Stoneridge Inc (SRI) 2003 Q2 法說會逐字稿

Good morning and welcome to the Stoneridge Second Quarter 2003 Earnings Release Conference Call. For your information all participants will be in a listen-only mode. There will be an opportunity 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 maybe considered forward-looking statements, forward-looking statements involving 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 obligations 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 effect financial performance related to forward-looking statements, please refer to the Stoneridge quarterly earnings release and periodic filings with the Securities and Exchange Commission If you should need assistance during the conference, please signal an operator by pressing “star” and “0” on your touchtone phone. This conference is being recorded. If you have any objections, please let us know by pressing “star” and “0” now. Hearing no objections, I will like to turn the conference over to Mr. Cloyd J. Abruzzo, President and CEO. Mr. Abruzzo.

Thank you. Good morning everyone. I am Cloyd J. Abruzzo, President and CEO of Stoneridge and I would like to welcome everyone to our second quarter earnings call. With me this morning is Kevin P. Bagby, Chief Financial Officer. After a few brief comments on the second quarter Kevin will get into the details of our financial performance for the quarter.

We are pleased to report a well-anticipated second quarter. The second quarter was a period marked by declining production volumes in all of our served markets. Our management focus has been on cost reduction and generating cash flow to strengthen our balance sheet and to support our future growth plans. Sales in the second quarter were $155m; this was compared to $172m in the second quarter of 2002. This represents approximately a 10% decline year-over-year. The decline reflects lower production volumes and reduced sales from a net excellent product line that we communicated to you in October of 2002. Earnings per share for the quarter was 28% of share compared to 30 cents a share for the second quarter of 2002. Sales for the six months ended June 30 were $315m compared to $330m in the same period of 2002. This represents about a 5% decline year-over-year. Earnings per share for the six months ended were 59 cents a share; this was compared to earnings per share of 55 cents a share in the same period of 2002 before the cumulative effect of an accounting change.

Our first half performance reflects our lean manufacturing in cost reduction efforts, as well as our aggressive capital management. There is a [number] of us who generate cash flow well ahead of our business plan. As we discussed during our first quarter call, as part of our ongoing efforts to enhance our competitive position, we have made certain decisions to shift manufacturing capacity in our Power and Signal Distribution division from the US to Mexico and please do note that this project is on schedule and we anticipate production of Power and Signal distribution products and modular assembly that is beginning in the fourth quarter of this year in this facility. Under the same competitive theme we have been actively exploring cost saving opportunities on certain components by sourcing them in the Far East. We are trying to see some success in this area and we expect to see future cost benefits from this initiative as we go forward. These projects reflect our ongoing efforts to realign our cost structure to better match industry conditions and meet competitive pressures and to meet our customers' needs. As been our past practice, we will charge continuing operations with shutdown of product's expenses associated with these strategic decisions. Regarding our cash flow, our solid operating performance during the quarter and our relentless commitment to the efficient use of working capital has allowed us to generate cash flow of approximately $7m during the quarter and approximately $23m year-to-date. As we move forward in 2003, we continue to use our planned out cash flow to support organic business growth opportunities and to reduce debt further. Recently there has been an increase in [M&A] activity in our industry. This is encouraging to us and while we continue to explore opportunistic strategic acquisitions, we are not exactly pursuing any at this time. We had a good quarter when it comes to new business activity. The new business activity in the second quarter continue to be very robust as it was in the first quarter. Suddenly we've just received approximately $50 million of new business awards in the first half of 2003. In addition, we will continue to work on a significant number of new opportunities and we are actually pursuing these across all of our products, markets, and geographic regions. Based on our book of award in new business and the product and our development pipelines our future growth prospects remain very encouraging.

Just a couple of comments about our outlook for the third quarter and we have a balance of 2003. We are anticipating production volumes in all of our markets in North America that remain at or slightly below the second quarter levels. Year-over-year we anticipate in North America our production declines from the third quarter of 2002 and a smaller but slight decline when we compare to the fourth quarter of 2002. In Europe, production volumes for both light vehicles and commercial vehicles appeared to be only a few percentage point behind 2002 levels for the first half of 2003. However, there are indications that the light vehicle markets are getting slightly weaker as we get into the second half of the year. In Brazil, the first half of 2003 saw Brazilian production drop dramatically from 2002 levels. The expectations appeared to be for an improvement in the second half for the year but they continue to anticipate production volume to be below the 2002 levels. Although, the near term industry outlook is not overly encouraging, we remain confident in our ability to deliver solid financial performance for the balance of the year.

With a result of our lower breakeven point and stronger balance sheet, we at Stoneridge are well-positioned to benefit from an economic recovery that seems to be underway when this economic recovery finally reaches the automated information vehicle markets mostly some time before the end of the year here. As has been our past practice, we are providing a forecast for the upcoming quarter recognizing the many uncertainties that currently exists and we estimate earnings per share to be in the range of 13-15 cents of share for the third quarter of 2003. Well it remains difficult to forecast the entire year in the wake of many geopolitical issues, economic uncertainty, and certain industry specific concerns we have. We are reaffirming our full year consensus estimates between 90-95 cents per share this time. We will continue to communicate to you as the full year becomes more clear to us. Now, Kevin is going to discuss our financial performance in detail for you.

Thanks Cloyd. Revenue for the quarter totaled $155m, compared to revenue of $172m in the previous year. Production volumes declined across all our served markets. North American light vehicle production declined by approximately 9% versus the difficult prior year's comparison. North American commercial vehicle production also declined in the quarter by approximately 9%. North American revenues were $124.3m, decreased by 14% from 2002, while European revenue increased 11.6% to $30.7m. In North America, lower industry volumes in exit product line more than accounted for the decline. A few examples of platforms that experienced content growth in the quarter are the Cadillac XLR, Ford F-series and Lincoln [Aviator].

Products include switching and sensors in the area of safety, chassis and power train. Variable currency translation positively impacted European sales while lower industry volume had a negative impact on the second quarter results. North American revenue accounted for 80.2% of total second quarter revenue compared with 84% for the same period in 2002. Our distribution revenue increased approximately 1.1% to $70.1m during the quarter as increased content and favorable foreign exchange rates offset volume declines in our end markets. Revenues for control device segment increased by 17.3% to $84.9m. The decrease is attributed to reduced sales and exhibit accelerator product line and lower industry volumes. Gross profit was $40.3m compared to $48.2m in a year ago. The corresponding margin rate is 26%, down 200 basis points from the 2002 level. The decline is mainly attributed to lower volume of our served markets and ongoing costs related to transitioning production to low-cost locations. During the second quarter, sales in low-cost locations accounted for 26% of total revenue compared to 23% in the prior year. Total employees of 5,338, are 336 or 5.9% below a year ago level. Selling, general, and administrative expenses of $24m in the second quarter compared to $23.5m in the second quarter of 2002 and $23.8m in the first quarter of 2003. Year-over-year increase in SG&A reflects increased investment on our design and development activity as well as increased activities in our sales and marketing efforts to support growth initiatives.

Operating income for the quarter of $16.6m was below the prior year level by $24.7m. Interest expense for the quarter of $6.6m was $1.6m below the 2002 level. Reduction in interest expense reflects our lower debt count and non-debt related interest income of $268,000 related to a tax refund. I will review these items in more detail in a moment. With the second half of the year, we expect interest expense to approximately $6.9m per quarter. The Company recognized tax expense of $2.7m in the second quarter yielding an effective tax rate of 34%. Tax rate reflects the effect of higher point income which generates a lower effective tax rate, as well as, the successful completion of several tax initiatives related to one time refund from amended tax returns. As a result, we now expect our effective tax rate to support growth initiatives. We now expect our effective tax rates to approximately 30% for the remainder of the year. Second quarter net income was $6.3m or 28 cents per share compared with net income of $6.8m or 30 cents a share in 2002. As outlined in our earnings release, 2002 results included non-cash loss of $3.6m or 16 cents per share after applicable income tax related to the early extinguishment of debt in connection with the company's debt refinancing. Depreciation expense for the quarter was $5.4m, up from $5.2m from the prior year. Amortization expense was $700,000; working capital excluding cash and current long term debt was $58.1m at June 30, 2003. Compared to the second quarter of 2002 working capital declined by $17.6m or 23% reflecting lower accounts receivable and inventory balances. Operating cash flow net of fixed assets addition was the source cash of $7.3m for the second quarter. The source of the cash flows were primarily net income. Through the first half of the year Stoneridge has generated $23m of operating cash flow net of capital investments. Capital investments totaled $3m in second quarter reflecting investments for process, automations, [inaudible] for acquisitions, products and next generation high pressure sensor product break applications. Total debt as of June 30, 2003 was $229.8m compared with $250.9m on December 31, 2002. Reduction in total debt reflects a $20m debt repayment that was made during the first quarter. Financial leverage improved 2.5 times from 3.7 times in the previous year. Revolver of $100m remains un-drawn at this time and our cash balance as of June 30 still approximately $30m. Average diluted shares outstanding in the first quarter were 22,644,000 shares.

In summary, we feel our second quarter performance was solid despite a difficult macroeconomic environment. We remained focused on generating cash flow during 2003 and continue to expect full year earnings in the range of 90-95 cents per share with third quarter EPS in the range of 13-15 cents per share. Going forward, we continue to focus on cost reduction efforts and lowering our breakeven points to remanufacturing of six sigma programs as well as migrating productions to lower cost locations. In addition, we are vigorously pursuing the expansion of our geographic footprint and customer base. With that I would like to turn the call back to Cloyd for closing remarks.

Thanks Kevin. That kind of concludes the former part of our presentation. We would be glad to answer any of your questions at this time.

At this time, if you would like to ask a question, please press "star" then "1" on your touchtone phone. If you decide you want to withdraw your question, please press "star" then "2" to remove yourself from the line. Our first question comes from Monica Keen (ph) from Morgan Stanley.

Good morning.

Hi, good morning.

I was wondering if you could update us on your CAPEX guidance for the year, it is look a little light in the quarter?

Yes, it is little lighter in the quarter Monica. But we still think that our CAPEX is going to be around 20-25m full year.

And so what projects you are coming out in the second half; are anything in particular are driving at?

Well, about three major products. One is the -- we have a launch of a new pressure switch occurring during the second half of the year to require additional capital. We also have some products launching in Europe; [C-track] positioned and ignition switch that will require additional cap in second half of the year. Those are kind of major ones.

And can you give us [FX's] impact on the sales as well as on operating income?

I think the [FX's] impact on sales was about $3.5-4m and on our operating income it's about $500,000.

And then can you give us an update on your outlook for [Class 8] as well as medium-duty? What are you seeing in the market, what you are hearing from your customers?

You know, right now in terms of the medium-duty market, Monica, we are seeing pretty much sum. The outlook right now and the production levels that we are producing at right now are pretty much flat with what we saw; flat meant just slightly up from what we saw in the second quarter of this year and we sort of think about the same thing. I think kind of just flat in the [Class 8] markets right now from very smart customers. That's in North America; European market we are seeing up slightly 2-3%.

So then -- what numbers are you using in terms of production for this year and next year? Do you think about North West [Class 8] and medium duty?

North American [Class 8] for the year was something around 170,000 units.

I am sorry I can't hear you.

About 170,000 units for the full year in 2003 for class 8. Medium duties we are thinking about 190,000 units and we have only begun planning profits for next year, so we do not have outlook as if this time. Next time we'll talk to you in third quarter, we'll have an outlook for 2004.

What do you think anecdotally?

Well it's really going to be a function of how fast the economy comes back and if that's the case, we will probably see 5-10% improvements in both those markets if the economy comes back pretty strong.

Thank you.

Our next question comes from Christopher D. Manuel from McDonald investments.

Good morning fellows.

Good morning.

Couple of questions for you. The revenue backlog, last quarter you indicated it was about $180m for the '03-'07 time frame, but you also indicated you want some new business in the quarter; where would your backlog stand right now?

We usually do a backlog analysis in conjunction with our business plan process, so you know at this point in time we haven't really changed our estimate on our backlog.

Okay it's just still around 180. Are you still anticipating about $15m coming on this year?

Roughly, yeah.

Okay. Next question is your guidance for the back half of the year. You had indicated what your class 8 medium duty production assumptions were, but what were your assumptions for light vehicle?

I was still looking at about 59 in terms of production for the full year. I think that gets you about 3.7m units in the Q3, roughly 3.9m units in Q4.

Okay, thank you. Let's see here, last question I had was -- you mentioned your D&A for you CAPEX for the year at 20-25, do you have an idea where depreciation amortization for the year will be and what you are thinking about for next year for both of those?

The depreciation is going to be around $20-22m and we would think that moves up slightly next year, but as again we are beginning our planning process, so I will be in better position to answer that question in Q3.

Okay and capital spending will probably stay roughly the same next year, you would guess?

Yes.

Okay. Thank you.

Our next question comes from David Zitterman (ph) from Deutsche Bank.

Good morning guys. Most of my questions have been answered, but two quick things. One is, I guess this is one for you Kevin, obviously you guys have a bit higher cash balance at the end of the quarter, albeit curious to give us a sense, you know, what do you think yearend cash and debt should look like, I am assuming that some of that cash maybe used to reduce debt over the next couple of quarters, but I will be curious for your thought sir?

Well, we think the -- we are looking right now on how to use the cash balance and we probably going to use as the pay-down debt sometime during the end of year or towards the end of the year. And with that in mind, we probably see our debt balance around 200m by the end of the year.

Great. The -- okay good, I think I am good.

Hi David.

Thanks David.

Our next question comes from Curt Lucky (ph) from J.P. Morgan.

Hello guys

Good morning.

I was hoping to get a little more color on the bridge between operating income of 25.3m in 2002 to 16.3 in 2003, is that -- it looks like the contribution margin there is higher than it has been in the past and this will help on -- where that is?

Well, if I interpret your question correctly, you mean that the downside leverage is higher than it has been in the past.

Well, the operating income is the change year-over-year in operating income relative to the change year-over-year revenues is a higher percentage than I would have expected it to be. So, I am just curious why the contribution margin is -- is there a charge in the '03 numbers, is that why operating income is lower or --?

Well, we've, as Cloyd indicated in the Q1 conference call and he also reiterated that position we have been moving production to low-cost countries that has affected the operating margin, but predominantly the issue is on the volume side.

Is that -- is this kind of relationship something that we should expect going forward?

I think you would expect that the relationship would remain the same as it has been in the past which is roughly 30-35% whether you are going on the upside or whether you are going on the downside.

So you are saying there is some nonrecurring items in this that depressed the 16.3.

Yes.

Yes.

I am sorry I missed that part. Did you give us a number as to what the nonrecurring?

No, typically we don’t give that number out -- we didn’t do that in the Q1 and we don’t think we should do it right now.

Okay. And a follow up to the [nicely] business question. How does the rest of the 180 roll out in '04 and '05? Do you have a sense here?

I think it rolls out fairly evenly.

Okay. So, what’s [loss] is about. You quite [inaudible]

Okay.

And I missed the cash flow from operations number for this quarter.

$7.3m.

$7.3m in CAPEX, again was right?

About [$3m] in CAPEX.

Okay. Great. Thank you.

Our next question comes from Barry Hines (ph) from Sage Asset Management.

Good morning. Just in the light vehicle segment, I wonder if you could tell us as you go into the new [mile] here and look at '04, if there are any particular new programs you are on that we should focus on in terms of thinking about the next 12 months or so, thanks.

We have a lot of content on the new redesigns for the F-150 Pick-up truck. Several of the new -- the Nissan's new heavy truck, I think, it's named The Titan, we have content on that and that's really kind of new force as well as the new Nissan SUV, the name is sketchy at the moment. The -- I think the Chrysler DCX [Pacifica], we have content on that; we on the several new GM products -- the Cadillac I think as Kevin mentioned, the SRX and XRR, we have some good content in it. So actually we have some pretty good content on some exciting new models that are being launched this year.

Great thanks very much.

Thank you.

Our next question comes from Laura K. Thurow from Robert W Baird.

Good morning.

Hi Laura.

Actually most of my questions have been answered, just a couple of quick questions in terms of the tax rate and some of the management that you have done there. I know you have said you see 30% as a good rate in the second half, do you see that being a good run rate in '04 as well?

Looking at '04 right now, we would probably be in a better position to discuss that in the Q3 call, but these are one-time issues as I indicated related to amended returns. So hopefully it has to stand on its own firstly.

Sure okay. And then in terms of the impact of foreign currency, do you have a -- could you kind of quantify the impact that had on sales?

I thought this was about $3.5-4m in the quarter.

Okay and that was all in Europe, I assume. So the European sales being up 12% [listed] by currency

Yes.

And could you also quantify the EBITDA impact on operating income?

We think it was about 400,000-500,000.

Okay and I think that’s all I have. Thank you.

Thank you.

Again if you would like to ask a question please press "star' then "1" on your touchtone phone. We have question from Curt Lucky (ph) from J.P. Morgan.

I just had one other topic that I wanted to touch on that was the percentage of your revenues that’s you -- I think it is revenue percentage that you source from low cost regions, the 26%?

Yes.

Where it is that -- where do you see that going over to -- say the next yearend and then in subsequent years?

I think Curt, right now we are now looking probably to some of this subjective volume, obviously but we are in our plans now to move about $20-30m of revenue over the next several years -- low wages although [we are at basically]. But that number is kind of very depending on again volumes.

In fact in terms -- that to make a big move going forward; it's going to probably stay below 30%.

I think we see it probably getting close to that and by '05; that time frame.

Okay. Thank you.

Again "star" and "1" to ask a question. Gentlemen we have no further questions at this time.

Okay we’d like to again thank everyone who have participated in our call today and we look forward to talking to you again around October 24. Thank you.