Stoneridge Inc (SRI) 2003 Q1 法說會逐字稿

Good morning and welcome to the Stoneridge First Quarter 2003 Earnings Release Conference Call. 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 for the Securities and Exchange Commission. This conference is being recorded.

I’d like to turn over the conference to Cloyd Abruzzo, President and CEO. Mr. Abruzzo?

Thank you. I’d like to welcome everyone to our first quarter earnings call. With me today is Kevin Bagby, our Chief Financial Officer. I’m going to start off this call today with a few brief comments about our first quarter. And then Kevin will get into the details of our financial performance for the quarter.

We’re very pleased to announce the first quarter was significantly better than we anticipated. Our first quarter operating results reflected relatively stable production volumes in both the North American light vehicle markets – automotive and light trucks, that is; and slightly better than forecasted production levels in the medium and heavy-duty truck markets, both in North America, as well as in Europe.

Sales in the first quarter were $160m approximately, compared to $158m in 2002 first quarter. This represents about a 1% year-over-year increase. As we announced last week, we anticipated earnings for the quarter to be ahead of analyst expectations. The consensus estimate for the quarter was about $0.25 a share.

Our earnings per share for the first quarter were $0.31 a share. This compares to earnings per share of about $0.25 a share in the first quarter of 2002. And that is before the cumulative effect of an accounting change related to good will. This represents a 24% increase year-over-year in earnings per share.

Our year-over-year improvement in earnings is a result of our continuous emphasis on new manufacturing cost reductions, and our ability to generate free cash flow that we’ve utilized to pay down debt, thereby lowering our interest expense.

During the first quarter, as part of our ongoing effort to enhance our competitive position, we made a decision to shift certain manufacturing capacity in our power and signal distribution divisions in the U.S. to Mexico. We anticipate closure of the U.S. facility to be completed by the early fourth quarter of 2003.

The new manufacturing facility we announced will be located in Monclova, Coahuila, Mexico. The facility is strategically located near several major customers near Monterrey, Mexico. We anticipate production of power and signal distribution products, as well as modular assemblies, to begin at this facility in the fourth quarter of 2003.

These actions were necessary and are part of our continuing effort to realign our cost structure to better match industry conditions, competitive pressures and customer needs. As has been our past practice, we will charge continuing operations with the shut-down as well as the start-up expenses associate with these strategic decisions.

We had a very good quarter, first quarter, from a cash flow perspective. Our solid operating performance during the quarter and our [unintelligible] commitments to the efficient use of working capital, allowed us to generate strong free cash flow of approximately $17m during the quarter.

As we’ve stated in past calls, one of our major objectives is to de-leverage our balance sheet. During the quarter we paid down $20m of our term B loan. This was in addition to the $50m that we paid down in 2002. We’ve made significant progress in reducing our debt load. At March 31, our net debt was approximately $208m, compared to $277m at March 31, 2002.

We’re very pleased with the improvement we’ve made on our credit statistics, and the significant progress toward our goal of de-leveraging our balance sheet. Kevin will get into more details on our debt statistics in a few moments here.

As we move forward into 2003, our plans are to continue to use our free cash flow to support our organic growth opportunities, and to reduce debt further. We continue to explore opportunistic strategic acquisitions. But at this time we’re not actively pursuing anything.

Relating to new business, the new business activity for the first quarter was very robust. We’re actively pursuing a significant amount of opportunities across all our products, all our markets, and the various geographic regions that we’re in.

There are two significant events that occurred during the quarter that I’d like to mention. The first is that we signed a comprehensive long-term supply agreement with our largest commercial truck manufacturer during the quarter. This strengthens our status as a major electrical supplier/partner for the future for this customer. We are currently working to identify additional business opportunities at this OEM as a result of signing this long-term agreement.

The second significant event that occurred, we were recently notified of a new switch product award from General Motors for the new GMC 900 pick-up trucks that GM will be coming out with. The estimated annual volume of this award is about $8m. While this is a very significant award for us from a dollar value standpoint, it’s also significant strategically, because it positions us well with General Motors. This product was awarded to us after a very extensive global competition. And we believe it really positions Stoneridge well for future switch business awards at this customer.

Our backlog of awarded new business continues to remain very strong. We estimate the backlog to be about $180m of net new business that will launch over the next four to five years. As we can see, as we have visibility today, there are no delays or cancellations on the horizon that would affect this backlog that we’re aware of at this point in time.

Based on our book of awarded new business and the products on our development pipeline, such as new safety-related control devices, next generation sensors, as well as commercial vehicle instrumentation and information management products, I remain very excited and confident about our future growth prospects.

Now a couple of comments regarding our outlook for the second quarter, and really the balance of 2003. By now everyone is, I am sure, aware of the announced second quarter North American automotive and light truck production cutbacks. It appears Big 3 light vehicle production for the second quarter will be off approximately 15% from 2002’s second quarter, and sequentially from the first quarter down about 4%.

In the commercial vehicles markets, we’re anticipating a year-over-year increase in medium and heavy-duty truck productions for the second quarter. The forecast for agricultural equipment production is flat, both year-over-year as well as sequentially. Our full year view for commercial vehicles remains pretty much the same as we started out the year at. And that should be about 5% below 2002 levels.

As relates to Europe, production volumes of both light vehicles and commercial vehicles appear to only be a few percentage points behind 2002 levels. However, there are some indications that the light vehicle markets are getting a slight bit weaker in the European marketplace.

As for Brazil, we continue to remain optimistic about the second quarter. And we see it being a continuation of some of the modest increases we’re seeing in the first quarter. For the year we anticipate slightly better than 2002 production levels. We continue to be encouraged by the strengthening of the Brazilian currency, as well as the political tones of the new administration.

Lastly, in terms of guidance for the second quarter, as has been our past practice, we’re going to give guidance for the upcoming quarter, recognizing that there are many uncertainties that currently exist. We estimate earnings per share will be in the range of $0.24 to $0.26 for the second quarter of 2003.

While it remains difficult if not impossible for us to forecast the entire year in the wake of many geopolitical issues, economic uncertainty, and certain industry-specific concerns, we are reaffirming our full year consensus estimates at this time. We will continue to communicate to you as the year becomes clearer to us. Now Kevin Bagby will give you some details of our financial performance for the first quarter.

Thank you Cloyd. Revenue for the quarter totaled $159.6m, and was up about 1.2% from the similar period in 2002, which had revenue of $157.7m. Production volume had a mixed impact on the quarter. North American light vehicle production increased approximately 2.6%, while North American commercial vehicle production was flat with the prior year.

Within the commercial vehicle market, the mix was negative from a Stoneridge perspective, as medium duty production fell 1.9% compared to an increase of 3% in the Class 8 market. And as many of you know, about one-third of our commercial vehicle revenue is generated in the Class 8 market, and two-thirds in the medium duty market.

North American revenues of $128.7m increased by 3.2% from 2002, while European revenues increased 24.4% to $30.9m. The North America volume was a slight positive. The year-over-year contribution of new business awards was a positive during the quarter. A few examples of platforms that experienced content growth are International’s next generation vehicle, Lincoln Aviator and Navigator, Ford Explorer and Expedition, and GM’s full-sized truck lines. Products include switch and sensors in the areas of safety and convenience.

Higher volumes and favorable currency translation positively impacted European sales volumes. North American revenues accounted for 80.6% of the total first quarter revenues, compared with 84.3% for the same period in 2002.

We’ve adjusted the product line reporting to reflect business segments as disclosed in our 10K [Hughes?]. Accordingly, power distribution revenues increased by 11.4% to $69.8m during the quarter, as increased content and favorable exchange rates positively impacted results.

Revenues for the control device segment decreased by 5.6% to $89.8m. The decrease is more than attributed to the reduced sales from the actuator products that we elected to exit in 2002. This information was previously announced in the third quarter 2002.

Full passenger car and light truck revenues were $87.8m or 3.2% below the 2002 level, while the medium and heavy-duty sector generated revenues of $55.1m, which exceeded the 2002 performance by 7.7%. The agricultural market generated revenues of $12.7m, which was slightly below the 2002 level. And all other revenues accounted for $3.9m.

Gross profit was $40.9m, $1.6m above the prior year level. The corresponding margin rate was 25.6%, up 70 basis points from a year ago. The improvement in gross profit is attributed to enhanced operating leverage, and ongoing cost reduction activities that were primarily attributed to new manufacturing six sigma programs, as well as other productivity initiatives.

One of the most consistent drivers of our cost reduction efforts is the movement of labor intensive manufacturing operations to low cost locations. In the quarter we generated 25% of our revenue from low cost locations, compared to 21% in the previous year. Total employees at 5,472 were 6.1% below a year ago level.

Selling, general and administrative expenses of $23.3m in the first quarter compared to $21.6m in the first quarter 2002, and $23.2m in the fourth quarter 2002. Operating income for the quarter of $17.6m was approximately the same as our 2002 performance.

Interest expense for the quarter was $7.3m, and was $1.5m below the 2002 level. The sequential and year over year reduction reflects the impact of lower interest rates and our lowered debt balances, which I will address in a moment.

The company recognized tax expense of $2.7m for the first quarter, implying an effect tax rate of 34.3%. The tax rate reflects the effect of higher foreign income, which generates a lower overall effective tax rate. We continue to anticipate an effective tax rate of approximately 35% for the full year.

First quarter net income was $7m, with $0.31 per share, versus net income from operations of $5.6m or $0.25 a share in prior year. Depreciation expense for the quarter was $5.2m, and was up approximately $200,000 over prior year. Amortization expense was $700,000, which was equal to the previous year. Income before interest, taxes, depreciation or amortization was $23.5m for the first quarter 2003, compared with $23.4m for the comparable period in 2002.

Working capital, excluding cash and the current portion of long-term debt, was $53.7m in 2003. Compared with the first quarter 2002, working capital declined $27.7m, or 34.1%. Our working capital declined sequentially by $6.5m or 10.8%. The reduction in working investment was achieved despite a revenue increase compared to both the first quarter of 2002 and the fourth quarter of 2002.

Operating cash flow, net of fixed asset addition was a source of cash at $16.6m for the first quarter. The sources of cash flow were lower working investment and higher income compared to the first quarter 2002.

Capital investments totaled $4.4m in the first quarter, reflecting the investments for information technology, seat track position products, and next generation high pressure sensor products for brake applications.

Total debt as of March 31, 2003 was $230.3m, compared with $250.9m on December 31, 2002. The reduction in debt reflects a $20m debt repayment that was made during the first quarter. Financial leverage, as measured by total debt to trailing 12 month EBITDA, decreased to 2.3 times from 2.5 times in the prior quarter, and 4.1 times in the prior year.

The revolver of $100m remains at this time undrawn. And our cash balance as of March 31 still at $22.2m, as is diluted shares outstanding in the first quarter of 22.6 million.

In summary, we are pleased with our operating performance for the first quarter. Our focus on cost control and working capital management allowed us to reduce our debt balance by approximately $20m during the quarter, and through our financial leverage.

We remain focused on generating free cash flow during 2003, and will aggressively adjust our cost structure [and issue?] volumes. With that, I’d like to turn the call back to Cloyd for closing remarks. .

Thanks Kevin. At this time now, we’d be glad to answer any questions you may have.

(Caller Instructions.) Our first question is from [Monica Keene] of Morgan Stanley.

Hi. Good morning. It’s actually [Svi Len] standing in for[Monica]. Can you hear me?

Yes. Good morning.

Good morning. Just first a quick question. Just on the top line, was there any for-ex impact on sales?

Foreign exchange impact on sales?

Yes.

Well we think about $4m of our top line was affected by favorable foreign exchange rates.

Okay. In terms of I guess your major customer, [Navistar] and International, how have the order rates been doing throughout the quarter?

Order rates – they’ve sort of been – they’ve been fairly stable, from what we saw really kind of in the fourth quarter – stable to maybe slightly down.

How much, in terms of the visibility going forward, has that changed?

The visibility we have looking out into the second quarter, again, we see them being pretty slack from where we’ve been – slack to slightly, again, from what we are seeing.

So in other words, everything has been pretty much as expected?

Yes.

Okay. And moving on to, I guess, more housekeeping items, with regards to sort of cash flow items for ’03, interest expense up $31m. Is that sort of still within guidance?

We think that interest expense probably is below that number. I think we’ve been giving the same run rate as the first quarter.

Okay. Cap ex is still about 22 for the full year?

We think it’s between 22 – well, between 20 and 25 million.

Twenty and twenty-five? Cash taxes of about $5m?

Yeah. We look at that with an effective tax rate around 35%. So cash taxes would be – we’re thinking about $5m now.

Okay. And in terms of your debt pay-down goal in ’03, do you have a bogey?

No. We really don’t at this point.

I guess should we expect the free cash flow that you should be generating in ’03, most of that will be used towards debt reduction?

It would be first used to fund working – or capital expenditures as it relates to new business awards. And then anything to the excess, we’ll be using to pay down debt. Yes.

Okay great. Thank you.

Our next question is from [David Bidderman] of Deutsche Bank.

Good morning guys. Cloyd, you mentioned that you got some decent new business, and that the backlog looks like it’s in pretty good shape. The question really is in terms of how you’re winning new business, is that an increasing content story? Is that market share gains? Is that some combination of both? Maybe you could talk about that a little bit.

Yeah. I think it’s a combination of both [David]. Obviously there’s some market share competition going on. I think we’re winning on that – new business on that front. But also the increasing amount of electrical content in vehicles, especially in the area of sort of safety-related items and devices – there’s more and more of those being placed on vehicles. And that’s where we’re seeing a lot of opportunity today for some new business.

Any ability to put out sort of an organic growth rate on electronic content? Or is that just a tough bogey to get your arms around?

I guess we’re still kind of going with some of the studies that we’ve seen over the last couple years. It’s sort of forecast – electrical content in vehicles to grow – be growing at a 5-7% compound annual rate.

Great. Thanks Cloyd.

Thank you.

Our next question is from [Mike Hessler] of Deutsche Bank.

Hi. Good morning guys.

Hi [Mike].

Good morning [Mike].

Just a couple of quick questions. You mentioned something about a move to Mexico, that you were closing down U.S. capacity, moving into Mexico, and that you ran that through the income statement in the quarter. How much did that cost?

We’ve typically not disclosed that amount, because we believe it’s just normal operations. And we’ve done that in the past – in 2000 and 2001. But we view those as normal operating expenses. And therefore, we don’t disclose them.

Okay. Was there an incrementally higher expense this year versus last year?

Yeah. But I think the other thing is it takes a little bit of time to do these things. It probably takes two to three quarters, as Cloyd outlined. So we wouldn’t expect to see any benefit from this transition until ’04.

Okay. On the new business that you guys are getting, how much new business did you get in the first quarter? And what are you guys looking for in the balance of the year? And what are the major programs that you guys are expecting this business to come from?

Well we haven’t disclosed the amount of new business in the first quarter [Mike]. And it’s pretty difficult to really predict what we’re going to get for the entire year. But we’re very optimistic about our chances of sort of maintaining the levels we have for the past several years in terms of new business awards.

We feel that we’re continuing to win at an increasing rate, frankly. But we’re seeing opportunities, as I had mentioned earlier, in the area of safety-related products, as well as in some of the enhanced performance products that go along with some of the [bi-wire?] applications in vehicles. And we’re seeing some other opportunities in commercial vehicles as well.

Okay. Out of the 180 million or so of net new business over the next few years, how much do you expect to realize in 2003?

I think we’re talking in 2003 of about – net new business about 15 million, 14 million.

Okay. So in 2004 is there a significant pick-up?

Yes. As we’ve disclosed in the past, we think it’s about [weightively?] over the next four years, five years. About $180m in the pipeline is [unintelligible] next four years.

Okay. All right. Thanks guys.

Our next question is from [Brett Hustleton] of McDonald Investments.

Good morning gentlemen.

Hi [Brett].

Good morning [Brett].

Kevin, I didn’t quite understand what you said about the backlog in ’04 and ’05. If I take the 180, divide it by four, I end up with about $45m. You’ve got the actuator business rolling off here. So that would leave you with 15 million for 2003. So that makes sense.

If you drop off the 15 million for 2003, and then you take the difference and divide it by four basically. And that’s the way we see it rolling out right now.

Oh, so take the 180, subtract the 15 million, and then divide that by four?

That’s correct.

And then that’s kind of pretty steady out through there.

Yeah.

Okay, cool. The FX impact in the quarter – did you say that was $4m?

Yes.

Okay. Was there an earnings impact associated with that?

That’s about two quarters of a million dollars on earnings.

Okay. The SG&A - your gross margins are up. Your op margins are down a little bit. So SG&A – kind of the offset there? And the question would be what’s – is there anything significant or notable going on in SG&A? And then of course what would be a decent run rate? Should we just kind of take what we see in the quarter and use that as a run rate?

Yeah. That’s consistent with the fourth quarter run rate as well – they’re about the same numbers – 23-1/2 million. That’s a good run rate going forward. There’s really nothing significant in there, I think, over last year was, as Cloyd indicated. Still investing in product development, organic growth product development. That’s the only notable increase.

Okay. And then as far as the outlook for the segments or for your markets, the ag business – he said second quarter, I believe, Cloyd was – would your expectations be roughly flat for the remainder of the year? Is your sense flat? Or do you think it’s going to be up? Down?

I think at this point in time [Brett], we think it’s going to pretty much flat compared to 2002.

Okay. And then what about European medium and heavy-duty truck? Any sense there?

We’re seeing right now that that’s pretty much on the par with last year. The forecast was to be down slightly over 2002 for the entire year. And we’re kind of seeing that at this point in time.

Okay. And then the heavy-duty truck expectations? I think you said down 5% for ’03. Did I hear that correctly?

That’s about what we’re expecting. Yeah. And that seems to be the sort of the consensus forecast right now.

Okay. And Kevin, the actuator business I think is about $30m annually. Is that a seasonally larger number here in the first quarter?

No. That’s just pretty much ratable over the quarters.

Is that right? Okay great. Thank you very much gentlemen.

All right [Brett].

Our next question is from [Jeff Hoagland] of UBS Warburg.

Hi. It’s [Eric Brovig] in for [Jeff]. Good morning.

Good morning.

Good morning.

I think most of the questions have been answered. Just one follow-up. I don’t know if you mentioned your North American light vehicles build [rated?] function for the year.

On a consensus basis it’s roughly fifteen nine.

Fifteen nine? Thank you.

(Caller instructions.) There appear to be no further questions at this time.

Okay. I’d like to thank everyone for participating in our first quarter call. And we look forward to talking with you again on or around July 24 with the second quarter results. Thank you.