Stoneridge Inc (SRI) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Stoneridge second quarter 2004 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 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 arrive 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 listen-only mode. We will be facilitating a question and answer session at the end of today's conference.

If at any time during the call you do require assistance, please press star followed by zero and a coordinator will be happy to assist you.

And I would now like to turn the call over to your host for today's call, Mr. Kevin Bagby, Chief Financial Officer. Please proceed, sir.

Thank you, good morning. I'm Kevin Bagby, Chief Financial Officer, of Stoneridge and with me is Gerry Pisani, The Chief Executive Officer of Stoneridge.

To begin today's call, I'm going to make a few brief comments about the state of our business in the current market; then Gerry Pisani will provide his perspective on the businesses and the outlook. I will close the prepared portion of the call by discussing the second quarter results in more detail. Following the formal presentation, we'll answer you questions.

We're pleased with our second quarter results. Earnings per share at 41cents was slightly above our guidance of 35 to 40 cents per share and [INAUDIBLE] increased 15% over a similar period in 2003, primarily on the strength of the commercial vehicle market. Net income increased 49% from the prior year.

We expect the commercial vehicle market to remain strong for the duration of the year. In the North American light vehicle market, we continue to anticipate softer market conditions during the second half of the year.

Now, I'd like to turn the call over to gerry for his comments.

Thank you Kevin. Good morning, everyone. Since this is my first conference call as CEO and some you may not know me, I thought I would provide you with a little background.

I joined Stoneridge in 1988 when it acquired the Joseph Pollock Corporation, the company I was operating at the time. I was appointed President of the Engineer Products Group in 1992 and then become Chief Operating Officer of the company in December 2003.

The advantage of having such a long history with a company is that you can hit the road running as CEO. I recognize what needs to be fixed and what doesn't need change.

We have a talented management team, a shared vision of where we want to take the company, and we have not lost focus of [INAUDIBLE] momentum during this management transition.

We have already made some organizational changes that we feel will improve our effectiveness. Stoneridge off-shore divisions and joint venture no longer report directly to the CEO.

Instead, each reports to one of four group executives. These four executives head our Power and Signal Distributions Systems Group, Electronic Products and Systems, Acuator and Sensor Products, and Switch and Sensor Products groups.

Each of the group executives is responsible for global product management, product development, and manufacturing for the group. And each reports to our new COO, Ed Mosel.

These changes are helping us to better utilize our design and development resources, improve our purchasing leverage, and coordinate our global account management and marketing strategy. It recognizes that we are a player in a global economy.

We have also placed all Stoneridge sales and applications engineering under Tom Beaver, our Vice President of Sales and Systems Engineering.

This will enable all Stoneridge operations to speak to our customers with one voice, and will emphasize our ability to deliver our complete portfolio of products and services to our global customers wherever we serve them.

I have already received favorable customer feedback regarding these changes, and we are optimistic that they will have a positive affect on our results as we move forward, since these customers value suppliers, who can meet the challenges of global platform launches and supply.

I would now like to say a few words about our recent performance. For most of the 1990s, Stoneridge was a company that sustained the top and bottom line growth. For the past three-years, we have not delivered on our promise of growth.

Some of the reasons were beyond our control. We experienced a severe downturn in the commercial vehicle sales, which is a market segment that accounts for 35% of our revenue, and we saw a major automotive customer lose market share.

This, combined with [INAUDIBLE] and program cancellations by these customers resulted in no new increase in net new business. Of course, we were not alone in facing these challenges.

In addition, our acquisitions in the late '90s leveraged our balance sheet, forcing us to restrict new product spending in favor of cost reduction and plant rationalization.

These efforts were successful, and today we are a leaner company, managing the working capital and cost structures more effectively. 30% of the manufacturing is now in low-cost regions and our coordinated commodity management program helped us to leverage our purchasing across the corporation and increase our fees in low-cost regions of China and India.

These efforts will continue, and these disciplines remain in place. We have fully repaid our senior-term loan, and we are not using our revolver, and we continue to accumulate cash.

As a result of these efforts, I am pleased to tell you that we will increase product development spending to a rate of 5.3% of sales this year to more aggressively pursue new business awards. As you know, the average supplier in our industry spends 4% of sales on R&D.

We have a complete portfolio of technologies that allow us to compete for the highly-engineered electrical content on passenger and commercial vehicles.

Organic growth will be the cornerstone of our growth strategy. Our focus is customer safety, environmental controls and customer convenience features.

We will also consider acquisitions and joint ventures, which will allow us to diversify our customer base and expand the markets we serve in. We believe that an expansion of our presence in Europe and the Far East would allow us to leverage our existing product capability.

Last month, we received authorization from the Republican of China to open an office in Shanghai. Our first first priority is to manage our growing supply base to China. We will also expand this office in the near future to engage in business development in China and other Far Eastern countries.

With a strong demand for medium and heavy duty trucks and farm equipment, we see a renewed interest in Stoneridge's systems and modular assembly capability.

Our core competencies, long recognized by the automotive customers, are serving as a springboard to help expand our customer base and global presence in a variety of markets.

Stoneridge is positioned to meet and exceed the expectations of these OEMs, and we are confident that we can resume the growth trend we enjoyed in the 1990s. I would now like to return the presentation to Kevin to provide further financial details for the second quarter.

Thanks, Gerry. The revenue for the quarter totalled $178.1 million compared to revenue $155 million in the previous year.

During the second quarter, North American medium and heavy truck production increased 31% and is the main factor behind our sales increase.

Our sales were also impacted by favorable foreign exchange rates, which added approximately $2.6 million to our fop line. These factors were mitigated by a 2% decline in the traditional to North American light vehicle production.

North American revenues of $143.5 million increased approximately 15.5% from the 2003 level, while non-North American revenues increased 12.4% to $34.5 million. North American increased sales in the commercial vehicle market more than accounted for the total increase.

European sales were favorably impacted by foreign currency translation and increased commercial vehicle volume. North American revenue accounted for 80.6% of second quarter revenue compared with 80.2% for the same period in 2003.

Our distribution revenue increased 32.5% to $91.3 million. The increased commercial vehicle capacity, and to a much lesser extent, favorable currency exchange rate were the drivers behind the sales growth.

Revenues for the Controlled Device segment were essentially equal to the prior year at approximately, $85.1 million. The performance reflected the production change in light vehicle volumes during the quarter.

Little passenger car and light truck revenues was $78.3 million, while medium and heavy truck sector revenues were $79.3 million. Sales to agriculture customers totalled $15.1 million, and other revenues were $5.4 million.

Those profit total $45.4 million compared to $40.3 million in the prior year period. Corresponding margin rate of 25.5% was down 50 basis points from the 2003 level. The decrease is mainly attributed to product mix and higher depreciation expense.

Sales from low-cost locations accounted for approximately 35% of total sales compared to 26% in the prior year. Total employees are approximately 15% above the year ago level.

The increase in staffing reflects our requirements to meet the increased demands of our commercial vehicle business. Selling, general and administrative expenses were $25.8 million in the quarter compared to $24.1 million in the second quarter of 2003.

Increased expenditures related to design and development and sales and marketing activities were the primary factors behind the increase. Design and development programs currently under way focus on products in the areas of instrument clusters, tachographs, occupant safety and chassis.

Operating income -- excuse me -- operating margin for the quarter was 11% compared to 10.4% in the prior yer. Interest expense for the quarter of 6.2 million dollars was $300,000 below the 2003 level.

Reduction in interest expense reflects our lower debt balance and was offset somewhat by a one-time interest income of $268,000 in the second quarter 2003 related to a tax refund.

Our full-year interest expense expectation remains unchanged at approximately $25 million. The company recognized tax expense of $4.2 million in the second quarter, yielding an effective tax rate of 31%. This rate is in line with our 2004 expectations of a tax rate in the low 30% range.

Net income for the second quarter was $9.3 million or .41 per share compared with net income $6.2 million or .28 per share in 2003. Appreciation expense for the quarter was, $6.2 million up from the $5.4 million in the prior year.

Amortization expense was $400,000 compared to $700,000 in 2003. Income before interest, taxes, depreciation and amortization was $26.2 million for the second quarter of 2004, compared with $22.3 million for the comparable period in 2003.

Working capital, excluding cash and long-term debt, was $68.7 million on June 30th. Working capital $10.6 million above the second quarter 2003 balance of $58.1 million. Higher level of working capital were predominantly attributed to higher sales activities.

Operating cash flow, net fixed asset additions were the source of cash, at $5.8 million for the second quarter. Apple investments totalled $6.7 million in the second quarter, reflecting investments for new programs in the areas of information display, tachographs and occupant safety and chassis products.

Total debt as of June 3rd, 2004, was $200.2 million, compared with $205 million on March 31 2004. Financial leverage is slightly below the previous year, at 2.2 times. Total debt less cash declined by 3.4% sequentially and 15.7% since June 30, 2003. A revolver of $100 million remains undrawn at this time and cash balance as of June 30 stood at $31.3 million.

First half of 2004 has been a strong one for Stoneridge. Our second half outlook remains somewhat more tempered, as high U.S. load levels in the U.S. loaded vehicle market could present a challenge to second half production schedules. While we do not anticipate a substantial change from the current outlook, the light vehicle market bears the most risk to the second half performance.

Our current outlook is -- 2004 light vehicle build of 15.9 million units. As such, our full-year guidance is unchanged at $1.10 to $1.20 per share; however, within this guidance, we're including second half charges of approximately .06 per share related to the consolidation of our European switch business and we're lowering the breakeven by combining three plants into one facility in the United Kingdom. This action will also complement our transition to low-cost countries.

The process is expected to take 12-months and we're -- expecting savings to be realized in the second half 2005. The majority of charges will be incurred in the fourth quarter of 2003. For the third quarter, we anticipate earnings in the range of .14 to .18 per share. And with that, I'd like to open the call for questions.

Ladies and gentlemen, if you wish to ask a question, please key star followed by 1 on your touch tone telephone. If the question is answered and you do wish to withdraw your question, press star followed by 2.

Questions will be taken in the order received. Please press star 1 to begin. Your first question comes from the line of Monica Keeney of Morgan Stanley. Please proceed.

Good morning.

Good morning, Monica.

I was wondering if you could talk a little bit more about the way you want to grow the business? I know you talked a little bit about spending and R&D and also organic growth.

You also mentioned potentially looking at acquisitions? I was wondering if you could talk a little bit about that in terms of, one, what areas are, you know, in particular, look looking at, criteria for that; and how much -- you know, what size would you be looking at?

Well, this is Gerry Pisani. Let my try to address that question. We believe we have a very broad portfolio of technology to draw from. And you know, we rely on our strong applications and engineering capability to fan that out to emerging growth opportunities on the vehicle.

And as I mentioned, the areas that have the most immediate opportunity are areas that are affected by legislation, such as occupant safety, crash worthiness, environment controls on the vehicle - and then, followed by that, would be customer convenience options that differentiate the vehicle.

Our traditional customers are losing market share, and they're looking to differentiate the vehicle, and as well as meet legislative requirements.

Our technologies are broad and flexible, and we have a great deal of applications knowledge in these areas, and so we see opportunities in the second generation air bag area with occupant classification, which meets the requirements that are currently being rolled out.

We focus that on not only the North American auto manufacturers, but also on the new domestics, the Japanese and the German transplants. Growing organically offers less risk.

We understand the applications, we understand the investments required to achieve these awards, and therefore, I call this the cornerstone of our growth strategy, and this is how we grew effectively in the '90s.

So that we'll continue to invest internally there to support a higher level of business quotation activity and a more aggressive approach with the new domestics.

In the same sense, I would not discourage a bolt-on application in North American that would allow us to further complement our technology portfolio, but we have a complete portfolio as we sit.

I mentioned the regional expansion. I think the obvious reason is that we all desire to diversify our customer base. We see market shares shifting, and while we have a strong presence in Europe regarding our commercial vehicles customers, we need a firmer presence within the automotive sector, and feel that that probably can best be accomplished through a strategic acquisition.

Right now, we have nothing specific to discuss, but we do believe that there are many opportunities with the consolidation that's occurring in the industry.

So when you say "bolt on", what do you define as revenues for something that's bolt-on?

Referring to the North American market, and what I'm saying is if new product lines or technologies that are complementary became available and they could be assimilated into the corporation as a product line without a large addition to plant capacity in the U.S., that would be attractive to us.

But it's not our primary focus for increasing market penetration and market share as we would be able to do, in Europe. The additional attraction in Europe and the Far East is that we would leverage our investment in R&D to get content on other batched vehicles and other OEM products.

So -- I'm just trying to gauge -- when you think about -- and I understand acquisitions may not be the primary focus, but if you were thinking about it, is there a [INAUDIBLE] level of revenues here that you're thinking about in terms what a target acquisition could look like?

And the second question, sort of related to that is: Would you consider levering up the balance sheet to do an acquisition, or do you like how your leveraged right now, or would you like to see it even go lower?

I'll let Kevin answer the question on leverage.

But I would say as far as size, I'm not going to define the size. I would rather look at the strategic fit, and I want to see what the acquisition would bring us in complementary products, what it would bring us, essentially, in new customers.

And that would be more significant to me than the size, because we can add product offerings, R&D, to that acquisition. We have a sales force now that is unified in Europe under a single management, and that allows us to also support an acquisition in Europe with sales implementation and applications engineering.

So, I think size is not the critical issue, it's how strategically it fits into our portfolio products and into our customer mix. You know, the other side of that question, Monica, on the financial structure, we work very hard to improve our credit ratings.

And we think that based on that, we're comfortable with where we are in terms of the debt structure. We would probably not leverage up the balance sheet on an acquisition.

Okay. And then my last question would be: Kevin, I know a couple of conference calls ago, there was discussion about how do you sort of see [INDISCERNIBLE], given that you paid off a term loan, and there was discussion about whether or not you buy back bonds? Do you have any further color on that?

Not really Monica. You know, we continue to evaluate our options for the excess cash flow that we have; and as Gerry indicated, you know, we've have opportunities for organic growth, and we continue to look for acquisitions in Europe and as well as potentially outside of Europe and Asia, and joint ventures. But at this time, we've not made a decision with respect to the what to do with the excess cash flow.

Okay, thank you.

Thank you, your next question from the line of Adrian Dale from CIBC World Markets. Please proceed.

Hi, I just have a couple of quick questions. First of all, I may have missed it, but did you mention what Capex was this quarter?

Yes, we did. Capex is, I believe, $6.7 million in the quarter.

Okay, and do you -- are you still comfortable with your 20-25 million target range?

Well actually, we probably would think it's closer to 25-30 at this point in time.

Okay. And then with respect to these acquisitions, do you have any sense for timing on when you might actually announce any of these or close on any of these?

Well, I think I can tell you one thing. Gerry indicated earlier we don't have anything that we're currently looking at, so timing would be further out. Potentially in 2005.

Okay. So nothing in '04?

Well, at least at this point in time.

Okay. Great, all right, thank you.

Thank you very much. As a reminder, ladies and gentlemen, it is star one to ask a question at this time.

Your next question comes from the line of Brett Hoselton of KeyBanc. Please proceed, sir.

Good morning, Jerry, good morning, Kevin.

Good morning.

Let's see. Well, just a couple of quick ones here. First off, D&A for the year?

Looking at about 26-27 million. For D&A.

Did you -- and I apologize, I only glanced through the earnings release, D&A number for the quarter?

I don't think so, but I can give that to you. The D&A for the quarter is $6.6 million.

Agriculture -- can you give us a sense as to what demand is like this year? Versus last year?

I think our revenues are up about, if I'm mot mistaken, 20% year-over-year; and although the demand has been very good going into the second quarter, we're still a little bit uncertain as to how the demand will -- will change through the remainder of the year.

As you know, Brett, typically what's happened in the AG market is the first quarter's been good and then there's been a sharp falloff in the second half of the year.

So at this point, we're still a little bit hesitant to think that that pace is going to remain for the duration of the year.

And, then, Jerry, as we think about -- uh. I know your focus is on organic revenue growth; and the market, historically, as you know, we've talked about it growing 6-7%, that you're playing in.

My question would be, do you still see the end market that you're currently playing in growing to 6-7%; and therefore, do you think that Stoneridge should potentially be able to enjoy organic revenue growth that is very close to that market rate?

Well, I think that we're certainly within the growth sector of the automotive content.

But some of that 6-7% growth referred to would be technologies we don't get involved in, such as the telematics, and off-board communication, radio and that sort of electronic feature. And, also, electronic engine controls.

Uh-huh.

But I think we certainly are in the growth segment, and probably a good 4 or 5% of organic growth is feasible if our customers can maintain that market share.

Okay. The -- now, as far as acquisitions, you mentioned, specifically, trying to increase, I believe, the exposure of the Europe automotive space -- light vehicle space -- and then earlier in the call, you mentioned recently opening an office in China.

I guess as I'm thinking, geographic exposure, where would you like to increase your geographic exposure?

I think both those areas offer tremendous opportunity. I believe we have commercial presence that's significant in Europe, and so we have the automotive sector that's relatively untapped.

And there our technologies are readily applicable and we already have context because of the relationship between some of the commercial vehicle builders and the automotive builders.

So -- and of course, we have -- we have plants and organizations in Europe so the cultural transition would be a lot easier for us, but we can't ignore China and the rapid growth that's occurring, and we've been drawn to China as a source of supply, and we're anxious to understand the plans the customers have in China and also what the growth rate and opportunities exist with the manufacturers in China.

We've recently been awarded some business with Japanese tier-one suppliers and this also allow us to have greater contact with their developing groups in Japan.

We see Shanghai as sort of being a center for operations in the Far East, but coordinating efforts in Japan, Korea and India.

Do you think the -- do you think there's an acquisition opportunity in the Far East, or would you say that you're primarily focused as for as that's concerned on Europe, and then Asian markets would be kind of a secondary issue?

Well, Europe is the prime focus at the current time. But I would say joint ventures are of interest to us in the Far East -- again, because of the difference culturally between what we are used to and way business is conducted in Europe and North America.

But if our opportunities were more short-term, we would even look to manufacture in China using some of the resources we already have in our supply base there.

Okay. And then finally, as you look across your product portfolio, do you see a need to sort of expand your product portfolio in any particular area, or are you comfortable with your current product lineup?

We're very comfortable with the current product lineup. I think we hit all of the enabling technologies that our customers are looking for.

And you know, I don't see a pressing need there, but I'll never -- I would never refuse to look at a product line or a technology that became available that could push us into the next generation product and allow us to transition our customers to a more cost effective solution or more capability. But, no, I think we have a complete portfolio as we sit.

Okay. Excellent. That does it for me. Thank you very much. I appreciate it.

Thanks, Brett.

Thank you, your next question comes from the line of Mike Kender of CitiGroup.

I was just wondering how much you got hit during the quarter by raw materials. Obviously, you're not as metal intensive as most suppliers, but I was wondering if that was kind of significant.

Mike, we continue to monitor rising commodity prices closely, and we've not really experienced a significant effect to date; however, we think it could weigh on the second half results.

Okay. Thank you.

Thanks, Mike.

Thank you as a reminder, ladies and gentlemen, it is star 1 to ask a question at this time. Your next questions comes from the line of Kurt Ledke of J.P. Morgan.

Good morning, guys.

Good morning, Kurt.

I'm sorry, I got on the call a little late. There's a lot of earnings today. But, it sounds like, historically, I'd always remembered that one of your strategies was to move your footprint, at least to a certain extent, to lower cost countries, and -- but it sounds like maybe that is becoming more of a strategy than or more of an urgency than it was before.

Am I interpreting that correctly? Or is this just more of the same strategy?

I think we're basically continuing a strategy that started many years ago when we moved facilities into Mexico. And it sort of mirrored the transition of the industry.

With our highly automated products, our higher tech products, there will always be a base of manufacturer in North America and in the Western Europe. But we can't ignore the facts that some of these products, as they mature in the life cycle, or some of the products that are high-volume, but low-cost, must transition into the lower-cost regions.

And so we are fully exploiting our opportunities Eastern Europe and Mexico and actively looking to expand our presence in China to manufacturer there -- and possibly also look out to manufacturer in India.

So I think it's just mirroring what's happening across the manufacturing landscape.

Is there a way that we could get a sense for the -- the capital intensity of moving our facilities from -- or moving production from North America towards a low-cost region?

My impression is this is not a very capital-intensive business, and the upfront costs would be -- as suppliers go -- relatively low. Is there way we can some put rules of thumb in place for that?

I would say the capital intensity of our business will remain the same as we move through -- continue, rather -- our movement to low-cost locations.

I wouldn't anticipate seeing much change in the capital intensity.

Is there a -- you know, I've heard other suppliers throw out, you know, if we wanted to add a dollar of revenue and build a facility to add a dollar of revenue, we'd have to spend .50 in Capex or something like that. Or there a rule of thumb in your business for this to be applicable?

We always thought that we could generate a dollar's worth of revenue on about .30 investment. Maybe .35? I think we've held pretty consistent to that, going forward.

And as you've indicated, we're not a capital-intensive industry.

We rely more on the engineered solutions and our innovative and very effective assembly systems. Our suppliers manage the capital investment.

So, it isn't an exceedingly costly capital investment to move into a third-world country.

So if it's the 30-35 cents? Is that the idea? How much of your -- you're putting the acquisitions aside or the stuff that you're more growth-oriented deals.

Just moving the footprint for existing regions to lower-cost regions, how much of your revenue do you want to move, that you feel you have to move, to stay competitive?

Well, that's a difficult question to answer because it depends on how long the product life cycle goes on.

We've been fortunate to have products that have very short product life cycles, due to technical innovation and the changing architecture of the vehicle. So you don't move a product that has a very short life because you don't have a lot of time to harvest it.

But, if products do live on beyond three or four years, then we will move them. Maybe a rule of thumb would be that half of our capabilities should be in third-world countries?

One-half of revenue?

That's a rough approximation. We actually do them and [INAUDIBLE] on a product by product basis, so it's hard to say we're going to have 50% or 40%. So it's really viewed on the cash flows by product.

There's a full financial analysis that has to go through process. For example, you know, we're talking about world class levels of quality where the defects per million units produced is less than 25.

Sometimes you can't achieve that without automation. And once you invest in automation, then there's less incentive to move it to a third-world country.

So you have to look at the nature of the product; you have to develop a model as to whether you automate to achieve those levels of cost and reliability; what it would cost you in the third-world region you're looking at; and the life of the product -- and make a decision accordingly.

So it's not -- every product has to be looked at individually and it's not a rule of thumb that we can readily refer to.

I'm sure it's very complicated. What is the timeframe for something like that? Couple of years? Five years? Do you have--

It's an ongoing evaluation, and an ongoing evaluation based on the business that we have, and it's kind of tough to put a time frame around any of it.

If you asked us three years ago would we have as much as we do, I don't know if I could've answered that three years ago.

I think the point we're making here is that we want the ability to produce in China and East Europe and Mexico and South America -- in any region where our customer needs us to produce, where it's economically feasible to produce, and where we keep the product line competitive.

And as long as we have that presence and that capability, each situation will dictate where we manufacturer the product.

Moving to the global product groups, who manage product life cycles, they have the responsibility to lay out that plan, specifically, and monitor it to see that we're saying competitive and meeting customer expectations, because that's really important in the long run. The customer really drives where you manufacturer the product.

Great. Okay, and then with respect to financing any of this, you would be willing to issue stock to a joint venture partner or somebody in order to avoid, you know, a cash outlay?

Oh, we do the most capital efficient method to the joint venture or a potential acquisition.

Okay. Great, thank you very much.

Thank you.

Thank you, sir. Gentleman, at this time, you have no further questions. Mr. Bagby, do you have any closing remarks?

Thank you everyone, for joining our call, and we'll be back online sometime in October to discuss our third quarter results. Thanks again for joining us.

Thank you for your participation in today's conference, ladies and gentlemen. This does conclude your presentation. You may now disconnect. Have a great day.