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Executives

Donald Duda - President and Chief Executive Officer

Doug Koman - Chief Financial Officer

Analysts

 

Jeremy Holmen - Singular Research

David - Robert W. Baird

Bryan Crawford - Parameter Capital Management

Tom Fogarty - Silverstone Capital Management

 

Methode Electronics Inc. (MEI) Q4 2008 Earnings Call July 17, 2008 11:00 AM ET

 

Operator

This press release contains 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 conform the statements to actual results or changes in Methode’s expectations on a quarterly basis or otherwise. The forward-looking statements in this press release involve a number of risks and uncertainties. The factors that could cause actual results to this press release 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 limitation the following; dependence on a small number of large customers within the automotive industry, pricing or prices could affect our automotive customer’s future results. The seasonal and cyclical nature of some of our businesses. The presence of the automotive industry, dependence on the appliance computer and communication industry, intense pricing pressures in the automotive industry, increases in raw material prices and customizes related to conducting global operation.

Greeting ladies and gentlemen and welcome to the Methode Electronics Fourth Quarter 2008 Earnings Conference Call. At this time all participants in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instruction]. As a reminder, this conference is being recorded. It is now my pleasure to introduce today your host Mr. Don Duda, President and Chief Executive Officer. Thank you Mr. Duda you may begin.

Donald Duda - President and Chief Executive Officer

 

Thank you, Melissa, good morning everyone thank you for joining us today for our fourth quarter and 2008 fiscal year end financial results conference call. Doug Koman, Chief Financial Officer and Ron Tsoumas, Metals Controller joining me today. Also with us is Joey Iske, Director of Investor Relations Director of investor relations. Both Doug and I have comments, and afterwards we will be pleased to take your questions.

Methode completed this fourth quarter with sales of a $154.4 million and net income of a 12.9 million or $0.35 per share. This compare to last year fourth quarter results of a 130.9 million in sales and net income of 12.1 million or $0.34 per share. For the full year Methode passes significant milestone. For the first time in the company’s 62 year history sales top the $0.5 billion mark. We congratulate all of Methode employees on this accomplishment.

Methode completed fiscal 2008 with sales of 551.1million and net income of 39.8 or a $1.07 per share. This compares to fiscal 2007 results of 448.4 million in sales and net income of 26.1 million or $0.72 per share.

Doug will provide a more detail discussion of the quarter and full year financial later in this call. At this point, I would like to move forward to discuss our business. First let me discuss the automotive segment. Methode spent the past few years repositioning itself from the automotive world. Only few years ago Methode was almost exclusively doing business with Chrysler and Ford primarily shipping product from US factories. Even our European automotive group was shipping a good portion of their product back to the US.

As it became evidence that Methode traditional customers were facing turbulent time, we begin to focus our efforts on cost reductions, initiatives, global expansion and new product development in conjunction with new technologies, while at the same time developing plan to exit on profitable or low profit products.

Today, Methode is best-in-class global manufacture supplying the US, European and Asian automotive markets in plan from Mexico, Europe and China. While having taking significant steps to adjust certain customers in Garner Roberts. In recent years Methode has add several new OEMs to our customer base including GM China, Cia, Honda, Box Wagon and [Tushou] to name a few.

During fiscal 2008 Methode was awarded several new switch and sensor business opportunities, that’s what the most part will begin production in 2010. This business includes substantial largest for GM that I will discuss further in a moment, but also includes Chinese OEM such as Cherry Automotive, (Lusa) Auto and Southeast Motors. Additionally, we are awarded new business to produce an entertainment panel that will utilize our technology. We are very excited in making headway with this technology in the automotive industry.

One significant limp is the Methode column electronic assembly to be used on GMs global small vehicle program launching in 2011. I should emphasis that this is a small vehicle platform not a truck or LCD program. This program is an excellent example as of global capabilities with our multi-component product being assembled into one subsystem shipped worldwide. The base components will be produced enough of the China facility or maybe assembled at another Methode facility which makes the most logistical sense since vehicles will be sold in multiple markets in Asia, Europe, North and South America to Middle East, Thailand and India. We expect this program to produce noteworthy line and to contribute roughly 18 million in sales during the first year or amplitude an estimate of 30 million per year over the life of the program. A few years ago Methode do not had the capability to design produce or even support this product on a global basis. It is a solid validation that are multipart, multiyear strategic agenda is working.

It is important to note that even as Methode's Detroit based automotive customers struggle with lower sales and the need to transition to more fuel efficient vehicles. On the automotive industry we will remain an important part of our global business mix. We are not exiting the automotive market, but rather are adjusting a customer base and product offering. New offerings based on patent technologies such as our position in steering angle sensors, MDI torque censoring and TouchSensor solid state switching capabilities along with power product solutions to the hybrid and electric vehicle market or help advance this initiative.

For example, in Europe alone our position in steering angle sensors are expected to grow from 12% of European sales in fiscal 2009 to 30% in fiscal 2012. Approximately half of our current business opportunities in Europe are for sensor base product. Our sharp contrast in the few years ago when the majority of the products were switched based. Before we move to automotive I want mention one other significant initiative which is our newly formed company in India, Methode Electronics India Limited. The company will not only focus on the both in business and in India form Methode, but also provide engineering support to Methode's company's worldwide in both auto and non-auto segments. The company has been formed, Managing Director has been appointed who is a long term Methode employee who was relocated to India, and we’re in the process recruiting engineers in the electronic, mechanical and software discipline.

Moving next to our interconnect segment, sales increased 66% compared to fiscal 2007, gross were mainly driven by our TouchSensor acquisition. Excluding TouchSensor the interconnect segment organically grew 10% over last year, but had disappointing profits on the dual current business. TouchSensor spend a good portion of the fiscal year launching several new programs through electro access new kitchen suite, which includes products and cook ups, ranges, ovens, refrigerators, and dish washers. This new electro like appliance debut in April featuring Kelly Weeper as a spokes person. Several prime time commercial featured the TouchSensor technology using Electrolux trademark name of wave touch controls.

Focusing on global expansion TouchSensor has recruited a European business develop manager to execute a very entrance to this important market in the coming year. In addition to its geographic expansion plans TouchSensor has been active in targeting new markets with its field effect user interface panel in the industrial and automotive market. Also TouchSensor engineers have developed several products using field effect technology for liquid level sensing.

Sales for our r one gigabit copper transceiver form day to make remains strong during fiscal 2008 both in the US and Asia. Customer interest for our 10 gigabit copper transceiver prototype is high. By launching this new product has been upon the supply of our custom semiconductor which we are in the process of sourcing.

Methode's power product segment expanded its offering during the 2008 fiscal year by acquiring value engineer product for VEP and the assets and patterns of (Trivatech). These acquisitions provide a power segment with thermal management and power connector capabilities. In the coming months we will begin manufacturing power products in the new plant located in Northern Africa. These geographic and product expansion are expected to unable power product segment to more effectively serve the needs of its growing multinational customer base.

Power products business in the telecommunication market increased towards the end of the fiscal 2008 and should carry forward. In addition, study growth has come from Military and Aerospace industries. Recently we awarded orders and product to be included on two new Virginia Class Submarine being commissioned.

Internationally, we continue to make considerable progress in the global railway market which uses laminated bus bars in the conversers of electrically power passenger and trade trains. Several new customers were added including Siemens, Bombardier and ADD. We are also gaining new business in the growing wind power market by laminated bus bars using the power conversion modules offered by customers plus investors. We anticipate our expansion in the Northern Africa will be welcomed by these European customers.

As the interest in Green Technology expands, Methode is positioning its power products to target opportunities in these growing markets. In addition to electric power trains and wind power, interest was generated from Methode's power product solution in the hybrid and electric vehicle markets. We intent to enthusiastically target these new opportunities in the coming year.

In Methode's other segment our magnalastic devices or MDI launched steering torque sensor in fiscal 2008 on the new spider three wheel motorcycle offered by Bombardier.

To minimize class and produce a high quality MDI take advantage of Methodes automotive manufacturing facilities towards production requirements. During the year MDI was also awarded the steering torque sensor on an ATV program. Indications are that the total volume of the two programs may increase to nearly 100,000 units by fiscal year 2010. These represent MDI's first major production limps.

As we continue to broaden our global footprint, Methode also remains focus on bringing new pattern technologies into the market place. We have recently finalized a strategic and business alliance with (Flumadine) located in Albuquerque New Mexico, to assist with their product development and to bring their pattern at biometric identification technology to new markets such as transportation. Biometric Identification can be used to support potential features in the auto such as the identification of the driver to personalize if it was right handling comfort and convenient characteristics, or to authorize to be able start and fore use our authentication of end vehicle transaction via thermotics.

With our technology incubators such as magnetic sensing, carbon fiber heaters, acoustic wave sensor, as well as our strategic alliances with Sensor Dynamic, Emergent and now Flumadine that will remains focused on transitioning and strengthen its business by incorporating leading edge technology into our markets, into our products.

In the coming years, our product focus will continue to evolve from the component format to won their highlight or direction into higher value added systems which focus on user control and interfaces, sensors and power products. We believe this shift will strengthen our valley to our current customer base as well as aging our focus to further penetrate into other market such as medical, consumer, defense security and industrial.

Because of the difficult economic market and in particular the unpredictable sales of the company’s largest automotive customers, Methode is just continuing its factors of dividing sales and earnings per share guidance.

Before I turn the call over to Doug, I want to comment on our acquisition program which is Methode's executive staff key initiatives for fiscal 2009.

Over the past few years, Methode's focus on balance sheet management has placed the company in a strong cash position with over 100 million in cash low debt and a $75 million credit facility. We anticipate that in the near term the struggling in the economy and struggling in financial markets will proves lower valuation for potential acquisition target which in the past have in our opinion than over price. With additional resources focus on acquisition our strong capital structure and excess to funds, plus our global reach. We have positioned the company to move quickly to take advantage of potential opportunities to add both depth and breadth to Methode Electronics.

And at this point I will turn the call over to Doug for his financial review.

Doug Koman – Chief Financial Officer

Thank you guys and good morning everyone. Let me start with the quarterly full year sales and gross margin review for our recording segment. The automotive segment had first quarter net sales of 108 million compared to 93.3 million last year. Included in the current quarter where price increase is up 10.1 million on price forward business that they had not yet transferred out of our facility. Including the price increase, automotive sales were up 8%. Excluding the price increase quarterly automotive sales were down 3.1%. This drop in the quarter is primarily due to the impact of the American actual strike on the North American automotive business.

For the fiscal year, the automotive segment had net sales of 362.1 million compared to 315.7 million last year. Included in the fiscal year where price increases are up 20.7 million. Again including the price increase automotive sales were up 14.7%. Excluding the price increase automotive sales for the year were up 8.1%. The increase in sales was from both at our European and Asian operation, better than expected volumes from our North American OEMs, and translating foreign sales using a weaker US dollar. The weaker US dollar positively affected automotive sales from our foreign operations by 3.5 million or 3.5% in the fourth quarter and by 9.2 million or 2.5% for the fiscal year.

In the fourth quarter, gross margin in automotive were 26.5 million compared to 18.5 million last year. Again included in the current quarter where price increases of 10.1 million, excluding the price increases gross margins as a percentage of sales were 26.3%. Excluding the price increases gross margins were 17.8% of sales. This compares to 19.8% last year. The lower gross margin contribution was the result of the lower production volumes in the quarter, again primarily due to the North American or the American actual strike and higher material cost.

For the fiscal year gross margin for the automotive segments are 80.1 million compared to 56.6 million year. Included in the current year where price increase is up 20.7 million. Including the price increases gross margin as a percent of sales were 22.1 million, excluding the price increases gross margin were 17.4% of sales, this compares to 16% last year. Our higher gross margin contribution is primarily the result of the successful integration of selling, manufacturing into our multi facility last year.

The interconnect segment had net sales of 39 million in the fourth quarter which is up 49% from 26.1 million last year. For the fiscal year the interconnect segment had net sales of a 136.3 million compared to 82.1 million last year, a 66% increase in net sales. The increase is substantially due to sales from TouchSensor which was acquired during last years fourth quarter. The remaining businesses in this segment had slightly higher sales overall in both the quarter and the fiscal year.

Currency translation increase foreign sales by about 0.5 million in the quarter and by 1.3 million in the fiscal year. Gross margin for the interconnect were 9.5 million or 24.4% of sales compared to 7.1 million or 27.2% last year. For the fiscal year gross margins for the interconnect segment were 31.6 million or 23.2% compared to 24.1 million or 29.4% of sales last year. The decrease in gross margin as a percentage of sales is primarily the result of the TouchSensor acquisition which currently has a higher cost of product sold than other businesses in the segment due to the value added nature of its business model. Additionally, cost of product sold for our PC card and Express Card business also increased due to difficulty in launching PC and Express Card adaptor products.

The power product segment sales were up in the quarter with 12.6 million this year, compared to 9.6 million last year. For the fiscal year sales were 45.8 million up from 43 million last year. The quarter fiscal year benefited from sales from VEP which is acquired on August 31st of last year. This was partially offset by a reduction in cost by sales on certain projection for our customers for whom we are no longer to sell supplier and certain other bus bar projects that reached end of life.

Gross margins in the power product segment increased to 3.3 million in the quarter from 2.8 million last year. As a percentage of sales however margins decreased to 26.2 million from 29.2% last year. The percentage decrease is primarily due to higher material cost and some price erosion at our North American operation. This was offset savings and lean activities at our China operation. For the fiscal year gross margins were 12.6 million or 27.5% of sales, compared to 12.2 million or 28.4% of sales last year. The other segment had fourth quarter sales of 1.8 million down slightly from 1.9 million last year. For the fiscal year the other segment had lower sales at 6.9 million compared to 7.6 million last year.

Gross margins were breakeven in the fourth quarter compared to a 0.5 million last year. For the fiscal year gross margin were 0.2 million compared to 1.8 million last year. The reduction in gross margin in both the quarter and fiscal year is primarily like the results have increased initiatives that have torque business.

Some of the highlights in the consolidated income statement for the year. In January we announced the structuring of the legacy North American automotive interconnect businesses. The restructuring charge in the fourth quarter was 4.1 million compared to a 100,000 in last years fourth quarter. For the year the restructuring charge was 5.2 million this year compared to 2 million last year. In the fiscal year 2007 we have restructured a European automotive business and transferred Scotland manufacturing to multi.

Selling and administrative expense in the fourth quarter was 16 million up from 13.4 million last year. As a percentage of net sales selling and administrative increased slightly to 10.4% compared to 10.2% last year.

For the fiscal year selling and administrative was 61.5 million compared to 50.2 million last year. As a percentage of sales however selling and administrative was 11.2% for the year and last year. The increase in spending is primarily due to the TouchSensor and VEP acquisition. The remainder of the increase is primarily due to additional global staff support increased long term incentive compensation due to higher amortizable stock prices and higher professional fees such as the increase in the M&A activity as we do focus on that part of our business.

In the fourth quarter we incurred assets total income $1.5 million, this includes 700,000 for machinery and equipment, as a result of the lower than expected sales over the life of the product, that was – it was using the news to produce. We also impaired 1.8 million for a patent which was deemed to be commercially impracticable. The amortization of intangibles was 1.8 million for the fourth quarter compared to 1.6 million last year. For the fiscal year intangible asset amortization was 6 million, compared to 4.7 million last year. The increase is primarily due to the acquisition of TouchSensor and value engineered product.

Interest income net was 600,000 for the fourth quarter compared to 700,000 last year. For the fiscal year interest income was 2.3 million compared to 3.4 million last year. The reduction is primarily due to lower nominal interest rates this year versus last year, lower average cash balances this year compared to last year again due to the GST acquisition, and the average yield on our investment is lower since we have been more heavily invested in tax exempt in this post this year compared to last year.

Other net expense of 1.2 million in the fourth quarter compared to an expense of 0.5 million last year. For the fiscal year other than that was an expense of 3.2 million compared to 200,000 last year. The increase in expense is substantially due to the impact of the weaker US dollar on the activities of some of our foreign operation and once recorded for the reduction in the net asset value on a short term investment. The effective tax rate in the quarter was 17.5% compared to 18.2% last year. The cash rate for the fiscal year was 19.7% compared to 27.4% last year. The effective tax rate in the current year benefited from the expiration of the schedule limitation. During the third quarter on certain tax position that were previously reserved and a favorable tax return to tax provision adjustment in the third quarter when we filed our 2007 tax returns. Both years reflect utilization of investment tax credit and the effect of lower tax-rate of the company’s foreign operations.

Looking at the balance sheet, cash is at a 104.7 million, compared to 60.1 million at year end. I will talk more about this when we move to the cash flow statement. Accounts receivable balance is 85.8 million up from 79.2 million at the end of fiscal 2007. Receivables are up primarily due to higher sales. Inventory is 55.9 million up from 54.5 million at the end of last year. The increase is primarily due to increased customer responded funded tooling balances, primarily related to increase automotive business in Europe and also is up because inventory from the VEP acquisition.

Other current assets are 14.8 million down from 15.7 million last year. This is due primarily to amortization of prepaid expenses. Property, plant and equipment net is at 90.3 million, and that’s up from 86.9 million last year. The increase primarily reflects our investment in paint and laser-etch capabilities and additional printed circuit board assembly lines.

Goodwill is at 54.5 million and this is up from 51.5 million at the end of last year. This is primarily related to the VEP acquisition and the purchase price adjustments related to the TouchSensor acquisition and also an earn out payment on the Cableco acquisition. Even or we acquire intangibles with the VEP acquisition, this is offset by normal amortization expense, therefore r intangible assets at the end of the year were 41.3 million compared to 43.7 million last year.

Other assets of 23.4 million are up from 20.2 million primarily due to the balance sheet reclassification of tax accounts relating to the adoption of FIN 48 at the beginning, and then also adjustment between current and non-current deferred tax items.

Accounts payable is at 42.8 million, this is up slightly from 41 million at the end of the year. Other current liabilities are at 34.3 million, those are up slightly compared to last year which was at 31.4 million. This is due primarily to adjustments between current and non-current deferred tax items.

Other non-current liability is at 20.7 million and this was up from 15.1 million at the end of the year, again primarily due to balance sheet account reclassification, due to the adaption of FIN 48 at the beginning of the fiscal year. This was offset by deferred compensation payments related to the TouchSensor acquisition.

On the cash flow statement the increase in cash and cash equivalents was 44.6 million for fiscal 2008. Year-over-year cash provided by operating activities increased 24.4 million, this is primarily due to the increase in net income including the customer price increases and another working capital account changes. While capital spending was $4.9 million higher this year than compared to last year primarily for the new paint and laser etching capabilities. We use less cash in investing activities this year compared to last because of our acquisition activity was much lower this year than last year. The increase in cash used in financing activities of 4.6 million is primarily due to fewer stock option being exercised this year, and this year we purchased 1.2 million in common stock where last year we purchase 3.6 million. And that concludes that my remarks.

Donald Duda - President and Chief Executive Officer

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

Question-and-Answer Session

 

Operator

Thank you. (Operators Instruction). Our first question comes from Jeremy Holmen from Singular Research please proceed with your question.

Jeremy Holmen

Hi good morning guys.

Donald Duda

Good morning.

Jeremy Holmen

I know you not in the business of offering guidance, but I just wanted to speak maybe in general terms about the next couple of years and to make sure I am kind of following things particularly in the order segment. I wonder how much I believe in May we were talking about beyond a worldwide GM platform beginning in 2011 that was expected to lend 18 million or so in that year, and also some new switch in Sensor businesses in 2010. Am I right? And looking at the order revenues in that, this year you had 20, I believe it was 20.7 million in, in I guess non-recurring type revenues so to speak related to the price we’re reprising that that will disappear next year right?

Doug Koman

Yeah we expect that to out of that Chrysler business at the end of fiscal `09.

Jeremy Holmen

Okay. And I don’t know how you might was talking about auto, it was in the quarter being down 3.1% without that price or effect and you started the American actual strike. If you would take the actual strike effect down of that would that have left you in the neighborhood of flat?

Doug Koman

Potentially.

Jeremy Holmen

What I am getting that is, are you overall seeing the overseas positive kind of counter balancing the North American negative right now in the grand, thanks?

Donald Duda

You are probably not going to allow my answer but that is, or that is the very reason that’s we are not giving guidance because over the turmoil we are seeing was a three its becoming somewhat difficult to predict what their buying are going to be.

Jeremy Holmen

Sure.

Donald Duda

And but I can tell you in past we offer both of that growth in Asia that and in Europe would offset that. A going forward it is difficult to predict whether it will or it won't. We had, in past year we had the positive swings but it is very difficult to predict what we are going to see particularly this year. You know, lot of sales used to relatively predictable only on give or take now the 0.5 million units in the year and if not that very much.

Jeremy Holmen

Sure. Yeah I can certainly advertise where you are with that and hold fresh ability to give guidance. Looking at inner-connect and ten power and moving through 2009-2010 yeah, what are your kind general directional expectations for those businesses in terms of revenues?

Donald Duda

We’re then please with our power segment, they’ve grown organically it have one program at the end of this year, their technology wasn't used on replacement business and that was a major reduction for them, but they also started other business to replace that, and they have the another customers that can source them and we chose not to try to maintain the businesses by reducing the margin, but that didn't make sense to us. So they have gone through that, they’ve got a new business and their entry into Europe has been excellent garnering customers that I think generally are difficult to get down of the event maybe used and note that we can feel more comfortable opening a plant in Northern Africa which I should point out will give our products very much a global footprint much make round that they can produce in the US from Mil Aero and more sensitive security program like Wilson in Europe and like Wilson in China. So the expectations are the need is moving in right direction there.

Interconnect Sensor is even now we purchase TouchSensor from European company there were actually have been pretty little business in Europe something around $1 million in sales is that. So that’s really untapped a territory for them, they have recruited a strong German based Manager form from the appliance industry, they are well positioned to penetrate, so I guess in – with the caveat but the new housing territory or down and the plant industry is from the lot pressure and that needle we think would be in the correct direction, but we have to see what happens in appliance in the defense quickly they can make investment in the year, but its probably important plan out of their product, it can be manufactured in automotive facility. So but its necessary in Europe we can have production quite quickly.

Jeremy Holmen

 

Okay, and looking at a point I saw Electrolux reporting this morning and there is geographically some disparity and what they had to say, what’s the general feedback that you got from Electrolux on in -- the way touch technology, in the way this line of products?

Donald Duda

 

They had a good launch and there the –at least to our knowledge the first company that really launched the whole suite of product they have launch, I think that’s helping they, but they are feeling no doubt the affect to the down turning the appliance industry they’re off I guess on our projections slightly but not lowly off, but they’re certainly effective out there.

Jeremy Holmen

 

What – I don’t know if this kind of asking for something that you really on that we can discuss, but -- over the next year to what goals if you will – do you have in terms of getting on other platforms or higher end points such as such Bolster or companies of that source?

Doug Koman

That’s exactly the reason we’re expanding in the Europe, that’s – if we look at European appliances they’re all fairly compact given the size of the European kitchen and the real technology from the company. So we are very much focus on that market. Now, it is somewhat like auto, it take you probably 18 months to get on the platform, and they’re probably less than auto but its not a – they don’t book it this month and ship it next month.

Jeremy Holmen

Right, it would sound to me that if you were to get on two or three platforms this year that would probably viewed as very good.

Doug Koman

 

Oh yes, and we are quite pleased, and it depends on the customer too. At last it would be very nice win for us.

Jeremy Holmen

 

Okay, one last wonder and then I will jump back, on Methode India, is that going to be within on order segment and just to make sure I called it you correctly that you guys have given a lot of information, I am just trying to keep it on those. That’s basically in engineering businesses I understand that – so I would suspect as the higher margin labor billing hour type business, am I right about that?

Donald Duda

I think its twofold, the Indian automotive is something we feel that we want to make in routes two way, we certainly have a desirable products for the marketplace so that is non initiative there, but the prime initiative is to provide Methode companies worldwide were with low cost, affordable engineering services as we pursue additional customer, additional programs, but all the respect to American and European engineers at 100-K plus that limits your ability to pursue certain program so while tapping into India which is in the national sorts of talent and quite affordable that allows us to expand product, to develop new product it’s probably the quicker pace we will be able to do in the past. Methode has done an excellent job of leading out its factories and really looking at cost of manufacturing, but when we look at the cost of launch at either a GM program or a non-auto program, the engineering expenses are quite hefty and you have to put all the engineering expense in the front, so you are in the red from the beginning until you are launching the product. So the focus India’s twofold but we are very excited about having that expertise available to our companies and the gentlemen that there knows that was extremely well, that was Methode quite sometime and able to fine job of servicing his the Methode, his Methode customers are quite well.

Jeremy Holmen

Okay.

Doug Koman

Which is the major initiative for us, its kind of last leg of what we have done, just try to be able to more competitive and require more business.

Jeremy Holmen

Okay, thanks I will jump up.

Doug Koman

Thank you.

Operator

Thank you. Our next question comes from Mr. David Leiker with Robert W. Baird. Please proceed with your question.

David

Hi this is David (Inaudible) for David. Let me jump back on pricing, it seems like you had a pretty substantial up tick sequentially, is there anything – do you have another pricing increase initial line that was going on the?

Donald Duda

Yeah David, what happen is you know initially when we start up this process we thought that threshold is going to be out by the end of the fiscal year, when they missed their deadlines we negotiated the new pricing with them and so that is covered by purchase orders. So the pricing in that fourth quarter was higher because of that, they’ve been delayed in getting their product out of our facilities.

David

Okay, is there in the past you think that continues to the second quarter and next year, is that still the thinking?

Donald Duda

No we I don’t know that we have necessarily commented on that, but I mean, they are giving us the new deadlines, but they have missed deadlines before, so we hope we expect them to be go on what we are seeing now as by the end of our fiscal year. We -- might that be operator they might, but we -- that’s up to them.

David

And your pricing basis on that year?

Donald Duda

To what level we can tell you?

Doug Koman

I may have thought this last quarter; they have made progress on their move. So we anticipate that will conclude their exit – the schedule shows by the end of the calendar year, but it you know again like they missed before and I don’t think we would go back, I shouldn’t say we wouldn’t but I don’t know there is additional price increases we just buy on that we did anticipate as they transfer the business and they’ve got other issues they’re dealing with but they have moving products of Methodes.

David

Okay, out of business how much of that is coming back in North American versus being in Asia?

Donald Duda

I want to give you a exact percentage as I will recall, but it is a significant portion that comes back to the US.

David

It would – more than half?

Donald Duda

Oh, yes, yes.

David

Okay. I need restructuring action, it sounds like you’re going to be done with that in third quarter 2009. When do you think that show-off in your, I was wondering if you (Inaudible)?

Donald Duda

 

The – when we complete that restructuring some of that depends on when Chrysler finally removes their project because that slows down that process. But I thin we are starting to see the benefit of some of that currently.

David

Okay, that made (Inaudible).

Donald Duda

Yeah, it – but it will increase as we are able to get product out of our facilities.

David

Okay. I mean my view what kind of header you guys thinking about for next year, I was wondering?

Donald Duda

 

I am sorry.

David

 

On higher commodity prices and you’ve mentioned that is one of things that you expect to reduce margins next year, I mean, any kind of numbers around that?

Donald Duda

No, getting to little bit in the guidance, I think we said it is something that we anticipate being an issue.

David

Right.

Donald Duda

I didn’t.

David

Okay, do you any hedging programs that are developed?

Doug Koman

We’re looking at that hedging opportunities but again its nothing that we have currently in place.

David

Looking at the interconnect business its been running pretty close as breakeven for a while, do you think the restructuring, do you think restructuring happen to taking there, are you going to, going that back to the 10% margin range if they’re running that is that?

Donald Duda

That is really our intent, the interconnect as you said has been running flat in generating revenues but not up to the bottom line. The PC card business was a good running business on product line, but the PC card that go into laptops now you are seeing that significantly reduced and pay of review is the of waste product so its time to exit that business and we had some growth from that last year, but really having (Inaudible) so we are making necessary adjustments there, we have been along with our auto restructuring, we talk about an interconnect restructuring and that’s gear to solving that issues that, we have certainly lot of diversifying Methode, we have been, I think we have been successful in the power product group, sometimes their acquisition was a good acquisition in Interconnect but we struggle from other areas and we are making those adjustments and they will see the benefit of that as we move forward..

David

How much of the margin decline in that segment has been PC card versus kind of legacy connector business?

Doug Koman

I don’t know, I don’t know if we quantify that for you David but I was a, I mean, they were about breakeven as the gross margin level, and then...

David

 

Which one of breakeven?

Donald Duda

Yeah, the gross margins that they do products, yeah. And so, and then they had their overhead in selling and administrative in top of that. So that was – they were just very disappointing this year, so they makeup a good portion of that.

Doug Koman

Let’s really say a good portion of that is the issue there.

David

Okay, you talk about acquisition being a big focus here on '09 any particular areas you’re focusing on?

Doug Koman

I don’t know what I want to comment on that?

Donald Duda

Profitable and accretive.

Doug Koman

And probably not something out of the trade. So I know, I think we appropriate to go any further than that as they said – as the key focus for us and we think there is going to be some real opportunities out there..

David

Is there non-auto or…

Doug Koman

I wouldn’t rollout on auto acquisition but our focuses has been on the non-auto. But again the profitable acquisition and maybe sensors are something like that we certainly wouldn’t roll that out?

David

Okay, what do you guys thinking about the taxes going forward, you have been running below 20% per line is that you can expect to continue?

Doug Koman

Yeah, we should probably be in the very low 20s again unless we do something with an acquisition that moves that number around but just where we are today where low 20s is probably an expected translate.

David

 

Okay and anything I am CapEx, any depreciation for ’09?

Doug Koman

I would expect at to be comparable that we give this past year.

David

CapEx?

Doug Koman

And again that includes as Don mentioned where we are moving into Northern Africa. So as capital spending related to net.

David

 

Okay great thank.

Doug Koman

Thank you.

Operator

Thank you, our next question from Bryan Crawford with Parameter Capital Management. Please proceed with your question.

Bryan Crawford

Hey good morning gentlemen.

Donald Duda

Good morning Bryan.

Bryan Crawford

You know most of my questions got answered with the last calling, but one –could you talk maybe just a little bit more about the interconnect business, I know its been breakeven, I know the PC card business has being challenging for you. What are you looking for towards interconnect business to drive profits in such going forward?

Donald Duda

Okay. Historically the TouchSensor out of that for a moment, interconnect has been our component driven business. And over the past several years those components have received tremendous pricing pressures from China and really other markets as well. And we have began the process of the transitioning that away from fewer interconnect more into user interface, higher subsystem or systems such as what TouchSensor offer. So you will see our efforts in that area more on lines of user interface where we are putting may be a complete user interface such as what TouchSensor does for its appliance customers that will having interconnect that will have maybe a power devices on it, but essentially going up the value pyramid. And its not a matter of simply restructuring the interconnect we are in the process of rebuilding that along those line and so we know we are exiting for the most parts of PC cards business, we are maintaining some of the business we have for set top devices as pretty good volume there and then for the next couple of years we will maintain that but –the fix that really is that it relies product offering and that unlike what we have done in auto in that in that many of the legacy products in auto were essentially commodities that could be bought from any number of people, we’ve been very pleased in Europe that lot of those now are technical based products that don’t have IP projection and they command a higher price in the market.

Bryan Crawford

You have mentioned in terms of user interface both in the automotive and the appliance world is there other applications?

Doug Koman

We believe there are. And what TouchSensor are brought to Methode is minimally have a little higher SG&A and some of the other companies. They operate much different level dealing with the designers and not so much from a purchasing standpoint, a lot of repurchasing involved, but they are customizing the human machine interface if you will. Much like we are deciding to do in auto and that we’re doing sensor stacks got infotainment systems that we’re dealing that using the TouchSensor technology where, I won’t where the experts enter, but where the people that are the acknowledgeable bringing that expertise to the customers to –and how should this particular device interact with the passenger or with the consumer. We believe there is allover opportunities not just in auto and appliances; there is certainly opportunities in medical for a company that have a good command of HMI and the manufacturing capabilities to produce the worldwide as competitive prices. So there is a – you will see us moving that direction, we target acquisitions in that area though. So it brings together a lot of Methode Technology a lot interface has have sensor. So the ability to provide not only the interface, but also going the sensing the interface is controlling is also fairly strategic for us, you will see the interconnect group moving in that direction

Doug Koman

Yeah, I mean, its just at a very, very high level you would – it sounds like things have turned it you know, on the power segment you guys feel pretty good about your position from the new customers, some of the new things that you’re doing there, it sounds like automotive you just don’t know next 12 months. Interconnect 20 more positive, don’t know, negative just trying to get your high level of that deal..

Donald Duda

Why, you said that the needle on power is probably in the right direction, TouchSensor I think we feel the same way about are probably a little tougher in the US, but there is a penetrating Europe. And interconnect, if we didn’t do anything I would say the needles are in the wrong direction, but we are taking the right steps and so that, it should trend where we want to it be and its again the key focus for us because we’re going to at least see there is a market developing for interface type products. But where we can integrate a number of Methode components and technology. So the needle is probably a little further, probably a little smaller needle, so that’s why until we get a couple of more things and interconnect number of balance. I don’t know if that answers your question probably best I can give at the moment.

Bryan Crawford

It helps that adds a some color. The final question I had is just in automotive how exposed are you to the SUD, I am sure you get this question SUD small truck, you know, obviously those platforms and products are in trouble for at least a little while anyway. Any sense core you exposure there?

Donald Duda

With our exit of price our exposure was significant we l reduce there which is one of the reason that we felt that appropriate that we think exit that business. Our afford is a bit of a midback, good card business in Europe, more truck in US, although we have made the correct adjustment by moving that to Mexico. GM, the new programs for GM are more passenger cars but we do have in our business in Asia for GM is going to GM, GM 800 in which portion of it so that’s dealing the – that’s about 15, maybe 12 million of sales or something like that, but its not a $100 million product. I have been more consent if the business that we have 114 were SUD base, but as I mentioned the small vehicle platform is master card. So we have a mix bag but I think Methode realize that it needed the noble rate from particularly the appropriate step but really some years ago.

Bryan Crawford

Okay, great. Thank you gentlemen.

Donald Duda

Thank you.

Operator

Thank you. Our next question comes from Mr. Tom Fogarty of Silverstone Capital Management. Please proceed with your question.

Tom Fogarty

Hi, good afternoon.

Donald Duda

Hi Tom.

Tom Fogarty

Hi. I just had a quick question about working capital you guys did a very good job straining the growth net this year, I am just wondering whether there are opportunity to actually squeeze some cash out of that next year to believe sales be down?

Donald Duda

Yeah, usually that’s what happens when sales do and we decline that there, we do expect that we’re seeing improvement in our working capital because of that.

Tom Fogarty

In terms of days, do you think these really improve that further?

Donald Duda

Yeah, I mean on DSO it’s interesting because as we move more of our business to outside the US the terms generally are a little bit longer. We find out that when we were doing the due diligence on our TouchSensor acquisition that also applies us a little bit longer as far as DSO than auto, and build that into the model. But, yes I think we might see a link of DSO going forward just exactly this year.

Tom Fogarty

Okay.

Donald Duda

And there is anything opportunities for us is inventory is to a degree that we can reduce our inventory and that’s really back to or lean initiative that would have done an okay job and its do a better job and that is an opportunity for us, but that’s not something new, we will get that, we ask to review we discussed inventory, but its an area that, that’s a squash, we can do that, but that will give us a a throw.

Tom Fogarty

That's a little bit difficult, that is not, I mean, as your supply chain is getting longer, as you move around the world?

Doug Koman

Yes, I feel there is a learning logistics.

Tom Fogarty

Yeah.

Doug Koman

Producing an Illinois shipping to Detroit into difficult and now you are buying from a multiple point somewhere in the world assembling different locations its challenging. And I think the quick solution that people look at what we have to increase inventory well that’s not the best solution, we have figure out and you do both, and I thing that will down the right track to do that, its just – its got a ways to go, but it’s an opportunity, its certainly, you know, we’ve gotten well in auto and for instances our ASD group and Mexico six, seven days of inventory. So we know we can do it, its doing an opportunity.

Tom Fogarty

Great thanks.

Donald Duda

Thank you.

Operator

Thank you. Our next question comes from the Mr. Jeremy Holmen with Singular Research. Please proceed with your with your question.

Jeremy Holmen

Hey, back to the discussion on medical devices if I could? Just that’s -- the medical device industry not being something I am super familiar with, if I look at if I look at the major companies like Siemens, GE, Philips and companies like, is the switch and sensor technology that’s used in their devices be at MRI's or head scan and things like that, are those enough technologies they used or they typically licensed from other parties?

Doug Koman

That’s a bit of mix bag. We are enrolled in the medical thus far have been through power products on MRI machines. The user inferences I don’t know that – and they are probably a mix bag as well I don’t know what some of the big guys are doing what. But, our interest in medical for user interfaces is really more when you look at devices that might be in the ER, where the some of the technology that we bring to market might help prevail a logical interface. There are some FDA regulations on user basis becoming more I don’t think regulated but more of the topic so those are the areas where you target a device manufacture that really doesn’t have the user interface they have the great, they have the technology, they have the scientist and so on, but those accounts that go outside for is that what we wanted to target and we think that we would have to at least acquire some sort of aftermarket in medical, I don’t think that’s something that we have smaller group together and we go penetrate the medical market and that’s one of our acquisitions target needs to be that has to market getting in front of the customers is difficult.

Jeremy Holmen

There is any particular path appear more easier challenging than the next a robotic surgical or anesthesiology? I mean you can kind of blend down a whole number or there any that kind of seem to be the lowest hanging fruit?

Doug Koman

I don’t know but I can answer that yet, and there is an area that we are having studies done on, and I think the initial read from the studies is that there is a market there to play in, but then the next step is looking at what the best way to get into that market and we are literally looking at that for that now.

Jeremy Holmen

Okay and back to auto, and just little reminder for me personally what – what sort of presence if any do you guys have in South America and the reason I asked is in recent news with Toyota looking to open up a facility down I think it was 2011 you wanted to see if you have a presence down there and if you don’t it kind with the game playing if any is over the long term. I am sure I am going to get a call from a marketing sale if you said that.

Donald Duda

We do not have adventure down there, and at the moment we don’t have plans for it. India was our focus and I think we will stay with that for a while. It’s a market we mannered, but it can only pride of so many fronts and I think we want to remain focus on what we’re doing in India and in Japan and Asia.

Jeremy Holmen

Alright.

Donald Duda

Our key areas first. I wouldn’t rule it out may be there is an acquisition that comes up like there is a joint venture opportunity, but that has not been part of our strategic discussion recently made.

 

Jeremy Holmen

And are you –I am sorry –are your probably doing business with into what extend?

Donald Duda

Very little bit.

.

Jeremy Holmen

Okay. And we would see the logical thing to be it would be if you work to get design into whatever platform there might be in producing down there have anything you will get not along that would be one path..

Donald Duda

I will certainly help, like we went into China and developed the facility there knowing we have the GM business that would always probably have been one of the reasons of North Africa for power as you go in with at least some backlog that help to cover lays that all.

Jeremy Holmen

Okay great, thanks guys.

Donald Duda

Thank you.

Operator

Ladies and Gentlemen, there are no further questions at this time. I will now like to turn this call over to management for closing comment.

Donald Duda

Alright, Melissa, thank you very much. We will thank everyone for listening and have good day and good weekend. Thank you.

Operator

Ladies and Gentlemen this does conclude today's teleconference. You may disconnect you line at this time. Thank you for your participation.

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THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Methode Electronics Inc. Q4 2008 Earnings Call Transcript
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