Don Duda - President, Chief Executive Officer Doug Koman - Chief Financial Officer, VP, Corporate Finance

Steve Dyer - Craig Hallum Christopher Van Horn - FBR Capital Markets Joe Vruwink - Robert W. Baird

Welcome to the Methode Electronics Fiscal 2015 Second Quarter Earnings Conference Call. At this time, all participants are in a listen only-mode. A brief question-and-answer session will follow the formal presentation. 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 conform the statements 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 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, volume, quality and cost of new program launches; ability to withstand price pressure; 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 U.S.; 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 cost and expenses due to regulations regarding complex minerals. It is now my pleasure to introduce your host, Don Duda, President and Chief Executive Officer for Methode Electronics.

Thank you, Adam, and good morning everyone. Thank you for joining us today for our fiscal 2015 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 will be pleased to take your questions. As we reported this morning, year-over-year second quarter sales grew 20% and first half sales grew 25% driven mainly by higher North American automotive and power products sales, partially offset by decreased sales in interface. Looking to the second half of the year, we expect revenues to decrease slightly compared to the first half affected by the full impact of the contractual automotive price reductions of the first portion of the Ford center console program going end of life in the fourth quarter, lower overall third quarter sales through the holidays and reduced appliance sales which I will discuss further in a minute. Second quarter consolidated gross margins increased 450 basis points and in the first six months improved 370 basis points, driven mainly by higher sales and the corresponding the manufacturing efficiencies, but margins were also positively impacted by a $1.3 million reimbursement for the cancellation of a center program worth $9 million in annual revenues which was to start in fiscal 2016, $0.6 million for increased manufacturing efficiencies, non-recurring price increases on legacy products and other improvements at AMD, Methode’s captive injection molder, also a very favorable automotive and power products sales mix as well as increased volume at our lower cost manufacturing facility in Egypt. We want to take this moment here to congratulate our teams in Europe and Egypt for the successful start-up of this facility over the past few years. Looking forward we anticipate lower second half margins as a result of decreased overall third quarter revenues through the holidays, lower appliance sales, the absence of the cancelled program benefit and one time price increase we saw in the second quarter, the first portion of the Ford center program going end of life, the full impact of the truck and SUV contractual price reductions and higher R&D spend for the chip development on the 10 gig transceivers of approximately $2 million. Worldwide we are very pleased with efficiencies which all of our factories are operating. And I congratulate our teams on their continuous efforts to improve our manufacturing efficiencies. These efforts continue to have a very favourable effect on our margins. Year-over-year second quarter selling and administrative expenses as a percentage of revenues increased to 11.1% from 10.3% and for the first six months decreased slightly to 10.6% from 10.7%. In the second quarter, salary and bonus accruals increased due to the company’s strong performance. We do expect compensation expense to increase SG&A as a percentage of sales in the second half of the year as well. Additionally, legal, travel and other expenses also increased. Legal expenses were $3.7 million in the first half and we anticipate approximately the same for the second half of the year. As such we expect SG&A as a percentage of sales to approximate 11% for the full year. Our second quarter operating margin was 15.1% compared to 11.4% last year. And income from operations improved 60% to nearly $35 million. In the first half, operating margin increased to 14% from 10% as income from operations grew 71% to $63million. Earnings per share improved 29% in the second quarter and 39% in the first half despite the fact that year over year our effective tax rate increased from 6.6% to 25% in the second quarter and from 7.5% to nearly 25% in the first six months. Given these results, we have increased our overall profit outlook for fiscal 2015 to a range of $114 million to $120 million for income from operations and $2.20 to $2.30 for earnings per share. We are reaffirming our sales guidance range of $870 million to $885 million as we anticipate appliance sales will be about $7 million lower in the first half due to our revised internal projections. Based on this guidance range, our fiscal 2015 operating margin target is in the 13.1% to 13.6% range. Now turning to review of individual segments compared to last year. Automotive segment net sales grew 32% in the second quarter and 40% in the first six months due to overall higher center console sales as well as higher lead frame sales and non-recurring price adjustments at the AMD. Automotive gross margins improved to 25.9% in the second quarter and to 24.4% in the first half. As I mentioned a moment ago, higher sales were the main driver to the improvement. The margins were also positively impacted by a very favourable sales mix, vertical integration, the program cancellation reimbursement, increased manufacturing efficiencies, non-recurring price increases and other improvements in AMD as well as increased volumes at our low cost manufacturing facility in Egypt. Without the reimbursement and price adjustment, first half gross margins would have been 23.7%. Looking to the second half, we anticipate automotive gross margins will be lower compared to the first half, attributable to decreased overall third quarter revenues through the holidays and the first portion of the Ford center console program going end of life and truck and SUV contractual price reductions. However we still anticipate our automotive gross margins will approximate the midpoint of our fiscal 2015 target range of low to mid 20s. During the second quarter, Methode was awarded the infotainment and HVAC modules as well as other content for the next line-up of Aston Martin vehicles. The program is expected to launch in our fiscal 2017 with average annual revenue of $4 million per year for four years. We were also awarded the domestic center console program for an SUV for model year 2018, launching late in our fiscal 2017 with average annual revenue of approximately $18 million for four years. Moving to Interface segment. Year-over-year second quarter revenues decreased 8%, driven mainly by lower North American remote control and appliance sales and lower Asian remote control sales than last year. In the first half, sales fell 5% due to lower North America appliance sales and lower remote control sales in the Asia and Europe. We anticipate interface sales will be lower in the second half as compared to the first half due to a reduced sales outlook for appliances. Sales to our largest appliance customer for our major laundry program dropped off significantly towards the end of the quarter. Therefore we have reduced our expectations for the program for the balance of this year. Compared to fiscal 2014, interface’s gross margin declined in both periods due to the lower sales. In power products, year-over-year sales improved 15% in the second quarter and nearly 5% in the first half driven mainly by higher North American and Asian datacom sales as well as increased demand for busbars and cable assemblies in Asia, somewhat offset by lower bypass switch sales in Europe. This segment is having its best year in its 30-year history. I congratulate the team on this very noteworthy accomplishment. Year over year power products gross margins improved to nearly 32% in the second quarter and 29% in the first half due mainly to a favourable sales mix and manufacturing efficiencies. Finally, an update on Dabir. Over the last two months, 100 plus cardiovascular surgical procedures have been performed utilizing the Dabir surface with zero adverse tissue effects or quality issues. The surgical procedures were 4 to 8.5 hours in duration with patient’s weight ranging from 150 to over 400 pounds. These procedures are taking place at one hospital in the Midwest which is part of our safe launch strategy. It is our intent to add additional surgical sites using Dabir Surfaces early next calendar year. We are currently negotiating a rollout plan with two more hospitals in the Midwest and one in Asia. This process entails a great deal of documentation with the hospitals as well as meeting the requirements of the respective internal review boards. Our commercialization strategy continues to be the utilization of direct sales, independent sales representatives and distributors. We are currently focusing on hiring representatives nationally who specialize in the surgical arena and to date we have secured positions in the Midwest and the Northeast. In summary, Methode’s first half revenue growth combined with manufacturing efficiencies, vertical integration and a favorable sales mix enabled us to post strong margins and operating profit as well as improve earnings per share and resulted in improved overall profit outlook for the fiscal year. We look forward to pursuing the opportunities in front of us and continue to strive to grow our industrial and medical businesses through product development and innovation. Now I will turn the call over to Doug who will give us further details regarding our financial results.

Thanks, Don. Good morning everyone. I have just a few brief comments on the quarter and six months period. Again the effective tax rate used in our guidance is in the mid-20s. And again this is higher than the previous year because of the effect that we no longer have the net operating loss valuation allowance to shelter the book income. So for the six months period, the tax rate which included some firs quarter discrete items was 24.9%. As we mentioned on the call last time, we still have tax net operating losses available which we expect will keep U.S. federal cash taxes and certain state cash taxes to a minimum throughout the fiscal year. The shares used to calculate the diluted EPS for the six month period increased to 39 million from 38.6 million in the first quarter. This was due to the performance-based restricted stock awards that were issued back in 2011 which vest at the end of fiscal ’15. The accounting rules require that the shares be recognized in the shares outstanding calculation when the performance threshold is achieved, which again occurred in the second quarter. So for the full year 2015 the diluted shares outstanding will increase to approximately 39.5 million shares. CapEx in the first half of fiscal ’15 was $10.8 million. For the full year, we expect it to be at the $22 million to $25 million range. That’s the same as our prior estimate. Depreciation and amortization expense for the first half of ’15 was $12 million, and again we expect the full year to be at about the $24 million to $27 million which again is unchanged from our prior estimate. EBITDA in the six months period was $75 million, or nearly 17% of sales. Based on our 2015 guidance range we expect EBITDA to remain in the 16% to 17% range and be between the $140 million and $145 million. Free cash flow for the six month period was $48.6 million and, again, based on our guidance we would expect the full-year free cash flow to be between $89 million and $93 million. Don, that concludes my remarks.

Doug, thank you very much. Adam, we are ready to take questions.

[Operator Instructions] Our first question comes from the line of Jimmy Baker with B. Riley & Company.

Good morning. This is Austin Dreg [ph] on for Jimmy Baker. Thanks for taking my questions. Can you provide some additional color on that cancelled automotive program, what products were you supplying and what triggered the cancelation? Also what was the annual revenue contribution and then was that expect to go end of life?

The annual revenue was about 9 million, end of life probably three years. I can tell you it was not a torque sensor type product. I really don’t want to get into anything more than that, that it was a sensor negotiation with customers on canceled programs, and be a bit sensitive. But it was a sensor program of slated for 9 million, and our planning for next year, it was a one segment of a worldwide program, one continent but the customer decided to go on a different direction with their product. It was nothing that we did. It was just a change in the customer’s direction and that we would expect to be reimbursed for our expenses.

And then you experienced a large jump in SG&A deleveraging despite the 20% sales growth. How does that compare to your expectation and how should we think about SG&A going forward, not just this year but in general what kind of leverage would you like to see?

Going forward, we expected 11% for the balance of this year. SG&A as I said in our prepared remarks is affected by really compensation expense given Methode’s performance. Going forward and we’re coming to the end of our five year plan, we are having to accrue at the appropriate level that has an impact on SG&A, that will not continue into next year as the plan terminates and of course there will be another plan but you start all over again. Tandem cash has an effect because of stock price. So some of that will mitigate next year but every year we will have salary increases and so on and so if we don’t expect a meaningful increase in SG&A but we do expect it to be to go moderately as we go forward.

Yes, couple of the business units that were not performing up to the threshold a year ago started to hit their numbers. So we needed to do basically almost the two year catch-up on those accruals because they are now performing either at target or at maximum. So there is quite a large adjustment for two of our business units in the one quarter.

Thank you. Our next question comes from the line of Steve Dyer with Craig Hallum.

A lot of the implied I guess weakness or the reason you are not raising more if the back half for the fiscal year comes from appliances, did you lose a customer? It sounds like maybe your major customer pulled back, is that a function do you think of high finished goods or has their trajectory in that program changed at all?

The customer – we are in front loads laundry program which is a higher price point for the customer. The customer launched a top load product which may have eroded the front load sales a bit. We don’t know if that’s all of it. We don’t know our customer’s overall sales were down, the top load is a lower price point to the consumer. So that could be some of it. There is a some expectations that might recover after the first of the year but our experience has been that there is a bit of a downturn that lasts more than a few weeks. So we have I think very wisely reduced our forecast. So to some degree, Steve, it’s too soon to tell and that was the product can go end of life. There is no recall, there is – we’re just looking at our forecasting and releases from the customer and making adjustments. And it occurred late in our second quarter.

Hopping over to automotive, how long – refresh my memory if you could – how long your, the K2 award is expected to run and maybe your understanding of when the successor to that program will go into bid?

Sure. It was a five year program. We are in the second year. So we have another three years, three model years. When it gets rebid, I would say in the next 12 to 18 months. It’s really dependent on where the customer is on their design cycles, when they are out of the studio but where they are a point they can request information and the quotations from vendors. But I would expect that follows the same pattern as it did in the past within the next 12 to 18 months.

And I am guessing you are going to pass on this question, Don, but I will ask it anyway, that you guys have launched that seemingly pretty flawlessly. Any sense on confidence level for the next generation of that program?

Certainly our successful launch gets you a ticket or I shouldn’t assume but gets you a ticket to the next game but it really comes down to design or competitiveness and so on and I have probably already said more than our trade guys would like me to say.

So you won’t know for a while is the bottom line.

Correct.

And then lastly, as it relates to the Dabir product, can you remind me as to whether these are paid trials or not, and then anyway of sort of sizing up how you think about revenue in the outyear for that product?

The trials are paid for, generally we will give the hospital the first month expenses of – not charge them for that, so they can try it, and then get comfortable with the product, and then after that, we expect to be compensated. We sell the overlays and then we lease or ramp the controllers. Revenue wise, I think as we get closer to giving our FY16 guidance we will put some parameters around what we expect, a little too soon, to tell you we are encouraged by the number of surgeries, pressure also but I would say that’s somewhat statistically inconsequential right now. I think we’d want to see many many more in that different hospitals before we could draw some conclusions. So it’s just too soon to tell but the revenue numbers around it which had no issues with the launch, we got no issues during the surgeries. So we are encouraged by that, our production is set, we are hiring reps. So we are in – we’re definitely into the selling mode right now.

And then one more quick one if I may. Obviously you continue to generate a lot of cash and the balance sheet is in great shape. Anymore updated thoughts there, whether it be M&A or how you would look to deploy that?

First of all, a lot of our cash is still outside the US, which – if we did a European or an Asian acquisition that would be helpful. We would pay of course taxes, we repatriated to the US, so as far as some of the other use of cash other than acquisition, as I always investing our businesses and acquisitions are our number one use. But as far as dividend increases or stock buybacks and so on, that is something we discuss and we will probably get more discussion as we build our US cash position but we are not quite there yet. And we did hire a New York boutique firm to assist us with acquisitions. They have been on board now for maybe three months and we have been meeting with them regularly to pursue acquisitions.

Our next question comes from the line of Christopher Van Horn with FBR Capital Markets.

Just to your last comment there, are there any discussions about potential divestitures with the firm that you have hired?

We – I must say routinely but it’s really part of our annual review, we look at our portfolio of companies. And their review is to look at companies for acquisition likely to be a larger dollar acquisitions that we have done in the past, and so I have said before, well then, once you were to take on debt, then logically you might look at some of our holdings that are not as core to our overall strategy and then they would be part of that divestiture if we chose to do that.

And then you talked a lot about the lead frame, the transition lead frame having some success this quarter. Was that specific to certain programs or was it kind of a broad based success? Can you just get into a little more detail there?

Sure. That is – were tiered to, to continental for transmission controller. That the revenues for that product do vary from quarter to quarter based on their customer demand. We don’t have quite as much visibility here as we would have if we were in tier 1 and that was – they had a very good quarter both in the manufacturer in Shanghai and in Monterey, Mexico. To some degree – more than to some degree, it goes with the SAR, increased automotive sales is a very beneficial to that business as it goes on several platforms.

And when you talk about kind of increased production out of the Egyptian plant, is there more to go? I mean is there more capacity in that plant that we might see in the coming quarters, that will possibly help our margins here?

Yes, I was saying in my margin comments, that halfway through the midpoint of our target range. Take that into account certainly as we enter ’16 and ’17 that is a key component of our strategy in Europe and that to improve our margins. For example, we are launching the Renault center console there including the decorative painting which is always difficult to launch. So that will give us a very strong positioning in Europe from a cost standpoint to pursue other center console – and other products. So the team has done a very good job of bringing the product up – or bringing the factory up, definitely this quarter helped at a significant contribution. So I don’t know that I would go any further on the second half of this year on margin improvement with that but certainly going forward it’s a key factor.

And then one last question if you don’t mind. Could you just give us an update on the torque sensor pipeline?

We continue to receive favourable comments from our customers on the data that they are receiving from the torque sensor. There has been no – I am not going to go – there has been no hiccups in the recent testing. And they will know in this coming calendar year whether that is going to go on in automobile or not.

[Operator Instructions] Our next question comes from the line of David Leiker with Robert W. Baird.

Hi, good morning. This is Joe Vruwink on for David. Don, you talked about a lot of things on why automotive margins would have improved in the quarter but if I just look at the sequential revenue increases you’ve seen really over the last 18 months, so it seemed like this quarter stands out as I was just thinking our gross profit contribution, it’s been kind of in the 20% range this quarter, even if you strip out the one timers to 65%, is there anything unusual that’s going on there because it just seems like a very big jump?

Well, you do need to take out the one time – but I think you said you did but our factories continue to perform with excellence – efficiency, low cost to quality, around the world. And there is always room for improvement. But I don’t know that, that I would take that and continue that into the next six quarters and this year and next year. We had a very favourable mix. I did point that out. And that will vary from quarter to quarter. We have a good sales in Asia, and some of our domestic programs, certainly are good programs for us but some of our other programs particularly outside of the US and Europe and Asia carry higher margins. And when that mix flows in the right direction, that has a very positive effect on margins. Some of the programs we have in Asia are much smaller than our US programs but they do carry higher margins. So I don’t want to raise expectations, that’s something that we can continue through the next 12 to 18 months, but we do have price reductions, they are contractual, those won’t affect, automatically we try to offset those with our factory efficiency and changes and so on. But they have an effect. Doug, I don’t know if there is anything else.

No, I don’t think any. I don’t think I can.

I mean any how I mentioned on the last question. Egypt has been a positive factory, we have seen that, but that’s not a step function that will improve as time goes on but there is also going to be offset by price reductions elsewhere in the world.

Switching gears a little bit. You touched on the Ford center console roll-off, is there anyway to frame that a dollar impact initially in the timeframe, over what the time, the seven vehicle models will be rolling off?

It’s up to the customers to when they actually introduce those but in round numbers and this will vary by the customers’ production needs quarter to quarter but in fiscal ’14 last year, the business was in the high $40 million range, continuing it in, we saw that in Q1 and Q2 of this year as well, Q3 and Q4 are going down to let’s say 15 million, 16 million, 17 million range and the next year total is around 12 million. And again those will vary by custom demand.

And then last one from me, first of all, I congrats on the center console, so look for Methode in the next James Bond film. On the domestic programs you've won, I think there is three now that are launching domestically in kind of that fiscal ’17 timeframe, just wondering are you utilizing your own touchscreens on any of those and can you say if the – I know you can't announce OEMs but can you say whether those programs are with different domestic automakers?

Well, it’s one of the Detroit 3. We are using our – I want to verify but I believe we are using our capacitive touch screen on the majority but I think I want to get back to you on that. There may be one with a smaller non-touch screen.

Are they all three with one of the Detroit automakers or do you have several of them represented?

I think I will pass on that question. I just – and we can announce what customer and program, once our customer does and they haven’t done that. So I need to pass on that, Joe.

Our next question comes from the line of Steve Dyer with Craig Hallum.

Thanks. Just a follow up, for me guys, as it relates to the capacitive touch screen, have you changed over to that on the K2 program yet?

We can say that we are totally vertically integrated on that.

What about the 31XX?

Yes, we are totally integrated in all that.

Does that offer margin upside going forward? I know you’ve had high expectations for a margin bump there. Have we kind of already begun to see that?

I think it’s hard to quantify that. The factory efficiencies and then the overall – as I stated earlier that the overall performance of factories is probably the main driver here and some of the vertical integration certainly plays but overall I would say that we have seen the benefit of all of those efforts and yes, the factories can continue to improve and they should but we have seen – I believe we have seen the benefit of all of that, mainly those were all designed to improve margins and also provide their contractual price down to our customers. So as I said good job of teams and good planning particularly – the planning for those events started two years ago, more than two years ago. End of Q&A

Thank you ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for closing remarks.

Adam, thank you very much. We will close off the call by wishing everyone a very safe and pleasant holiday season. Good day.

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