Stoneridge Inc (SRI) 2003 Q4 法說會逐字稿

Good morning everyone and welcome to the Stoneridge fourth-quarter 2003 conference. (OPERATOR INSTRUCTIONS).

Before we begin, the Company would like to remind you that statements made during this conference call, which are not historical facts, may be considered forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied. In addition, this conference call contains time sensitive information that reflects management's best analysis only as of the date of this live call. Stoneridge does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of this call. For further information concerning issues that could materially affect financial performance related to forward-looking statements, please refer to Stoneridge's quarterly earnings releases and periodic filings with the Securities and Exchange Commission. (OPERATOR INSTRUCTIONS). Hearing no objections, I would now like to turn the conference over to Kevin Bagby.

Thank you. Good morning. I am Kevin Bagby, Chief Financial Officer of Stoneridge. To begin today's call I am going to make a few brief comments about the state of our business and served markets, followed by the financial performance for the quarter.

We are pleased with our fourth-quarter and full-year results. 2003 was marked by several significant accomplishments and changes at Stoneridge. In December, our long-term CEO Cloyd Abruzzo announced his retirement. Cloyd's contribution has been immeasurable, and we will greatly miss his leadership and insight at Stoneridge. The search for a successor continues, and we will certainly keep you apprized of the situation as we progress toward selecting a candidate. In the meantime, the entire Stoneridge organization remains focused on the task at hand, and we continue to function in our normal day-to-day activities with the Company's Founder Max Draime acting as interim CEO.

One of our main focuses throughout the year is cash flow generation and subsequent debt repayment. During the year, we exceeded our internal goals and generated operating cash flow of $46 million after capital investments. During the quarter, we repaid the remaining balance of $29 million on our Term B facility.

As all of you know, we are a company that has the ability to generate significant cash flow. We are exploring all alternatives to continue to deliver value to our shareholders with our excess cash flow. We continue to have a strong focused on maintaining our cost competitiveness in the marketplace. During 2003, we have made the difficult decision to close one of our U.S. facilities and establish a new manufacturing facility in Mexico. We will continue to evaluate our cost on a product by product basis to determine the most competitive manufacturing location.

Under the same competitive team, we are continuing to explore cost savings opportunities for materials and services by increasing our sourcing from China and India. We expect to realize future benefits from both of these initiatives. These projects reflect our ongoing efforts to realign our cost structure to better match industry conditions, competitive pressures and customer needs.

After considering our alternatives regarding accounting for stock-based compensation, we have elected to adopt the Fair Value Recognition approach as outlined in FAS 123. The accounting rules require that adoption be applied effective as of January 1st, 2003. The Company recorded its pretax non-cash expense of $900,000 for the fourth quarter of 2003 and $1.3 million for the year ended December 31st, 2003. Our adoption results from our desire to increase transparency to our stakeholders and pursue best practices for corporate governance.

Now I would like to take a moment to discuss our backlog. As we review the backlog based on our current market outlook, net new business is estimated at approximately $160 million. The backlog was impacted by several industry factors that created significant volatility in our assumptions that derive the backlog. These factors include our customers retail pricing and product strategies, marketshare estimates, and production volumes. As competition intensifies, our customers have used non-traditional techniques to maintain the competitiveness in the marketplace. These strategies create volatility in the assumptions used to estimate the backlog due to decontenting, program cancellations and deferrals, changing installation rates and volume assumptions as well.

Due to the volatility implicit in estimating the backlog, we believe the backlog is not a good proxy for our business performance. We remain confident that our company is well positioned to benefit from our electronic focus and that we will generate strong results in the future. We feel we are in the right markets with the right products.

Regarding the outlook, we are being cautiously optimistic about the outlook for the North American commercial vehicle market and to a lesser extent light vehicle market. For the full year, we expect North American light vehicle production to increase approximately 1 to 2 percent. In the commercial vehicle market, we are anticipating an increase of approximately 10 percent in the production of Class 5 through 8 vehicles. We have begun to see some indications of a pickup in our production schedules in the commercial markets.

In 2004, we are expecting our revenues to grow in line with our served markets. In addition, for the first quarter, we are expecting earnings per share to be in the range of 32 to 38 cents.

Now I would like to address the financial performance for the quarter. Revenue for the quarter totaled $151.2 million compared to revenue of $148 million in the previous year. Our sales were favorably impacted by approximately a 20 percent increase in North American medium and heavy-duty truck production and favorable foreign currency exchange. This impact was tempered by lower North American vehicle production which declined 4 percent for the traditional manufacturers. North American revenue of $122.8 million increased 1.2 percent from 2002, while European revenue increased 5.7 percent to $28.5 million.

In North America, increased sales for the medium duty truck market more than accounted for the increase. A few examples of platforms that experienced content growth in the quarter are the Ford FreeStar (ph), Mercury Monterey, Chevrolet Canyon and PSA vehicles. Favorable currency translation positively impacted European sales, while lower volumes had a negative impact on fourth-quarter performance. North American revenues accounted for 81.2 percent of the fourth quarter revenue compared with 81.8 percent for the same period in 2002.

(inaudible) distribution revenues increased by 13.4 percent to approximately $71 million in the quarter as increased volume and favorable foreign currency exchange impacted the revenue. Revenues for the control device segment decreased by 6.3 percent to approximately $80 million. The decrease is attributable to lower volumes in our served markets, particularly the traditional domestic manufacturers.

Total passenger car and light truck revenues were $78.8 million, while the medium and heavy truck sector generated revenues of $59.1 million. The agricultural market generated revenues of 9.7, and all other revenues were $3.6 million. Gross profit totaled $40.4 million compared to $38.2 million in the prior year period. The corresponding margin rate was 26.7 percent, and that was up 90 basis points from 2002. The increase is mainly attributable to higher volumes, improved operating leverage and ongoing cost reduction initiatives. During the fourth quarter, sales of low-cost locations accounted for approximately 30 percent of total sales compared to 24 percent in the prior year. Total employees of 5340 are 120 or 2.2 percent below the year's low-level.

Selling, general and administrative expenses of $26.4 million for the quarter compared to $23.2 million in the fourth quarter of 2002 and $23.1 million in the third quarter of 2003. Our fourth-quarter SG&A was adversely impacted by the adoption of FAS 123, which resulted in expense of $900,000. Operating income for the quarter of $14 million was below the prior year level of $15 million, and this change was largely attributed to the adoption of FAS 123.

Interest expense for the quarter of $7.1 million was $1.4 million below the 2002 level. The reduction in interest expense reflects our lower debt balance. For the full year 2004, we expect interest expense to be approximately $25 million. The Company recognized tax expense of $2 million in the fourth quarter, yielding an effective tax rate of 28 percent. As has been the case for the year, our lower year-over-year tax rate reflects the successful completion of several tax initiatives, as well as an increased percentage of foreign income which is taxed on a lower effective tax rate.

Net income in the quarter was $5.1 million or 22 cents per share compared with net income of $4.4 million or 20 cents a share in 2002. Depreciation expense for the quarter was $5.7 million, and that was up from $5.5 million in the prior year. Amortization expense was $1.1 million.

Income before interest, taxes, depreciation and amortization was $20.8 million for the fourth quarter, and that compared to $22 million for the fourth quarter of 2002. Working capital, excluding cash and current long-term debt, was $47.3 million on December 31st. Working capital was $12.9 million, below the 2002 balance of $60.2 million. The reduction reflects higher Accounts Payable balances, accrued liability balances, as well as lower inventory levels. Operating cash flow net of fixed asset additions was a source of cash of $6.6 million for the fourth quarter. The sources of cash flow will improve working capital management and earnings after depreciation and amortization. For the full year, Stoneridge generated $46 million of operating cash flow net of capital additions.

Capital investments totaled $14.8 million in the fourth quarter, and that reflects investments in our low-cost manufacturing facilities in Mexico and Estonia and spending on products such as (inaudible) acquisition, instrument clusters (ph) and high-pressure sensors. Total debt as of December 31st, 2003 was 200.7 million compared with $250.9 million on December 31st, 2002. The reduction in total debt reflects the full repayment of our Term B facility which we paid down roughly $49 million during the year. Financial leverage improved to 2.4 times and 2.5 times in the previous year.

Total debt less cash declined by 4 percent sequentially and 21.1 percent since December 31st, 2002. The revolver of $100 million remains undrawn, and our cash balance as of December 31st stood at $24.1 million. Average diluted shares outstanding in the fourth quarter were 22,736,000.

In summary, we are pleased with our financial performance and remain cautiously optimistic about the prospects for the commercial vehicle market in 2004. We have significantly enhanced our credit profile through cash flow generation and subsequent debt repayment.

And with that, I would like to open up the call for questions.

(OPERATOR INSTRUCTIONS). Monica Kenney (ph), Morgan Stanley.

I was wondering if you could give us a little bit more information on the backlog. First, previously it was -- was the number 180 before and now it is 160, or do I have a stale number?

That is correct. 180 I think we gave last year, and it is approximately 160 this year.

Can you go through again why that number is lower?

As we talked earlier, the backlog is affected by significant amounts of volatility over the past years due to several factors. In our view, one of the principal drivers of this trend is the result of the retail price pressures that a customer has experienced. This has resulted in decontenting, a shift from standard equipment to optional equipment, program deferrals and reduced volume assumptions. The increased volatility has lower our visibility as to the timing and near-term predictability of our backlog. In our view, the backlog just is not a good proxy for the operating performance of Stoneridge.

We have focused our efforts on improving our competitive position and generating cash flow. During the past two years, we generated approximately $126 million in cash flow that was used to pay down debt. These efforts have significantly improved our credit worthiness.

Okay. So I understand that obviously the operations have improved and the cash flow absolutely has improved, but how do we think about the growth trajectory? Because if it is hard for you to predict your growth trajectory because of decontenting, does that worry you, and how should we think about modeling out the company's topline for next year in terms of incremental new business?

When we look at '04, I think we will probably be in line with what our end market's production growth is. So as I indicated earlier, that is probably 1 to 2 percent in the light vehicle market, and we are thinking right now approximately 10 percent in the Class 5 through 8 market.

Internally we have looked to measure our performance based on the return on invested capital. So that is the measure we currently use.

Okay. So if we just use the end markets, should I then take away from that that there is no incremental new business beyond what volume increases should be for '04? No net new business coming on beyond what the end markets are going to be doing?

I think that is a reasonable approach.

So the 160 that you are quoting, how does that carve out by year; how does that roll out by year? When will we start to see that business come online?

Well, it should pick up the way we are looking at things now in '05 and after. But again, the issue becomes how much our customers are going to change their program rates or installation rates, and that is part of why we have kind of looked to other measures to drive our business as opposed to the net book of business. We believe we are very competitive. We believe we are in the right products, but we are right now the backlog has been affected by the volatility that occurs in our customer level. And we have put a lot of effort in the course of the last couple of years into continuously looking at the backlog, and we really don't feel that that is providing us a value-added.

But are you losing contracts to competitors, or this is truly decontenting?

The way we look at it, it is really related -- it is not one single factor -- but the way we look at it, there are lower installation rates. An example of that is, for instance, General Motors went from a standard ABS package to one that is now optional. We have had some new products delayed as a result of our customers, and we have also seen some decontenting, which we talked about, and that decontenting is kind of across the board. So we don't think we are losing business to competitors. We think that the volatility and the backlog is related to the factors we have outlined earlier.

My final question on this front is do you feel confident in the 160, or do you think that has more downside to it?

We feel reasonably confident in the 160.

Okay. I will let someone else ask a question. Thank you.

Greg Singer, Morgan Stanley.

Can I ask a quick question on the FX? Can you quantify the impact on the sales and operating line?

Yes. For the quarter, the FX in terms of income was roughly about $500,000, and the sales was about 4 million.

I'm sorry. 4 million?

4 million in sales. Approximately 500,000 on the operating income line.

And then in regards to that lawsuit that you guys talked about today, can you quantify that a little bit further if this was due to an aftermarket part?

Yes, actually. In our view, this situation really is an excessive award. And as we stated earlier, we will vigorously appeal this situation.

But even if they won against you, at most you guys would only be exposed to about 1.5 million here because (inaudible) covered the insurance?

Yes. I think the other important issue here is we have had not made an accrual for that because in our view it is not a probable event.

Okay. And then you talked about that you guys continue to keep being a strong generator of cash flow if you are in there looking for ways to return to shareholders. What are the options you guys are considering at this time?

Beyond funding organic growth, we are evaluating all options in terms of what we can do with the additional cash. Those options would include buying back bonds and other things like that. At this point in time, we haven't made any decisions what we are going to do with the excess cash.

Would you consider a dividend? Are you allowed to?

That is one of the things we have to think through.

Jeff Scoklen (ph), UBS.

Good morning. Going back to the backlog, that 160 is a net number, right? That is net new business, net of business rolling off?

That is correct.

Following up on the last question, in terms of buying back bonds, the current bonds are not callable until '07 but you can buy -- is there any restrictions on buying those back in the open market?

There is a restriction on our bank covenant to buying back bonds. But since we have no debt on the books other than the bonds, we have to revisit that.

When you look with the management changes, is there -- (inaudible) any changes in the strategic direction of the Company in terms of potentially using the acquisitions to stimulate some growth? From a capital structure standpoint, where would you ultimately like to be? You are down with total average in the low 2s now. Where would you ultimately like to see that get?

In terms of the capital structure, we continue to rethink what is a good position there. We really do not have a formal target in terms of the capital structure, and we are in fairly good position in terms of liquidity.

Regarding the acquisition question, we we are always looking for ways to increase our product portfolio or our geographical presence. However, at this point in time, we are not engaged in any activities. But it is a consideration that we look at.

Going back to the capital structure question, is your target ultimately -- well, is your target to be an investment-grade company, and if so, how soon would you like to get there, or would you rather see growth?

I think we would like to see growth, but at the same time, we believe that our creditworthiness has improved to a position that we should see some movement on our bond and capital rating. As of yet, we have not seen anything there.

The last question is on CapEx. I think I missed the CapEx number for the quarter, for the fourth quarter. I was wondering if you could help us with an outlook for fiscal '04, as well as Q1 of '04.

I will give you a fiscal outlook, and that is probably around 20 to 25 million.

What was it in the fourth quarter this year of '03?

14.8 million.

So your seasonal patterns will be pretty consistent next year in terms of the quarterly?

That is just kind of hard to tell I think, and that is why I prefer to give you a full-year number.

Brett Hoselton, McDonald Investments.

A couple of questions here. First of all, on the CEO search, who is it going to be? No, just kidding. The question is as far as timing is concerned, do you have any sense of when you might be able to wrap that up? Is that a short-term thing, or do you think that could drag on for six months or so?

I think that the Board is moving in a reasonably quick fashion. I don't think it is going to drag on. It is hard to say how quickly they will get the right candidate, but I don't think it's going to drag on beyond into, say, June or something like that, but that is difficult to tell. Be sure of one thing, they are actively engaged in the process. I think that is the best way I can answer that question.

Fair enough. A quick question on the backlog, the 160. Typically you have given the 180 number looking over a period of about five years. Can you give me a sense as to what period of time that 160 range is over?

It is the same five-year period.

So in this case, I would assume it would move forward a year or so ago from 2004 to 2008?

That is correct.

The agriculture market, tough to get ahold of good data on that. What is your sense of what is going out with ag market, and what is your sense of where that market may go this year?

We are thinking internally that there probably is about a 5 percent pickup in the ag market. That said, it is difficult to tell because, as you know, there is a lot of seasonality to that market, particularly in the first half of the year. But we think on a year-over-year basis it is roughly around 5 percent. You may see a significant growth in the first two quarters of the year, and then it kind of slacks off after that.

Your tax rate obviously coming in at nice rate this year, but next year I think in the past you have talked about it rising again. Right now I am using about a 33 percent tax rate for '04. What are your thoughts going into '04 as far as a tax rate is concerned?

I think 33 percent is reasonable because as you know what they refer to as the EIE will phase-out next year as a result of the trade agreements.

And then D&A for next year, probably in the 20 to 22 million range?

That is a good number.

What is the possibility of a share repurchase amongst that group of cash flow priorities uses?

It is always a consideration. But I don't think we're leaning that way right now.

And then on the liability case here, first of all, why are you so optimistic that this thing is going to either be reversed or changed in some way, shape or form?

I think as the press release indicated we don't believe we are at fault and we also believe we are tried in a particular jurisdiction to get awards like this. It is our view that the award is excessive, and . Based on the facts of the case, we think it will be overturned or at least the liability will not be nowhere near what the award was.

I guess that implies that the appellate court is going to be much more favorably disposed to you than the current (inaudible) or the judge. Why? Any particular reason? I mean are you going to change venues?

I think that that is more of a legal of a legal issue than anything else, so I don't want to speculate on that.

How confident are you in the 1.5 million number you have come up with? Is that a number that you have discussed with your insurance company, or is that just your estimate of what you think it might be?

No. That number, that process has been discussed with our legal counsel, as well as the auditors based on the probability.

Okay. And then as far as timing, what kind of a timeframe, if you go back under appeal and so forth, what kind of a timeframe would you likely know the end result of all this?

We are in the process of putting together our planning basically, and we really don't have a specific date as to when we think any of these things will occur.

Given the length of the original lawsuit, is this something that is going to wrap up potentially in six months or five years?

I really cannot speculate on that.

Okay. Good. Enough. Thank you very much, Kevin.

Kirk Luggey (ph), J.P. Morgan.

Just a couple of questions from different directions. One is, do you have any thoughts on trends for margins in 2004 and beyond that you could share with us?

Well, I would think that our margins should stay about the same going forward. They might (inaudible) around the 26 or 27 level. We continue to look for cost reductions to offset the pricing pressures that we have, so that is about where we will end up I think.

And what kind of average price downs do you expect for '04?

We have been looking in the past between roughly 2 to 3 percent.

And that is what has been historically and that is what it will be in '04?

That is where we think it is going. It is going forward.

Okay. You mentioned that you may want to enhance your product portfolio or geographic reach, and I was curious what the priorities are.

You mean in terms of products?

And geography, I guess. I assume low-cost regions would be the place you want to take the business, but if you have any thoughts on that?

I think at this time we are exploring all our opportunities, so I would not say it is just low-cost regions.

In terms of products, are you going to stay with products you have now, or do you want to get into a different business?

Our focus is primary electrical/electronic products, and we will stay within that segment.

Okay. Shifting gears to the fuel valve case, what is it about it that -- how did you get comfortable if this is an isolated event?

Well, I think the way it has been described to me is that the failure, which we believe again -- we believe the failure is not in the valve, so that is why we think it is an isolated event. In other words, the court has ruled if the valve fails, it is our belief that we don't think the valve failed. So going forward, that is why we think it is an isolated event.

Okay. What are the implications if it is not reversed?

I think our maximum exposure is about $1.5 million. But again, based on legal counsel, we think that that is not a probable outcome.

Okay. But do you have trouble getting insurance going forward? Do rates go up? Anything material?

We have not seen that as of this time.

Okay. Lastly, did the insurance company bless the 1.5?

You know I am not sure of that answer. But you know I know that the legal counsel has been discussing it with the insurance company. That is about all I can say.

Okay. Great. Thank you very much.

Mike Hinder (ph), Citigroup.

Just a quick question on the backlog. I was wondering if you could give us a rough approximation of how much of that backlog was non Big Three?

I would have to get back to you with that number. I'm not exactly certain of what that is.

No problem. Thank you.

David Leiker, Robert W. Baird.

Can I get a couple of balance sheet numbers from you?

I think so. Which ones are you looking for?

Cash receivables, inventory and payables.

Hold on one second. Cash is 24.1 million, and our receivables are 89.2 million, and then the inventory is 48.6 million.

Payables?

Payables are 53.6 million.

Do you have any current debt maturities? That is probably zero, right?

We have about $400,000 in current maturities.

Did you give a depreciation amortization number for the quarter?

Yes, I did, but I will give it again.

I missed it.

The depreciation for the quarter was $5.7 million, and the amortization was $1.1 million.

Okay. On the backlog issue again, which I am sure you are tired of talking about, can you give some examples of things that are being decontented for you ?

Again, one of the examples is that the particular indication of GM they have taken ABS and made it an option. The penetration rates on our speed sensors are affected by that. They have also in some cases made decontented in terms of other sensors like temperature sensors where they no longer need the functionality of that. Those are two examples.

When did you start seeing this?

Well, I think the ABS issue came about primarily during the year, during 2003 or perhaps late 2002. What that creates, David, is this volatility in terms of trying to understand what the penetration rate is going to be as well as the volume of the particular vehicles. It is around the same time I think on a sensor side.

It sounds like there probably was a step up in that with the model year change.

Potentially, but I am not sure.

And then the 160 million number, if we just kind of butted that out over the next three years, it would hit 0 and then 40, 40, 40 ?

I guess I'm trying to move away from that because I don't want to -- I think, as I said, we believe it is not a real good proxy for what we're doing in terms of our performance.

If you don't have a backlog number that is driving growth, how do you grow the business?

Well, I guess as I implied earlier, I think we have put a lot of effort into calculating the backlog number. It continues to move around. So it is not a value to us to grow the business. I think we continue to look at our product portfolio, Next Generation products, and we continue to look at customer base to grow our business, and those are internal measurements that we use to determine our performance. But this backlog has so much volatility, and it creates non value-added effort throughout the organization.

Okay. And then what do you think your tax rate is in '04?

Well, I think one of the earlier comments we were around 33 percent. We are reasonably comfortable with that.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS). David Biderman, Deutsche Bank.

I guess you guys don't like me that much. You kicked me out of the queue.

I had nothing to do with that, David.

It's hard to ask questions about a company whose bonds trade at 118 or wherever they are. In any case, a couple of quick ones for you. One is I appreciate that comment, Kevin, on the backlog. The reality is I would imagine the thing you're feeling most good about relative to your top line in '04 is improvement in the medium and heavy-duty truck market as the economy generally recovers and as the inventory levels for DOEs have stabilized and, in fact, come down.

You know there a lot of the OEs out there that are talking about more robust numbers in terms of production for '04. Obviously you have got a much higher degree of content on the commercial side of your business and on the light vehicle side. The question really is a couple-fold. One is, as much as you have gotten questions on it, is your topline growth expectations and your backlog numbers, are you deeming yourself to be conservative in those numbers because again there are those that are thinking that heavy and medium will be more robust? That is question one.

Question two is, you really have not talked a lot about some of the technologies that you have gotten. Maybe you could give us a sense as to some of the technologies that you have got internally that you are feeling have decent commercial application, but perhaps you don't have them in your firm backlog at this point.

David, regarding the first question, it is probably our nature to be somewhat conservative. But as I indicated on the 5 to 8 build rate assumptions for 2004, we are looking at 10 percent, and we know that some of the other numbers out in the marketplace are looking at probably a 20 percent growth rate in the Class 5 through 8. And we are seeing some pickup, particularly in the first quarter, in that market. So we will have to see how it rolls out during the rest of the year.

In terms of our technology, one of the things I think we are particularly really happy about is the solid-state high-pressure sensor, which we have received some awards on already, but we believe it has a lot more applications, particularly on the ABS side as the ABS moves to more of a (inaudible) control application.

I think we see good things in seat track position. We are now moving to a linear technology from the current technology. We see good things there, but again, we are not sure of what the penetration rate is going forward. Those are two that I think are important to us, and we continue to look into the safety area to see if we can package our technology with safety restraints.

Are there any other questions?

Kirk Luggey, J.P. Morgan.

A couple of follow-ups. One is if the 2 to 3 percent of price downs on your existing business, is that netted against the net new business? Is that in that?

Yes, it is.

So that is part of the reason. The other question is, are your products sourced late in the product cycle so that maybe why the backlog numbers are low?

It depends I think. Generally our product cycle is between 24, and it could go as high as 30 months out. So I would not consider that late in the cycle.

Okay. Thanks.

Monica Kenney, Morgan Stanley.

I just wanted to get the CapEx number again for the fourth quarter.

About 14.8 million I think (inaudible).

For fourth quarter alone?

Right.

Mr. Bagby, I have no one in the queue at this time.

Well, thank you very much for listening in on the call, and we will be back to you some time in April, probably around this time in April with our first-quarter call. Thanks, again.