Stoneridge Inc (SRI) 2002 Q4 法說會逐字稿

Good morning and welcome to the Stoneridge 2002 fourth quarter earnings conference call. As a reminder, all participants will be in listen-only mode. There will be opportunities for you to ask questions at the end of today's presentation. 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 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 touchtone telephone. This conference is being recorded. If you have any objections, please let us know by pressing star then 0 now. Hearing no objections I would like to turn the conference over to Cloyd Abruzzo, President and CEO. Mr. Abruzzo.

Good morning, everyone. I'm Cloyd Abruzzo, President and CEO of Stoneridge. With me is Kevin Bagby our Chief Financial Officer. I'll make a few brief comments about our fourth quarter and full year 2002 then Kevin will discuss our financial performance in detail for you.

We're very pleased to report a better than anticipated fourth quarter as well as a full year 2002. Our results for 2002 were on a relative basis, the second best year in our company's history. This is a very significant accomplishment for us in what is less than a robust economy. It's an accomplishment that we as an organization are extremely proud of. I think it's a good indication of the strength and dedication of our entire global organization.

Our fourth quarter operating results reflect continued strength in North American light vehicle markets following the decline of heavy duty truck volumes subsequent to the October 1st new engine standards as well as new product launches and the continued benefits from our lean manufacturing and aggressive cost reduction initiatives. Sales in the fourth quarter were about $148 million dollars, compared to $140 million dollars in the fourth quarter of 2001. This represents about a six percent increase year-over-year. Earnings per share for the fourth quarter were 20 cents a share compared to earnings per share of one cent a share for our fourth quarter of 2001. However, effective 1-1-02, company adopted FAS 142 and eliminated the amortization of goodwill. If FAS142 were adopted on 1-1-01 pro forma EPS for the fourth quarter would have been eight cents a share.

Sales for our full year 2002 were approximately $637 million. This compares to about $585 million for the full year 2001. Again, the year-over-year increase of about nine percent. For the year 2002, income before extraordinary loss in the cumulative effect of an accounting change related to FAS 142 was $25 million dollars, or a $1.09 a share. This compared to $2.9 million or 13 cents a share for 2001. Once again, if FAS 142 were adopted 1-1-2001 pro forma EPS for 2001 would have been 44 cents a share.

Our sum of operating performance during the year and relentless commitment to efficient use of working capital generated strong free cash flow, approximately $23 million dollars during the quarter. For all of 2002, our free cash flow was approximately $81 million dollars. As we've stated in past calls, one of our major objectives is to deleverage our balance sheet. During the quarter we paid down $20 million dollars in our term B loan. This is in addition to a pay down we made in the third quarter of $30 million dollars on our term D loan. At December 31, our debt to EBITDA ratio is approximately 2.5 to 1. This compares to a debt to EBITDA ratio at December 31st of '01 of about 4.5 to 1. As you can see, in 2002 we've made significant progress toward our goal of deleveraging our balance sheet. As we go forward into 2003, our plans are to continue to use our free cash flow to support our organic business growth opportunities and to continue to reduce our debt further. While we continue to explore our acquisition opportunities on an opportunistic basis we're not actively pursuing anything at this time.

In terms of new business, our backlog of awards of future new business continues to remain very strong. In 2002 we received new business awards of approximately $115 million dollars on an annualized basis. These awards are spread across all our products, markets and geographic regions. This is the fourth consecutive year in a row that we've received new business awards in excess of $100 million dollars. As you all are aware of, continued top-level production in the commercial vehicle markets, especially in North America, as well as customer delayed product launches have caused some of our forecasted revenue to shift in our new business pipeline. Kevin Bagby will discuss more of this with you in a few moments.

We have some significant content on some of the exciting new vehicles that are being launched in 2003. A couple of them specifically are the Cadillac XLR, which is a new sports car, as well as the SRX, which is a new SUV by Cadillac. A new pickup from Chevy at DSSR. As well as the DCX PacificA. We had a significant amount of content on the redesigned Ford 150 pickup truck as well as on the new large pickup from Nissan, the Titan. In addition, we have content, we'll be launching on a new Infinity SUV which is yet to be named. Based on our book of awarded new business and some of the products we have in our development pipeline, such as our new safety related control devices, next generation censor products, as well as commercial vehicle information management products, give me reason to be still very excited about our future growth prospects.

Now a couple comments about our outlook for the beginning of 2003. North America, it appears that light vehicle production in the first quarter of North America will be stable, with only maybe a small increase over 2002's first quarter. We're anticipating no significant year over year increasing when it comes to medium to heavy-duty truck production for the first quarter. However we're anticipating a slight increase of about five to seven percent in the agricultural equipment market. And this is due primarily to the seasonal nature of the business. In Europe, we see production volumes for both light vehicles, as well as commercial vehicles, to be only a few percentage points behind 2002. This appears to be consistent with the consensus outlook for the European market as it stands right now. In Brazil, the Brazilian vehicle markets were down rather significantly in 2002. However, we managed to continue to grow our revenue base at approximately 20 percent year-over-year growth in Brazil. We are only anticipating a modest increase in vehicle production in Brazil for 2003. However, we are encouraged recently by statements made, the political statements coming out of new administration as well as the strengthening in the Brazilian currency. One important note about our Brazilian operation, for the second year in a row we were selected as Daimler Chrysler Brazil's electrical supplier of the year. This is a significant accomplishment and a real tribute to our Brazilian colleagues.

A comment on our guidance for the first quarter. We are anticipating first quarter earnings per share to be in a range of 24 to 26 cents a share. As has been our past practice, we're only giving guidance for the upcoming quarter because of the many uncertainties that exist in the economy today. Kevin.

Thanks, Cloyd. Revenue for the fourth quarter 2002 totaled $148.3 million dollars. Up 5.9 percent in the 2001 level of $140 million dollars. Production volumes positively impacted results during the fourth quarter, but not to the degree experienced in the first nine months. North American light vehicle production rose approximately 1.5 percent in the fourth quarter. Production of class five through seven vehicles rose approximately three percent. And Class A bills increased 21 percent, reflecting the premandated engine build out. North American volumes of $121.3 million dollars increased 3.7 percent from 2001, while European revenues increased by 17.4 percent to $27 million dollars. In North America, favorable light and commercial vehicle production combined with new content adds on the international next generation vehicle, Mazda 6, Lincoln Aviator, Jaguar and GM's full sized truck platform accounted for the increase. Higher volumes and favorable currency translation positively impacted European revenues. North American revenues accounted for 81.8 percent of total fourth quarter revenues, compared with 83.5 percent for the same period in 2001.

Total passenger car and light truck revenues were $82.6 million dollars during the quarter, while the medium and heavy truck sector generated revenues of $53.8 million dollars. The agricultural market had revenues of $10.6 million dollars, while other revenues were $1.3 million dollars. Now in our distribution revenues increased 16.2 percent to $32.2 million dollars during the quarter. Content increases for international's next generation vehicle, as well as improved volumes for John deer accounted for the increases. Revenue for control devices rose 1.8 percent to $50.6 million dollars, increased North American light vehicle production was the primary driver behind the revenue improvement. [Inaudible] Product revenues decreased 2.5 percent from the previous year to $35.1 million dollars, reflecting the impact of negative mix, which occurred during the fourth quarter. Shipments of vehicle management products in North America and Europe operations increased by 8 percent and 17.3 percent respectively. Improved North American vehicle commercial production and favorable exchange rates accounted for the bulk of the improvement.

Fourth quarter gross profit was $38.2 million dollars, $8.2 million dollars above the prior level. The corresponding rate was 25.8 percent up 440 basis points from a year ago. Consistent with our gross profit trend throughout 2002, the improvement is primarily attributed to ongoing cost reduction initiatives. That's a lean manufacturing and six sigma programs, productivity improvement, increased leverage from higher North American production volumes. In addition, we continued to benefit from the migration of our manufacturing footprint for low cost international locations and adjustments to production capacity that were completed in 2001. Revenue from our low cost location increased 30 percent over the prior year and now account for over 20 percent of total revenue. Higher depreciation expenses partially offset these improvements. Total employees of 5,460, or 2.4 percent below the December 31st level. Selling general and administrative expenses of $23.2 million dollars in the fourth quarter of 2002 is essentially in line with our 2002 run rate, adjusting for the adoption of FAS 142, SG&A as a percent of sales increased to 15.7 percent from 13.7 percent in the prior year.

Operating income for the quarter was $15 million dollars and is $6.7 million dollars above the same period in 2001. Pro forma for FAS 142, operating income increased by $4.2 million dollars, reflecting the cost reduction and volume improvements previously addressed. Interest expense for the fourth quarter 2002 was $8.5 million dollars, which was $273,000 dollars below the 2001 level. The sequential and year-over-year reduction reflects our lower debt balances, which I'll review in a moment.

The company's recognized tax expenses of $2 million for the fourth quarter implying an effective tax rate of 30.6 percent, sequential decline in our tax rate reflects the effects of increase in our ETI tax credits and other tax initiatives that were implemented during the year. Fourth quarter net income was $4.5 million dollars, or 20 cents per share, compared with $162,000 dollars or one penny a share in the fourth quarter of 2001. Effective January 1st, 2002, the company ceased amortizing goodwill in accordance with its adoption of FAS 142, goodwill and other intangible assets, issued by the financial accounting standards board. Pro forma fourth quarter 2001 net income as if the company had adopted the nonamortized provisions of FAS 142 would have been approximately $1.9 million dollars or 8 cents a share.

Depreciation expense for the fourth quarter was $5.5 million dollars, an increase of $250,000 for the previous year. While amortization expense was $1.5 million dollars. Income before interest, taxes, depreciation and amortization was $22 million dollars for the fourth quarter of 2002, compared with $16.5 million dollars for the same period 2001. Working capital, excluding cash and current provision of long-term debt, for the fourth quarter 2002 was $60.2 million dollars, which was down from both prior year and the previous quarter. Compared with the fourth quarter 2001, working capital declined $23.4 million dollars or 28 percent, while working capital declined sequentially by $10 million of 14.2 percent. The reduction working investment was achieved despite a revenue increase of 5.9 percent compared with the fourth quarter 2001.

Operating cash flow net of fixed asset editions was a source of cash at $22.9 million dollars for the fourth quarter of 2002. Sources of cash flow were lower working investment and higher net income, compared to the fourth quarter of 2001. Capital investments from the fourth quarter of 2002 were $4.8 million dollars, reflecting investments for Sensa products for chassis brake applications, customer actuary switch products and actuary applications. Total debt as of December 2002 was $250.9 million dollars, compared to $274.8 million dollars on September 30th, 2002. Reduction in total debt reflects $20 million dollar debt re-payment that was made during the fourth quarter, financial leverage as measured by total debt trailing 12 month EBITDA declined to 2.5 times compared to 2.9 times the fourth quarter and 4.5 times the previous year. $100 million dollars remains undrawn at this time and our cash balance at December 31st stood at $27.2 million dollars.

Average diluted shares outstanding in the fourth quarter were 22 million, 592 thousand. As we indicated earlier we're comfortable with the first quarter earnings estimate of 24 to 26 cents per share, our 2003 pipeline has been impacted by three major issues which I'll discuss by order of magnitude. The most significant issue was a continued slower than anticipated ramp up of products with our immediate and heavy-duty truck market. Market conditions continue to remain at trough or near trough levels this impact and the timing of our 2003 backlog by approximately $25 million dollars. Second major issue is the revision requirements for F and BSS 208 as it relates to the seat track position censors. The 2004 has been lowered to 20 percent installation rate and 35 percent requirement in the initial legislation. In fact this impacts our backlog by approximately $10 million dollars. It's important to note that full installation is still required by model year 2006. In addition the backlog was impacted by the program delays within our censor product lines, which accounted for approximately $5 million of reduction. Finally, our net new business backlog for the next five years now stands at approximately $180 million dollars.

In summary, we're pleased with our operating performance for both the fourth quarter and full year 2002. Our focus on cost controls and working capital management allowed us to reduce our debt balance by over $40 million dollars during the year and significantly improve our financial leverage. We remain focused on generating free cash flow during 2003 and are upbeat about our prospects going forward despite lingering uncertainties surrounding the overall economic outlook. With that I'd like to turn the call back over to Cloyd for closing remarks.

Kevin, thank you. At this time now we're prepared to answer questions anyone may have.

At this time if you would like to ask a question, please press star then 1 on your touchtone telephone. If you decide to withdraw your question you may do see by pressing star and two first question is from Monica Keeney with Morgan Stanley.

Good morning. Can you give us a sense of the EPS guidance, what that would translate into for the first quarter for EBITDA.

EBITDA guidance?

Yes.

I'm not sure I have that number readily available.

And in terms of sales expectation for the first quarter.

I think we're talking about $157 million dollars approximately for the first quarter.

And then in the first quarter, would you expect to be generating free cash flow?

We think we're going to be positive cash flow for the first quarter.

Do you have a sense of the magnitude of that right now?

Not at this point in time, no.

In terms of year-over-year would it potentially be more? Or would this be a tougher comp on a free cash flow basis?

I think it is going to depend on the timing of our capital investments. So I would think it would be positive cash flow, but at this time we're not in a position to give you a range.

In terms of working capital, you've done a nice job this year. I was wondering if you have a sense, do you have any of the metrics, the AR, accounts payable and inventory figures for this quarter as well as what may be some, where you think more opportunity may lie for next year?

We still think we can get some more inventory out, that's what our targets are for next year. I'm not sure I understood the first part of the question.

Do you have the balance sheet item? , the payable.

Right.

Receivables.

Payables are about $43 million dollars. Receivables approximately $79 million dollars and inventory is $51 million dollars.

Okay. Thank you.

Our next question is from Jeff Scoglin of UBS Warburg.

A question for you on your first quarter outlook. I think I heard you right when you said you expect a modest increase in light vehicle production and basically no change in medium truck and heavy truck; is that right.

Right.

To clarify that point, we expect a moderate increase in light vehicles, very moderate, but we anticipate that medium and heavy duty production is going to be down 8 to 12 percent from first quarter of the year.

Okay. I just wanted to make sure of that in terms of your EPS guidance. And then in terms of what you're seeing out of NaviStar for their productions in the first quarter, can you comment on that?

We're seeing those schedules being slightly off from where they were at basically over the fourth quarter. I think we were at a run rate of, I want to say about 195 units a day in terms of medium duty trucks and we see that moving down maybe to about 175 units a day.

Okay. And then a question on your new book of business. I think you mentioned it was $180 million dollars at this point.

Yes.

I thought it was about 250 to 260 at one point with about $85 million in 2003. Is that just a matter of some of the business being recognized and rolling off? Your prior guidance was about 250, 260, right?

Our prior guidance, I think we gave guidance in the third quarter and again at the fourth quarter. As a result of fourth quarter guidance, it was closer to about 240, 220 range. And we think that the 180 now is probably good going forward.

Aside from this, maybe you can clarify what the $10 million from the censor program that was lost, was that related to tires or something else? What was the bulk of the -- what was the rest of the -- what was the driver for the rest of the change?

We tried to walk through those, maybe we did it too quickly. In terms of lower volumes in the medium and heavy-duty market, as you know that market is at or near trough levels and that's affected our 2003 backlog by about $25 million dollars. We expect that to ramp up in the later years. And again we talked about the impact of changing installation rate due to the FMDSS 208, which is a requirement, a government requirement that you have the ability to two stage deployment of the air bag. And that's required by model year 2006. The government lowered the installation rate from 35 percent for 2004 model year to 20 percent. That affected our backlog by about $10 million. Once again that pushed it out to year-end, when we talked about the censor product business, roughly around five million.

So there is mostly, the reduction was mostly as a result of you changing your volume assumptions as opposed to the loss of any contracts?

Primarily volume and then the change from the government.

Then the backlog for 2003, is 85 still a decent number?

That's what we're trying to give you is a backlog has changed to about $10 million of new business we think in 2003. That backlog is now about $180 million for the next five years and of that it's going to move out a little bit related to volume and government issues.

Okay. Lastly your CAPEX forecast for 2003.

I think we gave guidance in the past about $20 to 25 million. We're still comfortable with those numbers.

Great. Thank you.

Our next question is from Steve Gursky of Morgan Stanley.

It's Greg [inaudible] For Steve here. Just a quick follow-up question on this backlog. If you were previously $85 million and you lost about $35 million due to the deferral, with your lower assumption on the medium to heavy, deferral on the installation what happened to the difference that drove you down to a ten million net in the new business number?

Again, I think we've taken you through the numbers what we think in terms of volume, as well as in terms of what's going on with the government regulation. If you're talking about -- we kind of gave guidance before roughly $230 million dollars of backlog in the third quarter and we gave you guidance of the $30 million dollar business change, so that's around $200 million dollars in pipeline. So the difference you're seeing now is some cancellations to get us down to about 180, roughly $180 million dollars.

In terms of the active health care expense you guys are expecting in '03 are you seeing an increase there because I know you weren't giving full benefits last year.

In the health care area?

Yeah.

We see about a 10 to 12 percent increase in health care. But health care is not an issue that we curtailed last year. And that was more a benefits related to 401K.

That was wages and retirement benefits, Steve.

Are you fully putting those back into place this year?

We intend to put them fully back in place right now but always have the opportunity to go back and adjust those if business conditions change. And quite frankly we were able to because of our performance this year being better than anticipated to restore some of those benefits earlier than we anticipated actually in 2002.

What was the FX impact on both the sales and operating profit on the quarter?

FX impact was about three and a half million dollars and so it's about roughly 300 to 500,000 dollars on the operating income line.

Okay. Thank you.

Our next question is from Mike Kinder of Salomon Smith Barney.

Yes to follow up on the backlog question. You threw out a number of ten million incremental in '03. Do you have a rough ballpark for '04 and '05. I have a feeling for how that 180 lays in some of the further out years.

I'm not in a position to discuss that right now, Mike. It's going to, we're focused primarily on the business plan for 2003 right now. We're still kind of looking at the out years. I would say probably about by the second quarter call we'll be in a position to discuss what the backlog looks like going out.

Okay. And under the revolver, you said it was undrawn at the end of December. What was the availability? Did you have any covenant restraints or LCs?

No.

On the health care, you mentioned an increase by 10 percent. What's the dollar magnitude of that on an annualized basis?

I would say that magnitude is roughly a million dollars, maybe a little higher.

Okay thank you.

Next question is from Brett Hoselton of McDonald Investments.

Good morning. I was going to ask you about the backlog but I think you covered that. The tax rate for 2003, as of the third quarter, I think you were looking at an increase in the tax rate to maybe about 37 and a half percent.

I think we put some things in place, we're comfortable with around 35 percent going forward.

Okay. And then secondly, you obviously have some exposure to Europe and the Euro and as the Euro fluctuates and the dollar weakens, what kind of impact can you see on operating earnings into this year? If the Euro were to stay where it is at today, with a one percent change in the Euro, do you have any idea what that would translate into in terms of operating earnings?

As a one percent change we don't think it's going to be a meaningful number, a translation in operating income.

D and A for 2003.

It's in roughly the $20 million, $22 million area.

Then finally, just with regards to the Ag market and European heavy truck market, your comments earlier, were they basically for the first quarter or is that a general comment about where you see it going in 2003 and if it's more of a first quarter comment, what is your sense for the Ag business and European heavy truck business in 2003?

The comments were basically first quarter related, Brett. However we think that North American Ag market and our customers, our main customers, John Deere there, we believe five to seven percent for the year is probably realistic expectation right now. Having come from very low levels for the last three to four years in that market. As it relates to Europe, we believe again the comments were pretty much first quarter was sort of what we were going to see for the full year. Being slightly off from the '02 levels but no real significant decrease, maybe a couple percent. That seems to be the consensus with the market over there.

Great. Thank you very much, gentlemen.

Our next question is from David Bidderman from Deutsche Banc.

This is NATSSHA silver for David. A couple quick questions, you mentioned that Pacifica as one of your new awards can you talk about the content on that?

On the Pacifica, we have add this up real quick in my head. Probably 35 to 40 dollars worth content here. We have pressure switches, transmission range censors, we have a pressure switch, steep track position switch, as well as a POD switch on that product. We have a wide range of products on that vehicle.

Any increase in orders given the positive feedback from that platform?

This is early in the launch process right now. So it's kind of hard to answer that question at the moment.

Okay. And also what about on the -- I know you have content on the Lincoln Navigator, does it translate to the Aviator?

Certain of it does, yes.

Could you quantify that?

We have to get back to you on that one.

Finally, what's your cash balance.

It's about$ 27 million dollars.

Thank you. Great quarter and year.

Again, if would you like to ask a question, please press star then 1 on your touchtone telephone. Our next question is from Monica Keeney with Morgan Stanley.

Sorry just a quick follow-up. You had mentioned with the free cash flow generation, the focus would be on debt reduction and then you allude to acquisitions and nothing imminent, but I was curious as to if you were going to make one, an opportunity arose, what areas would you look at either on a product basis or geography or market and what leverage would you not want to go above?

I guess it's two parts to your question, Monica. First, right now as we look at our products and our capabilities, we really don't see any strategic hold. So there's no real area we would be focusing on to try to either fill in the hole or add to. So it's really opportunistic. But primarily around the higher value-added engineered electrical products, electronic products is where we would probably have the most interest. In terms of leverage, I don't think we'd like to see our debt to EBITDA ratio get much up above three.

Thank you.

Again, that's star then 1 to ask a question. There appear to be no further questions at this time.

Okay. Once again I'd like to thank everyone who participated and listened in to our call this morning and we look forward to talking to you at our next call. We anticipate it to be around April 24th. Thanks again.