Don Duda - President and CEO Ron Tsoumas – Controller and Treasurer

Steve Dyer - Craig Hallum Jimmy Baker - B. Riley

Welcome to Methode Electronics Fiscal 2015 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 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 concession, 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 costs and expenses due to regulations regarding complex 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 fiscal 2015 financial results conference call. I am 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, fiscal 2015 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 net sales by $7.5 million or 3.2% in the fourth quarter of fiscal 2015 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 product sales, partially offset by decreased interface sales. Fourth quarter consolidated gross margins increased 380 basis point for the full year 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 Product segments positively affected fourth quarter margins. For both periods, consolidated gross margins were negatively impacted by higher development cost in our Interface and other segments, specifically for our Data Group's 10-gig copper transceiver products 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 fiscal 2015 and 2014, 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 fiscal 2015 net income was $20.1 million or $0.51 per share compared to fourth quarter fiscal 2014 net income of $14.6 million or $0.38 per share. When excluding these items for the full-year periods, our fiscal 2015 net income was $94.6 million or $2.41 per share compared to fiscal 2014 net income of $62.6 million or $1.64 per share. As announced this morning, we are anticipating fiscal 2016 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 fiscal 2016 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 fiscal 2016 guidance anticipates lower PowerRail product sales of about $20 million. Fiscal 2015 PowerRail sales came in approximately twice what we anticipated at the beginning of last year as our Big Data customer accelerated the build-out of their datacenters. While this had a very positive effect on fiscal 2015, it will have a negative impact on 2016. Our fiscal 2016 sales guidance also anticipates slightly 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 Center Console program is launching in our Egyptian manufacturing facility late in fiscal 2016 for approximately $3 million ramping to $11 million in fiscal 2017. Also in late 2016, we're launching two more Center Console programs for General Motors with average annual revenue of $30 million. One programs shifts to South America. The other is domestic. When we are able to, we will provide you more details on these programs. Fiscal 2016 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 of fiscal 2015 sales. While fiscal 2016 guidance calls for lower revenue and earnings over 2015, we are targeting a five-year compounded annual growth rate of the -- 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 Motor center console and linear position sensor product 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 fiscal 2016, 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 $11.1 million goodwill impairment charge related to touch sensor. As I’ve mentioned in the past, we are refocusing our efforts on higher margin user interface and sensor solutions in market such as medical, vending, food service. This is consistent with our long-term strategy to direct our engineering resources to opportunities that meet our margin expectations. We believe we will see some improvement in Hetronic in this fiscal year or fiscal 2015 due to improved revenues and cost savings from relocating manufacturing from the Philippines to Egypt, which has just been completed. Compared to fiscal 2014 interfaces' gross margins declined in both periods due primarily to unfavorable sales mix of data solution products and increased development cost for our 10 gig copper transceiver product. For fiscal 2016 we are targeting interface gross margins in the range of 23% to 25% which would place fiscal 2016 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 bust power and caballing 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 fiscal 2016. 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 fiscal 2018 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 Implizite, Methode will be Tier 2 to Harman who will provide the infotainment content through the silver box with Methode providing Class A center console module. This award spans our fiscal 2017 through 2019 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 fiscal 2018 and run through 2021 and represent approximately $8 million average annual 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 fiscal 2017 and running through 2021. This compact system allows for controlling several functions in the vehicle through a combination of touchpad, joystick and rotary technology. Building on our success with Bash E-bikes, Methode will provide a torque sensor subassembly for Japanese manufacture of power modules to be exported to the European market for several e-bike OEMs. This program will ramp in fiscal 2017 to average annual revenue of $10 million through fiscal 2021. 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 the 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, several recovery areas or what is referred to as med surge in the ICU. Additional surgical and med surged 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, predominantly east of the Mississippi, but also in Texas. 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 Laboratory in the U.S. 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 customer's 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 that we see ahead of us. We look forward to the future. Now, I’ll 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 fiscal '15, 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 fiscal '15 was 23.5%, which is in line with our guidance range of a mid 20% tax rate. In fiscal '15 we had certain domestic tax net operating losses available, which kept U.S. Federal cash taxes and certain other state cash taxes to a minimum. Since our Federal net operating losses in the U.S. to shelter taxable income are largely exhausted, our cash taxes paid will increase in fiscal 2016. The estimated tax rate for fiscal 2016 is approximately 25% and assumes no significant changes in tax valuation allowances or enacted tax loss. In fiscal '15 we invested $22.5 million for capital expenditures as compared to $29 million in fiscal '14. For fiscal '16, we expect capital investment to be in the range of $20 million and $25 million. Depreciation and amortization expense for fiscal '15 was $23.4 million compared to $23.9 million in fiscal '14. For fiscal '16, we expect full year depreciation and amortization to be between $23 million and $26 million. EBITDA for the full year of fiscal '15 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 fiscal '15. Based on our fiscal '16 guidance, we expect EBITDA to be in the 15% to 16% of sales range and be between $132 million and $143 million. Lastly for fiscal '15, free cash flow was a $102 million. This was $11 million higher than the free cash flow for fiscal '14. Based on our guidance, we expect fiscal '16 free cash flow to be between $85 million and $95 million. In fiscal '15, long-term debt was paid down by $43 million pending the year at $5 million. Net cash increased during the fiscal year of '15 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 fiscal '15, $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're ready to take questions.

Thank you. We will now be conduction a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Steve Dyer with Craig Hallum. Please proceed with your question.

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 some things to Egypt and so forth, what would you expect the margin range and I am sorry if I missed it for to be in the Auto segment for fiscal '16?

Very similar to '15, in the mid-20s.

Okay. And then jumping over to Dabir, do you have any revenue expectations embedded in the fiscal '16 guidance and that’s part one, and 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 have said as the product starts to evolve at very low, maybe the hospital and the hospital buying units that direct us to distribution and we would let that happen naturally but we might actually make more money on that model. But right now we feel we have to kind of 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 last question and I’ll hop back in the queue. The stock obviously down 30% plus today, you guys have a huge balance sheet, lot of borrowing power, free cash flow etcetera. Is there a level at which you guys would strongly consider buying back stock?

That certainly is a topic of discussion. We’ll 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 overseas. So we would either need to repatriate, but we would have to repatriate cash to affect that. But that is certainly something that is a topic of discussion amongst Management and the Board.

Okay. Thank you.

Thanks Steve.

[Operator Instructions] Our next question comes from the line of Jimmy Baker with B. Riley. Please proceed with your question.

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 fiscal '15 or fiscal '16 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 year is '15. And when we look to that CAGR, that involves a number of assumptions including future automotive programs, but other products as well which was talked about Dabir, which carry 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 margin than automotive.

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

Jimmy, I don’t want to go any further than that. We’ve announced the target. We’re good at hitting our targets. We do five-year planning routinely as part of our business and 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 isn’t there and what could or couldn’t happen.

Sure enough, Don, I had to try. Can you just talk a little -- switching over to Power 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’s happening with your large PowerRail customer? Do they kind of complete a build-out and now they're taking a breather or just 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 it really came in probably more than twice of what we anticipated for '15 because they did accelerate their builds. Now they’ll do additional builds, but that’s not likely to happen in our fiscal '16. So it could be that that just -- it slows down and then fix backup as they need additional capacity, but again I don’t see that happening in our fiscal '16 because they haven’t informed us if they 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 or one quarter out, excuse me, I would say that it will be down for '16.

Okay. And then 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 and can you just elaborate a little bit on what's assumed for '16 there?

No. 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's a separate issue and that still continues, but as we routinely do, we look at how much energy and resources we’re expanding and what type of return. We're driven -- top line obviously is important, but we’re driven by margin and whether it be an auto program or an appliance program, there is 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 and if we say a five-year period where their in-house engineers decide that they can do it less expensively than outside and then contract manufacturing is a model that that works for some, we can’t compete on that. And so we’ll continue -- we’re not exiting the appliance business, but we want it to let investors know that that we’re deemphasizing and refocusing in other areas. Now we don’t give customer-specific information. We’ve talked about interface, but our margin anticipation is there. So I think I’ll stay with that, but I can’t say that we year-over-year we’re anticipating for both those reasons that our appliance sales will be down. Hetronic which is also in that segment, we see that improving and I’m definitely more excited about the opportunities in interface in the industrial area that carries considerably higher margin and we may see at some point that that margin shift to the positive.

Okay, very helpful. Lastly maybe just one for Ron, when we look at the segmented income or expenses from operations in the K, you can 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 explain that change in a little bit more detail for us and what you’re assuming as kind of an appropriate go forward rate?

You’re referring to what we’ve talked in the past as tandem cash driven by stock price.

I’m not sure exactly what’s driving that increase in corporate expense. I assume some of it’s the stock price which is obviously going the other way now, but I would just be interested in kind of what all is in that number in the change and what’s a fair kind of go-forward range?

Obviously the Tandem cash 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. So that type of variability in the corporate expenses around performance-based compensation will no longer occur going forward, but that was -- that is a chuck of it is the performance based compensation.

So was the, this April quarter run rate going forward and May quarter I should say.

No, you’ve -- 12%

About 12% is what we’re forecasting going forward a good rate.

Okay. Got it. Thanks very much.

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

All right. Thank you very much. I’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 your participation, and have a wonderful day.