling $8.6 million, the effective tax rate for FY15 was 23.5%, which is in line with our guidance range of a mid-20% tax rate.

In FY15, we had certain domestic tax net operating losses available, which kept US federal cash taxes and certain other state cash taxes to a minimum. Since our federal net operating losses in the US to shelter taxable income are largely exhausted, our cash taxes paid will increase in FY16. The estimated tax rate for FY16 is approximately 25%, and assumes no significant changes in tax valuation allowances or enacted tax laws.

In FY15, we invested $22.5 million for capital expenditures, as compared to $29 million in FY14. For FY16, we expect capital investment to be in the range of $20 million and $25 million. Depreciation and amortization expense for FY15 was $23.4 million, compared to $23.9 million in FY14. For FY16, we expect full-year depreciation and amortization to be between $23 million and $26 million.

EBITDA for the full year of FY15 was nearly $145 million, or 16.5% of sales. Adjusted EBITDA, which excludes the impairments, and sales of businesses and investments, was $149 million in FY15. Based on our FY16 guidance, we expect EBITDA to be in the 15% to 16% sales range, and be between $132 million and $143 million.

Lastly, for FY15, free cash flow was $102 million. This was $11 million higher than the free cash flow for FY14. Based on our guidance, we expect FY16 free cash flow to be between $85 million and $95 million.

In FY15, long-term debt was paid down by $43 million, ending the year at $5 million. Net cash increased during FY15 by nearly $95 million to $163 million. The balance sheet effect of foreign currency fluctuation on our cash balances was a negative $11.4 million, mainly due to the weakening of the euro as compared to the USD during the fiscal year. At the end of FY15, $161 million, or approximately 96%, of the Company's total cash, was held outside the United States.

Don, that concludes my comments.

Thank you, Ron. Christine, we are ready to take questions.

(Operator Instructions)

Steve Dyer, Craig-Hallum.

Thank you. Good morning, guys.

Good morning.

As it relates to your gross margin in auto, given all of the puts and takes and price downs but moving something to Egypt and so forth, what would you expect the margin range, and I'm sorry if I missed it, to be in the auto segment for FY16?

Very similar to 2015, in the mid-20%s.

Okay. And then jumping over to Dabir, do you have any revenue expectations embedded in FY16 guidance? That's part one. Part two is, are you still thinking this is going to be a product that you distribute in-house, largely?

Let me answer the second question first. Right now we will, but as I've said, as the product starts to evolve, it very well may be the hospital and the hospital buying units that direct us to distribution. We would let that happen naturally.

In fact, we might actually make more money on that model. Right now, we feel we have to kick-start sales, explain what the product does and that's best done, at the moment, through direct sales. We have goals for the Dabir group for sales, but we've included very little in our guidance for that.

Okay. And then a last question and I'll hop back in the queue. The stock, obviously, down 30%-plus today. You guys have a huge balance sheet, a lot of borrowing power, free cash flow, et cetera. Is there a level at which you guys would strongly consider buying back stock?

That certainly is a topic of discussion. We will see where we end up on the stock. The only caveat I would say to that, as Ron mentioned, we have a good portion of our cash is overseas, so we either need to repatriate -- we would have to repatriate cash to effect that, but that is certainly something that is a topic of discussion amongst Management and the Board.

Okay. Thank you.

Thanks Steve.

(Operator Instructions)

Jimmy Baker, B. Riley.

Hi, good morning. Thanks for taking my questions.

Good morning.

First, just a point of clarification. Is the base year for your new long-term EBITDA CAGR target FY15 or FY16? And then separately, or I guess as a follow-on, are you assuming that you could hit that target even if you were to lose your largest automotive program when it begins to go end of life?

The base here is FY15. When we looked at that CAGR, that involves a number of assumptions, including future automotive programs, but other products as well, which we just talked about, the Dabir, which carry a much higher margin than automotive, which is why we list an EBITDA goal versus a revenue goal, because you could have some slippage in automotive revenue to be made up by our other products, which carry considerably higher margins than automotive.

Okay. Let me try this from a different angle, then. Does the target assume any a large wins that you haven't already announced?

Jimmy, I don't want to go any further than that. We've announced a target. We're good at hitting our targets. We do five-year planning routinely as part of our business. There are a number of ins and outs that go into that and a number of different scenarios that give us confidence in that number. I really don't want to speculate on what is in there and what could or couldn't happen.

Fair enough, Don. I had to try. Can you just talk a little -- switching over to prior products segment, can you just talk a little bit about this $20 million hit in the PowerRail? Are you assuming that, that will drive the entire segment down about $20 million for the year? And then can you just talk a little bit about what is happening with your large PowerRail customer? Do they kind of complete a build-out now they're taking a breather? How should we expect that to transpire on maybe a multi-year basis?

Okay. The $20 million is in our -- being down is in our guidance but we do anticipate some uptick from other customers. But for the most part, I would take the whole $20 million.

That particular customer, as I said in my prepared remarks, really came in probably more than twice of what we anticipated for 2015, because they did accelerate their builds. Now they will do additional builds, but that's not likely to happen in our FY16.

So it could be that, that just -- it slows down and then picks back up as they need additional capacity. But again, I don't see that happening in our FY16, because they have informed us that have sufficient capacity at the moment.

Now, they did say that last year at this time, too. But I think looking at our releases, and again we only can look really about one month out -- one quarter out, excuse me, I would say that will be -- it will be down for 2016.

Okay. On the interface side, you mentioned that your customers are moving to some -- or at least a customer is moving to in-housing of your touch product. I guess previously you had talked about some mix issues at your large appliance customer.

Did that turn out to be your customer in-sourcing away from you or is this a separate issue? Can you just elaborate a little bit on what is assumed for 2016, there?

Those two issues, I think, were separate. The customer came out with a less expensive model which eroded some sales from the more expensive units, which we are on. So that is a separate issue, and that still continues.

But as we routinely do, we look at how much energy and resources we are expending and what type of return. We are driven -- top line obviously is important, but we're driven by margin, and whether it be an auto program or an appliance program, there's a tremendous amount of design and engineering that goes into it.

And customers go through cycles. I would say that the appliance industry is maybe a mid-cycle in a five-year period where their in-house engineers decide that's a can do it less expensively than outside and contact manufacturing is a model that works for some.

We can't compete on that. We'll continue -- we're not exiting the appliance business, but we wanted to let investors know that, that we are deemphasizing and refocusing in other areas.

Now, we don't give customer-specific information. We've talked about interface, what our margin anticipation is there. I think I'll stay with that, but I can say that year over year, we're anticipating, for both those reasons, that our appliance sales will be down.

Hetronic, which is also that segment, we see that improving. I'm definitely more excited about the opportunities in interface in the industrial area. That carries considerably higher margin. We may see, at some point, that margin shift to the positive.

Very helpful. Lastly, maybe just one last one for Ron. When we look at the segmented income or expenses from operations in the K, you can talk back into your corporate expenses jumping pretty dramatically here in the fourth quarter. Looks like it almost doubled quarter over quarter. I'm sure part of that dovetails into Don's comments about incentive comp and so forth driving SG&A higher, but could you just expand that change in a little bit more detail for us and what you are assuming is kind of an appropriate go-forward rate?

You are referring to what we've talked in the past is tandem cash driven by stock price?

I'm not sure exactly what's driving that increase in corporate expense. I assume some of it is the stock price, which is obvious the going the other way now. Just be interested in kind of what all is in that number in the change and what's a fair kind of go-forward rate.

Obviously the tandem performance-based compensation was a chunk and going forward into next year, as you mentioned, the stock price just went down today. There won't be a benefit going forward from that because the variable accounting on that plan ended in this quarter.

That type of variability in the corporate expenses around performance-based compensation will no longer occur going forward. That was -- that is a chunk of it, is the performance-based compensation.

So is this April quarter run rate kind of a fair run rate going forward? May quarter, I should say.

(Technical difficulty) standpoint, no. The 12% --

Is what we are forecasting going forward. A good rate.

Okay. Got it. Thanks very much.

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

All right. Christine, thank you very much. We'll thank everyone for listening and we will talk to you in the fall. Have a good day.

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