Stoneridge Inc (SRI) 2002 Q3 法說會逐字稿

Good morning and Welcome to the Stoneridge third quarter 2002 earnings conference call. For your information, all participants will be in listen only mode. There will be an opportunity for you to ask questions at the end of today's presentation. Instructions will be provided at that time.

Before we begin, the company would like to remind you that statements made during this conference call which are not historical facts may be considered forward looking statements. Forward looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied.

In addition, this conference call contains time-sensitive information that reflects management's best analysis only as of the date of this live call. Stoneridge does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of this call.

For further information concerning issues that could materially affect financial performance related to forward looking statements, please refer to Stoneridge's quarterly earnings releases and periodic filings with the Securities and Exchange Commission.

If you should need assistance during the conference, please signal an operator by pressing star, then zero on your touch-tone phone.

This call is being recorded. If you have any objections, please let us know by pressing star, then zero, now.

Hearing no objections, I would like to turn over the conference to Cloyd Abruzzo. Mr. Abruzzo?

Thank you.

First of all, I'd like to welcome everyone this morning to Stoneridge's third quarter earnings call. I'm Cloyd Abruzzo, President and CEO of Stoneridge. With me today is Kevin Bagby, our chief financial officer.

This morning's call will start off with a few brief comments about the quarter, and then Kevin will get into more of the details of our financial performance for the quarter.

We're very pleased to report very good third quarter of 2002. Typically the third quarter is our slowest quarter of the year. Our third quarter operating results reflect the continuation of better than anticipated production volume in the North American light vehicle market, a surge in heavy duty truck volumes over the last several months as a result of the new engine standards, which take effect on October 1. In addition, new product launches as well as the realization of benefits of our aggressive cost reduction initiatives all resulted in a very good third quarter performance.

Sales in the third quarter were approximately $158 million, compared to $136 million in the third quarter of 2001. This represents a year over year increase of about 16 percent.

Earnings per share for the quarter were 19 cents a share, compared to a loss of eight cents a share in the same quarter of 2001. However, effect 1/1/02 the company adopted FAS 142 and has eliminated the amortization of good will. If FAS 142 were adopted 1/1/01 pro forma results for the third quarter of 2001 would have been about a break- even.

Sales for the nine months ended September 30, 2002 were $448 million compared to $445 million for the same period of 2001. This represents a year over year increase of about ten percent in revenue.

For the same period, income before extraordinary loss and cumulative effect of an accounting change relating to FAS 142 was about $20 million, or 90 cents a share. This compares to about $2.8 million or 12 cents a share for the same nine month period ended September 30, 2001. However, if FAS 142 were adopted for that period in 2001, earnings per share for that period would have been approximately 35 cents.

Our solid operating performance during the quarter and our relentless commitment to the efficient use of working capital allowed us to generate strong free cash flow of approximately $20 million during the third quarter. Year to date our free cash flow has been approximately $58 million.

As we have stated in our past calls, one of our major objectives is to deleverage our balance sheet. During the quarter we made significant progress toward achieving this objective by paying down approximately $30 million of our Term B loan during the period.

Going forward we will continue to use our free cash flow to support our new organic business growth opportunities as well as continuing to reduce our debt.

A cross-reduction initiative implemented in late 2001 and our lean manufacturing initiative have had the intended impact during 2002 and have resulted in improved operating results and strong cash flow during this period. I'm proud to say we're successfully leveraging the better than anticipated volumes into improved operating profits throughout our entire business.

Our backlog of awarded new business continues to remain very strong and is growing. During the first nine months of 2002 we've received annualized new business awards of approximately $52 million. However, during the third quarter we did receive notification from a customer that a very mature actuator product was being re-sourced to a competitor, solely based on price. This is a mature, low-tech product that was approaching commodity status.

While this event is in the normal course of day-to-day business, we choose to mention this because it represents about $30 million of revenue for 2003. Adjustments to our cost structure to reflect this event has already been made.

We're very confident, based on the amount of activity in our new product development pipeline will more than replace this business with new technically advanced specialty products. I continue to believe our future growth prospects remain outstanding.

Now I have just a few comments about our outlook for the balance of 2002. In North America it appears light vehicle production will remain reasonably strong for the remainder of the year. We're anticipating no significant increase in medium duty truck production for the remainder of 2002. While heavy duty truck production is forecasted to decline significantly in the fourth quarter as a result of a significant pre-buy before the new engine requirements took effect October 1.

Lastly, the agricultural vehicle market in North America is forecasted to remain relatively flat for the remainder of the year.

In Europe, production volumes in Europe for both light vehicles and commercial vehicles have been only a few percent behind 2001 levels for the first nine months of the year, and are forecasted to finish the entire year 2002 at these same levels, basically.

Our Brazilian operations continue to grow. While the vehicle markets are off 15 to 18 percent this year in Brazil, the economic uncertainty brought about by the presidential elections make forecasting a turnaround of the economy and the vehicle market specifically very difficult to predict.

Lastly, in the past it has been our practice on these calls to give guidance on the upcoming quarter. However, because of the uncertainty of our fourth quarter revenues from the medium and heavy duty truck market caused by the previously mentioned pre-buy, as well as the potential of a work stoppage in one of our major customers, we're not going to give guidance about the fourth quarter at this time.

And now Kevin Bagby is going to go into the details of our financial performance. Kevin?

Thank you, Cloyd.

Revenues of 2002 of $158.4 million increased by $22.1 million or 16.2 percent, compared with $136.4 million for the same period in 2001.

Production volumes were robust in the light and commercial vehicle market. North American light vehicle production rose approximately eleven percent in the third quarter. Production of Class 5 to 7 vehicles rose six percent, and Class 8 vehicles increased 64.6 percent, reflecting the pre-buy activity.

Total class 5 through 7 production increased 32.6 percent.

North American revenues of $136 million increased by 16.1 percent from the prior year, while European revenues increased by 15.6 percent to $22.5 million. In North America, strong light vehicle and commercial vehicle production, combined with new content ads on international's next generation vehicle, a Lincoln 88 or LS, Jaguar XK8, Ford Thunderbird and GM's full-size truck platform, accounted for the increases.

Higher volumes and favorable currency translations positively impacted European sales. North American revenue accounted for 85.8 percent of the total third quarter revenues, compared with 85.9 percent for the same period in 2001.

Total passenger car and light truck revenues were $89.3 million, while the medium and heavy truck sector experienced revenues of $55.6 million.

The agricultural market had revenues of approximately $11.6 million and all other revenues were $2 million.

Power distribution revenues rose 22.4 percent to $38.3 million during the quarter. Content increases for international next generation vehicle as well as robust volumes within the commercial vehicle market drove the increase. Control devices posted sales of $56.5 million, reflecting a 20 percent increase of the prior year. New product launches and increased North American light vehicle production were the main drivers behind the increase.

Sensor product revenues rose 3.2 percent from the previous year, to $35.7 million. Increased light vehicle production was offset by unfavorable mix.

Shipments of vehicle management products in North America and European operations jumped 36.1 percent and 10.2 percent respectively. Strong North American commercial vehicle production, particularly within the Class 8 market, and favorable exchange rates accounted for the bulk of the improvement.

Third quarter gross profit was $39.6 million, $9.4 million above the prior year's level. The corresponding margin rate was 25 percent, up 280 basis points from a year ago.

As has been the case throughout 2002, the improvement in gross margin is primarily a tribute to the ongoing cost reduction initiatives, such as remanufacturing and sic sigma program, productivity improvements and increased North American light and commercial vehicle volumes. In addition, we are also realizing the benefit of migrating our manufacturing footprint to low cost international locations and adjustments to our production capacity that were initiated in 2001. Higher depreciation expense partially offset these improvements.

Total employees of 5,480 were two percent below the December 31 level.

[indiscernible] administrative and development expenses of $23.9 million in the third quarter of 2002 was approximately $2 million lower compared to the similar period in 2001. The adoption of FAS 142 accounted for $2.5 million of the reduction. Adjusting for the impact of the amortization, SG&A as a percent of sales declined to 15 percent from 17.1 percent in the prior year.

Operating income for the third quarter was $15.8 million, $11.3 million above the same period in 2001. Pro forma for FAS 142 operating income increased by $8.7 million, reflecting the cost reductions and volume improvements previously reviewed.

Interest expense for the third quarter of 2002 was $9.4 million, which was $2.2 million higher than the previous year. We expect our interest expense, including amortization of the cost related to the refinancing to remain in this range for the duration of the year.

The company recognized tax expense of $2.2 million for the second quarter - excuse me, the third quarter, a decline in effective tax rate of 34.7 percent. The sequential decline in our tax rate reflect the tax initiatives that were launched during the year and higher foreign income.

Third quarter net income was $4.2 million, or 19 cents per share, versus a net loss of $1.8 million or eight cents a share in the prior year.

Effective January 1, 2002 the company ceased amortizing good will in accordance with its adoption of FAS 142. Good will and other intangible assets issued by the Financial Accounting Standards Board, pro forma third quarter 2001 net income as of [audio break] if the company had adopted the non-amortizing provisions of FAS 142 at the beginning of 2001 it would have been approximately $100,000 and a break-even in earnings per share.

Depreciation expense for the quarter was $5.4 million, up $1 million from the prior year, while amortization expense was $1.9 million.

Income before interest and taxes depreciation and amortization was $23.1 million for the third quarter, compared with $11.6 million for the similar period in 2001.

Working capital excluding cash and current long-term debt for the third quarter of 2002 was $70.2 million, which was down from both prior year and quarter. Compared with the third quarter of 2001, working capital declined by $35.5 million, or 33.6 percent, while working capital declined sequentially quarter to quarter by $5.5 million or 7.3 percent.

The year to year reduction in our primary working capital account continues to reduce our working investment. Operating cash flow net of fixed asset additions was a source of cash to $19.6 million for the third quarter of 2002, which was $9.6 million higher than the third quarter of 2001. The sources of cash flow were lower working investment, lower capital expenditures, and higher net income compared to the third quarter 2001.

Capital investments in the third quarter 2002 were $2.7 million, reflecting investments for sensor products, the chassis and brake applications and actuary applications.

Total debt as of September 30, 2002 was $274.8 million compared with $306.2 million on June 30, 2002. The reduction in total debt reflects a $30 million debt repayment that was made during the quarter.

Financial leverage as measured by total debt to EBDA ratio decreased to 2.9 times, compared to 3.7 times in the prior quarter, and 4.9 times in the previous year. The revolver of $100 million remained undrawn at this time and our cash balance as of September 30 stood at $29.1 million.

Diluted shares outstanding as of September 30, 2002 were 22,693,000.

In summary, we are pleased with our operating performance in the third quarter, which demonstrates our ability to generate strong operating leverage while maintaining the emphasis on the cost structure and continuing our cost reduction activities. The combination of our operating performance and the concentration on working capital management generated strong cash flow during the quarter and enabled us to pay down $30 million of debt.

We remain focused on generating free cash flow and building upon our recent momentum.

With that, I'd like to turn the call back over to Cloyd for closing remarks.

Thanks, Kevin.

That concludes the formal part of our presentation. At this time we'd be glad to answer any questions anyone has.

At this time if you would like to ask a question, please press star, then one, on your touch tone phone. If you decide you want to withdraw your question, please press star, then two, to remove yourself from the list.

Our first question comes from Steve [Gursky] with Morgan Stanley.

Good morning, everybody. So this 30 million in lost business, are you suggesting there was no margin on that business?

No, this had margin about typical with our other actuated type products.

Okay. And that comes off starting January or fourth quarter?

We're going to start tailing off in the fourth quarter.

And the work stoppage you reference, is that Navistar or who is that?

That's international, yes.

Okay. And I think was it Navistar closed a plant recently?

They've announced that they're going to close their Chatham heavy duty truck plant.

Does that affect you guys at all or no?

No.

Why, you don't supply the plant or they'll just make it up with production somewhere else?

They're going to make the production up elsewhere, yes.

And do you have any details, Kevin, on the balance sheet, what's in there in terms of the pieces of working capital and what have you?

Yes. In terms of cash, we said 29 million. Accounts receivable 107 million. Inventory is 53 million. Pre-paid expenses and others are roughly ten. Deferred income taxes is about eight. And then in terms of current liabilities, 1.9 million in current, forced long-term debt. Accounts payable are roughly 51.5 million. And accrued liabilities are 57 million.

And what accounted for the bump in accrued liabilities?

We have interest expense in there, which is about, I think about $8 million. Accrued interest expense will be paid in November.

So that number will come back down.

Yes. We still think we'll be positive in terms of cash flow in the fourth quarter, though.

All right. Great.

Our next question comes from Monica [Keeney] with Morgan Stanley.

Good morning. In terms of that business that got re-sourced, just a follow-up question on that. Do you have any other revenues associated with that product line currently in your top line, with other customers?

Yes. We have revenue with other customers as well.

And how much does that represent of your current revenue? In other words, do you think that that may potentially be at risk to be re-sourced?

Not at this time.

And do you have that number?

You know, it's probably less than two percent of revenues.

And that would include the 30.

No, that would exclude the 30.

And do you have a strategy in terms of if it's similar margin business of insuring that you maintain that business?

Repeat the question.

I said, do you have a strategy going forward in terms of retaining that business?

We'll retain that business as long as it maintains its profitability and return on investment, frankly. But again, they're lower tech maturing products. And in the normal course of business they'll typically drop off over a period of time and be replaced with new businesses.

So this isn't in your mind sort of aberrational.

No, not at all.

And in terms of the guidance that was given earlier in the year, I have cap ex of 25 million. Does that sound way too high?

It's probably going to be lower than that, I would think, in terms of cap ex this year. It's probably going to be in the $15 to $20 million range.

And should we assume something similar to that for '03?

Actually, I think '03 is going to be slightly higher than that. It's probably going to be in the $20 million to $25 million range.

And in terms of your savings, is it still $13 million for the year?

Yes.

And should there be any more incremental savings in '03 we should expect?

Not of a similar kind. We have continuing ongoing cost reduction programs. The $13 million we're talking about right now is kind of a one time event.

And then in terms of goals for debt pay-down - I'm sorry, maybe you said this, but do you have that for '02?

There may be some additional debt pay-down in '02. We're looking at that now. Again, long term we look for our EBITDA, the total debt ratio, to be around 2-1/2 times.

And how much cash on the balance sheet do you need to maintain to sort of feel comfortable, given the pre-buy situation?

You know, we're looking at that right now. But we think we'll probably have too much cash on the balance sheet by maybe $10 million, even in lieu of the international situation.

Thank you.

Our next question comes from David [Bidderman] with Deutsche Bank.

Good morning, guys. You know, all along you've kind of not really given a whole lot of credit to this pre-buy and effectively said, look, we think it's temporary. And relative to your fourth quarter expectations, I mean, it sounds like at the end of the day it's sort of working the way that you kind of had originally anticipated. So I wouldn't imagine you're particularly concerned about the tail-off here on pre-buy and that you've been prepared for it relative to your internal modeling.

That's exactly right, Dave. This has been coming for a long time and all our plans have been built around a pretty weak fourth quarter when it comes to classic trucks.

Sure. Cloyd, any particular sort of industry observations for '03 in terms of build, medium/heavy?

You know, I think we sort of concur with what seems to be the consensus, that the industry is going to still stay pretty soft for the first half of the year, and everybody, I think, is looking for sort of a pickup come mid-year, toward the tail end of the second quarter, going into the second half of the year.

And would it be fair to say, Cloyd, that you feel reasonably good about the ability to sort of stabilize or grow revenues in a softish environment, both medium, heavy and light, given the incremental new content and new products for you guys?

Yes, I think that's a fair statement. Again, based on the amount of new business awards and what our product backlog looks like going out a couple years.

Thanks, Cloyd.

Our next question comes from Kirk [Wykee] with J.P. Morgan.

Good morning, guys. Following up on the Class A truck volume topic, what type of year over year change to you see in North American Class A truck production?

Flat.

You know, Kirk, I think - we think that, as Cloyd indicated earlier, we're still thinking about 160 in terms of Class A production, 150-ish range for 2003. So we don't see that much growth, actually no growth. And it's actually reflective of this pre-buy situation.

The third and fourth quarters may be a higher run rate than that. But what happened in the first two quarters will probably be a lot lower than that. So we expect it to spike down the first two quarters and then return to normalized levels after that.

But, again, that's just right now our view of that. It may last longer, it may come around earlier, depending, I think, on the performance of the engines as well as the economy overall.

And how is the volume and the profitability of the NGB playing out relative to your expectations?

The profitability is playing out pretty much according to our expectations, possibly a little bit better. Unfortunately, the volumes are, because of where the industry's at and the position that it's been in, aren't at the levels that we anticipated. But we see that coming back. And the backlog seems to be growing slightly as we look out over the next quarter or so.

So even though the volumes are below what you expected them to be, it's still achieving the profitability that you expected?

Yes.

Is that through efficiencies, or how did you manage, how do you manage that?

A lot of it is through efficiencies, obviously. Our productivity level is much higher than we'd anticipated as we went into this program.

And then, I was curious, what percentage of your revenue do you think would be at risk if international went out on strike?

About ten percent possibly.

The entire amount, you think?

The entire amount of medium duty.

Wasn't international 13 percent of revenue?

That's roughly about right.

Almost the entire amount would be at risk. Okay.

You mentioned that you weren't drawing on your revolver, and I was wondering do you have letters of credit or other things that reduce availability?

Yes, I think there may be $1 million or so on a letter of credit. That's about it.

Is the full 100 available to you or is it limited by covenants?

No, it's not limited by covenants. It's available to us.

And then with respect to the contract that was moved away from you, how much lead time did the customer give you and was it clear that you might lose the business or was it a surprise?

It wasn't a surprise. I mean, I think we had probably several months lead time. We knew this product was going to be threatened as it got older and post-commodity status. So it didn't come as a total surprise to us by any means.

So we've had time to plan and begin, like I said, to reduce our cost structure accordingly.

I know that there is, at least at Ford there's a big effort to combine programs and achieve greater commonality among components. And I'm curious if this is part of the - I'm curious who the ultimate customer is on this and if it was attributable to some larger program that, a larger trend that would should be aware of.

We'd rather not mention the customer for competitive reasons. And as far as being part of a larger trend, we don't see that at all.

I mean, clearly, this is in the normal course of business. We just thought in the spirit of trying to give better visibility into our company that we would disclose this specific event just because of the size of it.

It starts to go away in the December quarter and when will it be completely out of your revenue?

By the end of '03, probably.

You know, Kirk, we're involved in this kind of activity on a daily basis. So this was a strategic decision that we made. And we could have retained the business had we elected to reduce our return on definite criteria. I think that's the way I characterize it.

When was the last time you gave up a program like this, though? It must...

I think probably 1999, something like that, that time frame.

But it sounds like it will, the impact won't be fully felt in '03. We shouldn't subtract $30 million of revenue from our '03 forecasts.

No, I think that is the impact in '03.

I thought it might - it sounded like it was kind of tailing off gradually.

Are there any unusual items in the income statement this quarter that you didn't break out for us, positive or negative?

Not really.

Great. Thank you.

Kirk, I'd like to go back to your international question just for a moment. We said ten percent as being the entire medium duty volume. A portion of that, probably two to three percent of that business is actually being manufactured in Mexico. So it will not be affected by the work stoppage if in fact it does occur.

The work stoppage will just be in -

Instead of really ten percent, it's probably more like seven or eight percent of our international revenue.

Seven or eight percent of total revenue.

Total revenue, right. A portion of these vehicles are being built in Mexico, and there are some indications that production may be shifted around.

Thank you very much.

Our next question comes from John [Casmere] with Robert Baird.

Good morning. Most of my questions have been answered. There's one kind of lingering.

You stated that production volumes and new product launches were the drivers for revenue growth in the quarter. I was wondering if you could provide any further detail on those new launches.

In terms of what? What type of detail?

Just programs or amounts, size of contracts.

Not at this time.

That's it. Thanks.

Our next question comes from Brett Hoselton with McDonald Investments.

Good morning, Cloyd, good morning, Kevin.

Let's see. A couple of things. The vehicle management, North American and Europe, did you give us some numbers for those in the quarter, or could you?

Yes. Vehicle management is 11.7 million.

And then gross profit for this quarter and then good will adjusted last year?

Well, good will wouldn't affect the gross profit. It affects the operating income. So the operating income was, this quarter is $15.8 million. The comparable operating income for last year would have been $11.1 million.

And gross profit for this quarter?

Gross profit is 39.6 million.

Have you provided what your annual price reductions are? Have you ever given that out on a public basis?

No.

And then in terms of your backlog, the last I have is about 250 to $260 million backlog with about 85 million in incremental new business for '03. Can you give me a rough update as to what it looks like?

Well, we're going through our business planning process right now. So I think we'll be in a better position to give you an update on that probably the next time we have this call.

And can you quantify the FX impact in the quarter?

On European sales, roughly $2.4 million.

And then as we look at it in the next year and you think about your expense structure, is there anything that's going to significantly change, you know, health care costs, pension, anything along those lines?

Well, we only have pension cost, so that wouldn't impact our cost structure. And I think we have continued to look for different health care designs to maintain the health care cost at normalized levels.

Other than that, I don't think there's anything significant that would affect our cost structure.

And there seems to be, or at least there was a significant amount of insider selling kind of in that September time frame. I'm wondering if you can kind of speak to that, Cloyd?

I think most of it, Brett, is a result of some personal diversification plans, as well as please recognize that there were no executive bonuses this past year and it's not certain that there will be anything for this coming year. So I think it's partly motivated by that.

And then this idea of de-contenting at the auto makers. Does that impact you guys at all?

We're seeing very little impact on us of de-contenting. Remember, most of our products are what we categorize as must have products that are essential to the operation of a vehicle. And so we don't really have a lot of exposure when it comes to de-contenting.

Thank you very much.

Our next question comes from Jeff [Scoglin] with UBS Warburg.

Good morning. Did you guys get or have you given a revenue or EBDA forecast for the fourth quarter? There's a bunch of adds and subtracts here. I just wonder if you could provide some guidance on that.

At this point we're not providing any guidance. As we said earlier, there's some significant uncertainties regarding our medium and heavy duty truck revenues as a result of the pre-buys as well as a possible work stoppage at one of our major customers.

And in terms of relative margins between your commercial truck business and your light vehicle business, recognizing that there's a lot of volume issues right now, in normalized times how would the margins compare to each other?

They're similar to our overall margin rates, post- profit rates, rather.

Similar to each other?

Yes.

And just following up on the last question, the $85 million book of business for next year I guess had previously been issued. There's offsets, I assume, to that $30 million lost business for next year, too, as well, right?

Right.

As we indicated, though, we're going through a business planning process and that will probably take us to the end of the quarter to complete that. And so by the time we have our first quarter conference call we'll probably update you at that time.

Thank you.

Again, if you'd like to ask a question, please press star, then one, on your touch tone phone.

Our next question comes from Andy Ingwith with Mason Street Advisors.

Hey, guys. First question is on contract loss.

Can you tell me what segment the actuator modulator is in? I don't know what it is.

It's in the light vehicle sector.

And then can you comment on what type of pricing you lost it based on? I mean, you said it was abnormally low and you didn't want to take this, but is this just outrageous in terms of the pricing that you've seen?

No, I don't think it was - outrageous is probably difficult to classify.

These - we always undergo a return on investment calculation, discounted cash flows for all new business and all existing business. And these, given the pricing levels that were being targeted for this particular product, was well below our return on invested capital.

Right now our accrual rate for new programs and existing programs is 20 percent.

And then lastly, on the debt that you bought back, did you realize any gains or losses?

No, we did not.

Thanks.

At this time there are no further questions.