Stoneridge Inc (SRI) 2003 Q3 法說會逐字稿

Good morning. Welcome to the Stoneridge third 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 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 publically 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 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 and zero on your touch-tone phone. For your information, this conference is being recorded. If you have any objections, please let us know by pressing star and then zero now. Hearing no objections, I would now like to turn the conference to Mr. Cloyd Abruzzo, President and CEO. Mr. Abruzzo?

Thank you. Good morning. I'm Cloyd Abruzzo, President and CEO of Stoneridge. With me today is Kevin Bagby, our Chief Financial Officer. We're going to start off today's call -- I'm going to make a few comments about our third quarter and then Kevin will get get in to discuss the financial details with you.

We're very pleased to report a solid third quarter operationally as well as commercially. The third quarter auto and light truck production was relatively stable when compared to the same period in 2002. However, we did experience a year-over-year decline in commercial vehicle production volumes during the third quarter. Sales in the third quarter were 141 million compared to 158 million in the third quarter of 2002. This represents about a 10% decline year-over-year. The decline reflects low production volumes and reduce sales from an exited product line that was communicated to you in October 2002. Even for the quarter were 14 cents per share compared to earnings per share of 19 cents per share in the third quarter of 2002. Sales for nine months ended September 30 were 455 million compared to 488 in the same period in 2002, about a 7% decline year-over-year. Earnings per share for the nine months ended September 30, before the cumulative effect of an accounting change, were 73 cents per share compared to earnings per share of 73 cents also in the same period 2002. Our solid operating performance year-to-date, our lower year-over-year revenue is the result of our lean manufacturing and cost reduction efforts as well as our agressive capital management practices both working capital as well as our capital expenditures.

I'vAs e discussed in previous calls this year with you, our plans to establish a new facility in Mexico to expand our manufacturing of power and single-distribution products in lower wage areas. I'm pleased to announce this project of transitioning power and single-distribution products from one of our U.S. facilities to a new facility in Mexico is almost complete. The Mexico facility is ramping up production in early October of this year, on schedule. This is an important step in our continuous efforts to enhance our competitive position. Under the same competitive theme, we are currently actively exploring cost-saving opportunities on materials and services, primarily working with materials, doing more sourcing of components in the far east as well as India. We expect to realize future cost benefits from these initiatives as we go forward. These projects reflect our ongoing effort to realign our cost structure to better match industry conditions, competitive pressures and customer needs.

I just have a couple comments about cash flow. Again, our solid operating performance during the quarter as well as our relentless commitment to the efficient use of working capital allowed us to generate strong operating cash flows of approximately $20 million in the third quarter. On a year-to-date basis we've generated about $50 million of operating cash flow. This has allowed us to reduce our net debt level at the end of September to about $185 million. As we move forward, our plans are to continue to use our cash flow to support our organic business growth opportunities as well as to further reduce our debt. We'll continue to explore opportunistic strategic acquisitions; however, we're not actively pursuing any acquisitions at this point in time.

Regarding new business, our new business activity in the third quarter was very robust. Stoneridge has received new business awards during the quarter of approximately $30 million on an annualized basis. This brings our year-to-date total of new business awards for 2003 to be about $80 million. We continue to see a significant number of new opportunities that we are actively pursuing across all our products, markets, and geographic regions. Several years ago, we recognized the need to modify our business model and to broaden our customer base. We began by allocating more resources for developing business with European as well as Asian OEMs. As a continuation of this process we have recently established a sales engineering presence in Japan to support our business development efforts with the local OEMs. We'll continue to add resources to this office as required.

Just a couple comments now regarding our outlook for the balance balance of the year. Regarding North America, we're anticipating production volumes in North America, automotive, and commercial vehicle markets to remain at or slightly above third quarter levels. Although our visibility beyond the end of the year is pretty limited at this time, we are beginning to grow cautiously more optimistic about production increases starting in 2004. In terms of Europe, 2003 production volumes for both light vehicles and commercial vehicles continue to be a few percentage points behind the 2002 levels. The fourth quarter appears to be a continuation of the same. In Brazil, Brazilian production is showing some sign of improving, but vehicle production is forecasted to end 2003 below the 2002 levels. Overall, the near term industry outlook is stable. However we are growing, as I mentioned earlier, cautiously more optimistic that production volumes will increase in 2004. We remain confident in our ability to develop solid financial performance for the balance of the year. Our lower break-even point and stronger balance sheet positions Stoneridge to improve performance when the economic recovery occurred especially in the commercial vehicle sectors of the economy.

In terms of guidance, as has been our past practice during third quarter calls in previous years, we're providing a forecast for full year 2003 earnings. We refined our guidance for the full year of 2003 to be 92 to 94 cents per fully diluted share from the previously issued 90 to 95 cents per fully diluted share.

Now Kevin will go into some of the financial details. Kevin?

Thank you, Cloyd.

Revenues for the quarter totaled 140.8 million compared to revenues of 158.4 million in the previous year. For the second consecutive quarter, production volumes declined across all our served markets. North American light production declined by approximately 5%, while in the commercials vehicle market production declined by approximately 9% during the quarter. North American revenues of 116.8 million decreased 14.1% from 2002, while European revenues increased 6.7% to $24 million. In North America lower industry volumes and an exited product line more than accounted for the decline. A few examples of platforms that experienced content growth in the quarter are the Ford Free Star, Ford F-series, Mazda RXE, and the Chevrolet SSR. Products included switches and sensors in the primary areas of safety, chassis, and power train.

Available currency translation positively impacted European sales and lower industry volume had a negative impact on the third third quarter results. North American revenues accounted for 82.9% of third quarter revenues compared with 85.8% for the same period in 2002. During -- the power train revenues decreased 2.1% to $64.7 million during the quarter as increased currency rates were more than offset by production volume decline in our end markets. Revenues for control device segment decreased 17.5% to $76.1 million. The decrease is attributed to lower production volumes in our served market, particularly at the traditional domestic auto makers and an exited actuary product line.

Gross profits totalled $34.4 million compared to 39.6 million in the prior year. The corresponding margin rate was 24.4%, down 60 basis points from the 2002 levels. The decline is mainly attributed to lower volume in our served markets. During the third quarter, sales and low cost locations accounted for approximately 30% of total sales compared to 26% in the prior year. Total employees of 5,162 are 7.8% below a year ago level.

Billing, general, and administrative expenses of $23.1 million in the quarter compared to $23.3 million in the third quarter of 2002, and $24 million in the 2nd quarter of 2003. Operating income for the quarter of $11.3 million was below the prior year level of $16.3 million. Interest expense for the quarter of 6.8 million was $2.6 million below the 2002 levels. The reduction in interest expense reflects our lower debt balances. In the fourth quarter, we expect the interest expense to approximate our third quarter level. The company recognized tax expense of $1.4 million in the third quarter, yielding an effective tax rate of 31%. The tax rate reflects the effect of the successful completion of several tax initiatives related to one time refunds from amending tax returns. As a result, we now expect our effective tax rate to be approximately 30% in the fourth quarter.

Net income in the third quarter was $3.2 million or 14 cents per share compared to net income of $4.2 million or 19 cents per share in 2002. Depreciation expense for the quarter was $5.6 million, up slightly from the prior year of $5.4 million. Amortization expense was $700,000. Working capital, excluding cash and current long term debt was $54.5 million on September 30. Working capital was $15.7 million below the third quarter of 2002 balance, which was $70.2 million. Reduction reflects lower accounts receivable and inventory balances. Operating cash flow net of success and additions was a source of cash of $16.4 million for for the quarter. The sources of cash flow were improved working capital management and earnings after depreciation and amortization. For the first nine months of the year, Stoneridge has generated $39.4 million of operating cash flow net of investments. Speaking of capital investments, we totaled $4.2 million in investments during the third quarter, and this reflects investments for low-cost manufacturing facilities, position centers, and other commercial vehicle products.

Total debt as of September 30, 2003, was $229.2 million compared with $250.9 million on December 31, 2002. Reduction in total debt reflects a $20 million debt repayment that was made during the 1st quarter. Financial leverage improved to 2.7 times from 2.9 times in the previous year. Total debt less cash declined by 8.7% sequentially and 24.7% since December 31. A revolver of $100 million remains undrawn at this time, and our cash balance as of September 30 stood at $45.4 million. Average diluted shares outstanding in the third quarter were 22,758,000.

In summary, we are pleased with our financial performance in a less than robust operating environment. Our cash flow generation remains strong and has enabled us to significantly deleverage our balance sheet. As mentioned earlier by Cloyd, we have refined our full year earnings guidance to 92 to 94 cents per share.

I'd like to turn back to Cloyd for his closing remarks.

Thanks, Kevin. This concludes our prepared remarks. We'd be glad to answer any questions at this time.

At this time, if you would like to ask a question, please press star and one on the touch-tone phone. And we have a question from Brett Hoselton from McDonald Investments.

All right. Hi Cloyd, hi Kevin. How are you?

Fine.

Kevin, can you give me an idea on what the FX impact on revenues were in the quarter?

We calculate that roughly $2.2 million.

Okay. And then Cloyd, as far as your backlog, the 30 million is incremental business that you've won; is that correct?

Right.

Now --. [ overlapping speakers ] I believe the last quarter you said the backlog between '03 and '07 stood at around $180 million. So should I simply -- simply add $130 million on top of that for that same period of time? Or how would you look at that?

No, I wouldn't do that at this point, Brett. First of all, that 30 million includes some replacement business as well as some new business. And we're at the point in the year now where we are evaluating our backlog as we do on an annual basis, and we'll be in a better position to discuss backlog with you in our January earnings call.

Okay. As far as the agriculture segment of the business, do you have any sense of what's going on in that segment of the business, what the outlook is?

Yeah. We have not seen it reflected at this point in any of our production schedules, but it's still a little bit too far in the future. But we're hearing from our customers that they're expecting a better first quarter in 2004. But we have not seen that reflected in any of our production schedules at this point.

Okay. And Kevin can you repeat what the cap ex expenditures were in the quarter?

$4.2 million.

$4.2?

Yeah.

Okay. I think I'm going to circle back with another question. Thank you very much.

Thanks.

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

Good morning.

Good morning.

Just a couple of questions for you. First just to clarify on the tax rate. Because of the initiative I know you're expecting 30% in the fourth quarter. What about next year? Were these mostly one-time items or also --

It will have some impact on next year. We think the tax rate should be roughly 33%.

Okay. And I just wanted to get a little more color on your comment about being cautiously optimistic, particularly as it relates to the commercial vehicle side. Could you talk a little bit, if only directionally, even about about what you're seeing there, when you expect recovery, timing of that. Is that more back end of next year, sooner than that?

Laura, I think we're seeing some indication that there's been some talk about production schedules at the OEs starting to increase at the beginning of 2004. I think you maybe saw the article on the front page of the -- of yesterday's paper that talked about the amount of freight being moved in this country being on the increase. So combine that with some of the tax incentives that are still out there in 2004, and that is, I think, the source of our cautious optimism at this point.

Okay. And that's all I have for now. Thank you.

Thank you.

Once again, if you would like to ask a question, please press star and then one on a touch-tone phone. If you would like to are draw your question, press star and then two to remove yourself from the list. Once again, that is star and one to ask a question. Gentlemen, we have a question from Brett Hoselton from McDonald Investments.

That was pretty quick.

Gentlemen, can you hear me?

Sure.

Kevin, other income, can you talk about what the primary components are of other income? And then secondly, can you talk about how do you think about forecasting other income?

Other income in our case is predominantly equity investment income, and actually we just forecast other income through our normal planning process. Primarily joint venture income.

Okay. As I think about -- well, first of all, the joint venture, is there -- are we referring to one specific one primarily or is it just the group?

It's actually a group.

And I guess what I was asking about as far as forecasting was if you're me, what kind of a number would you use?

It's hard to use a number in that case. I think we tend to be rather conservative about forecasting it.

Okay.

There's too many dynamic variables. You can get an upside in one JV and a downside on the other, so we tend to be conservative.

Okay. Cloyd, I'd appreciate it if you could talk a little about your low-cost strategy. I think, Kevin, you mentioned, if I'm not mistaken, that roughly 30% of your operations are in low-wage areas presently. Correct me if I'm wrong. Cloyd, you mentioned -- you talked about Mexico and India and so forth. Can you talk about where you are today and kind of as a percentage of your manufacturing capacity, and then where do you expect to go over the next year or two?

Brett, we tend to look at -- we haven't necessarily targeted X percent of our revenue to be in low-cost countries. How we look at it is basically on sort of a product-by-product basis and what it takes to keep these products competitive in the global marketplace. That is, in many cases, the primary motivation of moving to lower cost countries, lower cost wage areas, for instance. So it's not really a case of targeting X percent of revenue, it's more on a product-by-product basis and remaining competitive on those products on a global basis. In addition to that, we have continued to aggressively pursue our lean manufacturing six sigma strategies that we put in place several years ago and continue to lean out costs out of our operations through those initiatives also.

Okay. The 30% figure that I heard earlier, what was that? I didn't quite catch that.

It's sales revenues generated from those locations during the third quarter.

From the low-cost wage areas?

Yes.

Okay. And then Cloyd, again, you mentioned Mexico and your move there and you mentioned India as well. Can you kind of clarify that?

Our initiatives also are in terms of not only our wages, manufacturing costs, but also in terms of material content. What we're doing is we're looking at not only Indian, but Chinese sourcing for some of our components as well as some of our tooling. So that is what we're looking at those areas for at this point, Brett.

Okay. Great. Thank you very much.

Next question, Natasha Silver from Deutsch Bank.

Hi, gentlemen.

Good morning

I have two quick questions. First is you said your mix North America versus Europe was 83% down from 86% last year. Are you kind of shifting as you bring production into Mexico and China? This mix will be you 80/20 in the next year or so?

Natasha, I think we'll probably remain in the high teens. In the mix we're talking about is our revenue, our sales revenue coming out of the company.

Right. Okay. And, also, could you give give me receivables and inventory?

Sure . Accounts receivable for the quarter was $94.9 million, and inventory was $49.5 million.

Okay. Thank you.

Once again, if you would hike to ask a question, press star and then one on a touch-tone phone. And gentlemen, at this time I'm not showing any further questions.

Okay. We'd like to thank everyone for participating in our call today and look forward to talking to you again around January 22. Thank you.

Thank you.