Stoneridge Inc (SRI) 2004 Q1 法說會逐字稿

Good afternoon, and welcome to this Stoneridge first quarter 2004 conference call. My name is Lenny. And I will be your operator today. Before we begin, the company would like to remind you that statements made during this conference call which are not historical 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 that 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. At this time, all participants are in a listen only mode. However, we will be facilitating a question-and-answer session towards the end of this conference. (Caller instructions.) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Kevin Bagby, Chief Financial Officer of Stoneridge. Please proceed sir.

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. As you have read in our release, our first quarter net income was 33% above the prior year.

Much of this strength is attributed to the commercial vehicle market. We expect the commercial vehicle market to remain strong for the remainder of the year. In the North American light vehicle market, we are somewhat less optimistic. We continue to expect results to approximate the prior year in this market.

Operationally, we are working diligently towards reducing our cost structure. I would like to highlight two ongoing initiatives at Stoneridge that help us reduce costs. First, we continue to take advantage of off-shore sourcing opportunities. Current purchasing initiatives leverage China and India as low cost material sources.

Secondly, we are improving our manufacturing competitiveness for labor intensive products, by relocating manufacturing to low-cost locations. Our low cost locations now account for approximately 30% of our total manufacturing floor space.

Regarding the company’s liquidity position, we currently maintain a strong liquidity position, with a cash balance of approximately $25m, and significant flexibility, with an undrawn revolver of $100m. We continue to explore alternatives to deplore our excess cash, including potential acquisitions, which have a strong strategic fit for Stoneridge.

A topic I am sure that all of you are interested in is the status of our CEO search. The search for a successor continues to progress. And we anticipate selecting a successor some time in the third quarter. In the meantime, the entire Stoneridge organization remains focused on our respective activities, and is functioning well under the leadership of the company’s founder, Max Draime, as interim CEO. With that, I would now like to discuss the quarter’s financial results in detail.

Revenues for the first quarter totaled $176m, compared to revenues of $159.6m in the previous year. During the first quarter, North American medium and heavy truck production increased 34%. The increase was the most prominent factor in our year over year revenue change. Our revenues were also impacted by favorable foreign currency translation, which added approximately $5m to our top line.

These factors were mitigated by a 4% decline in the traditional domestic North American vehicle production. North American revenues of $142.5m increased by 10.8% from 2002, while European revenues increased 8.4%, to $33.5m. In North America, increased revenues to the commercial vehicle market more than accounted for the change. Examples of platforms that experienced content growth in the quarter are the Nissan full-sized truck, Ford Freestar, Mercury Monterey, Chevrolet, and GMC Cannon.

European revenues were favorably impacted by foreign currency translation. However, this amount was partially offset by lower first quarter volume. North American revenues accounted for 81% of first quarter revenues, compared with 80.6% for the same period in 2003. Our distribution revenues increased 22% to $85.3m. Increased commercial vehicle production and favorable currency translation were the primary drivers behind the sales growth.

Revenue for the control device segment increased 1% to $90.7m. The increase is attributed to a favorable foreign currency translation, and increasing commercial vehicle production, that was offset by lower North American light vehicle production. Total passenger car light truck revenues were $85.9m, while medium and heavy truck revenues were approximately $71m. Sales to the agricultural customers totaled $13.8m. And all other revenues were $5.3m.

Gross profit totaled $47.8m, compared to $40.9m in the prior year period. The corresponding margin rate was 27.2%, up 160 basis points from the 2003 level. The increase is mainly attributed to higher volumes, improved operating leverage, and ongoing cost reduction initiatives. The significant cost reduction initiatives include lean manufacturing, six sigma, and material sourcing.

Sales from low cost locations accounted for approximately 33% of total revenue, compared to 25% in the prior year. Total employees of 6,095 were 11.5% above the prior year level. The increase is employees is predominantly in the hourly area, and reflects a requirement to meet the increased production requirements for customers, particularly in the commercial vehicle market.

Selling, general and administrative expenses of $28.1m in the quarter, compared to $22.9m in the first quarter 2003, and $26.4m in the fourth quarter of 2003. Additional investments related to design and development activities were the primary reasons for the increase. Design and development programs currently underway focused on products in the areas of occupant safety, chassis, and information systems.

Operating income for the quarter of $19.8m was $2.1m over the 2003 performance, while the corresponding margin rate of 11.2% was 50 basis points above the prior year. Interest expense for the quarter was $6.3m, and is approximately $900,000 below the 2003 level. The reduction in interest expense reflects our lower debt position. Our full year interest expense expectations remain unchanged at approximately $25m.

The company recognized tax expense of $4.6m in the first quarter, yielding an effective tax rate of 32.1%. This tax rate is in line with our 2004 expectations. Net income for the first quarter was $9.2m, or $0.40 per share, compared with net income of $7m, or $0.31 per share in 2003. Depreciation expense for the quarter was $6.2m, compared to $5.2m in the prior year. Amortization expense was $400,000, compared to $700,000 in 2003.

Income before interest, taxes, depreciation and amortization was $26.4m for the first quarter of 2004. And that compares to $22.9m for the similar period in 2003. Working capital, excluding cash and long-term debt, was $61.9m on March 31. Working capital is $8.3 above the first quarter of 2003’s balance of $53.7m. The higher levels of working capital is predominantly attributed to higher sales levels.

Operating cash flow, net of fixed asset additions, was a [inaudible] cash of $1.4m for the first quarter. Capital investments totaled $4.8m in the quarter, reflecting investments for new programs in the area of officer, safety, chassis, and information displays. Total debt as of March 31, 2004 was $200.5m, compared with $200.7m on December 31, 2003.

Financial leverage was unchanged with the prior year, at 2.3 times. Total debt, less cash, declined by 1% sequentially, and was 16% below since March 31, 2003. The revolver of $100m remains undrawn at this time. And our cash balance as of March 31 stood at $25.7m. Average diluted shares outstanding in the first quarter were 22,794,724.

We feel that we have started 2004 on a strong note. And we remain focused on improving efficiency across the entire organization, in creating value for our customers and shareholders. In closing our outlook for 2004 earnings, we anticipate second quarter earnings per share to be in the range of $0.35 to $0.40. And for the full year, we expect results in the range of $1.10 to $1.20 per share. These results compare to the prior year’s totals of $0.28 and $0.94, respectively.

In addition to our industry views, we continue to monitor rising commodity prices closely. While we have not experienced a significant effect to date, we feel that the increase could weigh on our second half results. Our guidance reflects a modest negative impact in the second half. With that, I’d like to open the call up for questions.

Thank you sir. (Caller instructions.) And your first question comes from Liz Lemesevski with Nicholas-Applegate. Please proceed.

Hi there.

Good morning.

I was wondering, on the – when you’re talking about the rising commodity prices, what in particular are you referring to?

Well, in general, we have material, plastics and copper, that are raw material components. So we are monitoring those prices rather carefully.

Do you have long-term contracts on them? Or you would just take it – you buy as needed?

No. We have contracts on them. That’s why they haven’t been able to effect us as of yet.

Okay. And my other question is, when you were talking about that you were looking at acquisitions – possible acquisitions – what kind of size are we talking about? And are you currently seeking them right now? Or it’s just a possibility?

It’s just a possible. Really, size is not necessarily a criterion. We’re thinking about complementing our product portfolio, diversifying our customer base, and potentially increasing our geographic footprint.

Okay. And then the commercial vehicle – well I guess when you were saying that mostly it’s commercial vehicle that helps your earnings, and then to a lesser extent the foreign currency. How much would you attribute on the EPS line to foreign currency?

Maybe about a penny.

Okay. Great. Thank you very much.

And your next question comes from [Monica Keeney] with Morgan Stanley.

Hi. Good morning. This is [Svi Lem] for Monica. Kevin, I know you had mentioned acquisition as a possible use of cash in this conference call. And I think on the previous conference call you guys had mentioned the possibility of bond buy back or dividend programs. I was wondering if you could give us more color on that front.

Well, we’re still evaluating whether a bond buy back would be appropriate. We continue to evaluate that on an ongoing basis. But, as you know, the bonds are selling for a premium of about 118. So, as far as the dividend, we continue to think about that. But we haven’t made any real decisions there.

Okay. Just in terms of some of the cash flow items for the year, the – I guess you had mentioned interest expense of about 25. Are we thinking cap ex is sort of in that realm, as well as the $25m for the year?

That’s good. Yeah, between $20m and $25m. I think I gave that guidance last call.

What about cash taxes for the year?

Cash taxes might be positive this year by about $4-5m, in that range.

And just sort of lastly, in terms of working capital, how do you see that movement during the year?

Well, that sort of depends on what happens to revenues. But we’ll probably be a user of working capital this year.

How much of a use do you think?

Well, again, that’s going to depend on our revenue increase.

Okay. And then in terms of the EPS guidance for the year, $1.10 to $1.20, would that sort of equate into EBITDA of $90m for the year?

Well probably in that range, yeah.

Okay great. Thank you.

It might be a little lower than that. But it’s probably in that range.

Okay. Thank you.

(Caller instructions.) And your next question comes from Steve Barger with KeyBanc Capital Markets.

Good morning.

Good morning.

We – I am really surprised at how strong the heavy truck numbers have come in, and medium as well. Are you seeing more strength in medium, or heavy?

Heavy.

Heavy definitely?

Yeah.

What’s your outlook for both sectors going forward?

Well, we’re thinking probably in the range of about 200,000 to 225,000 units for heavy, and about a little less than that for the medium duty, maybe 200,000 to 215,000.

And that’s ’04 numbers, right?

That’s correct.

Do you have any outlook for ’05 or any - ? Do you look forward in terms of the emission regulations in ’07?

Basically, we think there is going to be kind of an increased production in ’05 and ’06. But right now we’re not sure by how much.

Right.

And of course it’s going to fall off in ’07. It’s going to depend a lot on what we finish 2004 at.

I understand. Agricultural demand looks like it was pretty strong. Is that something that you see as a sustainable level going forward?

It’s going to depend on farm pricing, as well as what Deere is able to increase their pricing going forward. That market has been flat for about the last five years. And every year around this time we see some increases in it. But then they don’t sustain themselves for the rest of the year. I think we’re still thinking maybe 5% this year.

Okay. I think that’s it then. Thanks a lot.

Thank you.

And there are no further questions at this time. I would now like to turn the presentation back over to your host, Mr. Kevin Bagby.

Thank you very much for listening in. And we’ll probably be back to you some time in July.

Ladies and gentlemen, thank you very much for your participation in today’s conference. This concludes the presentation. You may now disconnect.