Stoneridge Inc (SRI) 2004 Q4 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Stoneridge third quarter 2004 conference call.

Before we begin, the company would like to remind you that statements made during this call that today's are not historical facts are forward-looking statements. Forward-looking statements that involves risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in the forward-looking statements.

For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the information under the caption forward-looking statements in the company's latest annual report on Form 10-K filed with SEC. The 10-K and the company's other fillings which also contain important information about the company, can be accessed from the SEC website at www.sec.gov and from the company's website at www.stoneridge.com.

The company would also like to advice you that during the course of the call they would be referencing earnings before interest, other income, goodwill impairment loss, taxes, depreciation and amortization and also operating cash flow, net of fixed asset addition. These items are non-GAAP financial measures.

Please see the investor relations section of the company's website are www.stoneridge.com for a presentation of the most directly comparable GAAP measures and reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

In addition, this conference call contains time sensitive information that reflects management's best analysis only as of the date of the live call. Stoneridge does not undertake any obligation to publicly update or revise any forward-looking statements to reflects future events, information or circumstances that arise after the date of this call.

[Operator Instructions]. I would now like to turn the presentation over to your host for today's call, Mr. Jerry Pisani, the Company's President and Chief Executive Officer, please proceed, sir.

Thank you.

Good morning and welcome to our fourth quarter earnings call. With me today is Joe Mallak, the Company's Chief Financial Officer. I'm going to make a few brief comments about the state of our business and the company's serves market and Joe will provide his perspective on the company's fourth quarter results as well as our outlook for the first quarter and full year of 2005. Following that, we will address any questions that you may have.

I would like to start by saying that we are pleased with our fourth quarter performance. Our net sales increased 8% from this time last year, primarily because of the continued strength of the commercial vehicle market. We expect commercial vehicle production to remain at present levels and automotive production to be lower in the first quarter. Because of the high automotive inventories carried by our North American customers, we expect -- we remain cautious about the near term business environment for this sector.

As I explained during our last two conference calls, we are pursuing various ways to increase our top line growth to help offset the pricing pressures in our industry. It is our belief that we can achieve an 8% growth rate through a combination of acquisitions and organic growth over the next five years.

As we continue repositioning the company for future growth, we have focused our spending on product development which was $36 million in 2004 and increased $7 million year over year. While in most cases it takes at least 24 months for these products to reach the market, we are pleased with the rate of new business awards. These awards have been driven in part by North American legislated content, which reduces the risk of de-contenting and program delays.

Our application focus is on sensors and switches for second generation vehicle occupant safety systems, vehicle stability control systems and diesel exhaust management and actuators for mandated fuel vapor control systems.

In Europe, we are prepared to introduce smart card tachographs for recording commercial vehicle driver's hours. This will present an opportunity to increase our market share as legislation has changed to require this new technology. In addition to our commitment to new product innovation, we are also currently engaged in a global expansion effort that includes our previously announced joint venture agreement with Minda Instruments Limited, a company based in New Delhi, India to manufacture electronic instrumentation for their regional automotive and truck markets. This strategic alliance is an important component of our growth strategy, which includes establishing a presence in the emerging Asian markets.

We recently received two business awards, one from Tata commercial vehicles and the second from Ashok Leyland which validates our forecast that this market will rapidly transition to electronic instrumentation. While these awards represent only a few million dollars in annual sales, we have joined a small group of suppliers to the commercial vehicle sector who can demonstrate global capability. We have been told by several OEMs that this will be a requirement as they move to global truck platforms.

Also as previously announced, we opened an international purchasing office in Shanghai, China to improve our access to low cost suppliers and to establish a base for future business development in Asia. This month we appointed a Director of Business Development Steve Syzdek, to assume responsibility for the Asian region, where he has previous automotive sales and business development experience. He and his family will relocate to the Shanghai area in the near future.

The pace of change at Stoneridge is accelerating. As we enter the first quarter of 2005, we expect material inflation to continue and we seek constructively dialogue with our customers and suppliers to address this global trend and the need to share the burden. Under our corporate wide commodity management program, we continue to leverage our purchasing across de-centralized business units and to consolidate our supply base to those that share our commitment to continuous improvement in value chain integration.

We continue to be committed to our lean enterprise initiatives and our best cost producer strategies to remain competitive. But it's becoming increasingly difficult to offset contractual price downs and material inflation, even with these efforts. Our recently announced restructuring accelerates the trend of consolidating our operations in high cost regions while migrating our mature products to low cost regions. 2005 will be a transition year during which these initiatives will improve efficiency and effectiveness. But there will be restructuring cost to accomplish this. In late 2005, we will see -- start to see the benefits of our restructuring benefits.

Finally, I want to reaffirm our interest in acquiring companies in the EU and Asian region. They bring us customer diversity and complimentary technology. These acquisitions must have the potential to quickly become accretive. We have worked hard to strengthen our balance sheet and we intend to use this leverage prudently.

The entire organization is very excited about Stoneridge's future and we are determined to deliver top and bottom line growth through differentiated products and services, best cost practices and globalization. What is most exciting is the fact that we have a strong management team that shares a common vision and a sense of urgency to return value to our shareholders. I will now turn the call over to Joe, so that he can provide his perspective on the company's fourth quarter results. Joe?

Thank you, Jerry. Before I get into our financial performance for the fourth quarter, I would like to take a brief discussion of our reasons for delaying our fourth quarter earnings release and conference call, which was previously scheduled for January 26.

We decided to delay the release to allow for additional time to finalize our goodwill impairment charge and to ensure the completeness and accuracy. A thorough analysis of financial accounting standards was performed and at this time we feel confident that the remaining goodwill balances are appropriately given with our current fair value of the business unit (inaudible).

Our revenue for the quarter totaled a $163.4 million compared to $151.2 in the previous year, representing an increase of 8%. During the fourth quarter of 2004, North American medium and heavy duty truck production increased 35% from the fourth quarter in 2003 and is the main factor behind the sales increase. Our sales were impacted by a favorable foreign exchange rate which added approximately $2.9 million to our top line.

North American revenue of $124.9 million increased 2% from 2003 while North American revenue increased 35% to 38.5 million. In North America, the increase was primarily due to commercial vehicle market. The increase in European sales was also attributed to increased commercial vehicle volume as well as favorable currency exchange rates. North American revenue accounted for 76% of the fourth quarter revenue with 81% for the same period in 2003.

Car distribution revenue increased 20% to $84.8 million. Increased commercial vehicle production and to much less extent favorable currency exchange rates were the primary drivers behind the sales growth. Revenue for the controlled device segment increased 2.7% in 2004, to $84 million primarily due to increase (ph) in light vehicle production.

Total passenger car and light truck revenue was $73.5 million in the fourth quarter of '04. While the medium and heavy duty truck sector revenues was 70.3 million. Sales to agriculture customers totaled 14.7 million and other revenues were 4.9 million.

Gross profit totaled $41.5 million for the fourth quarter compared to 40.4 million in '03. The corresponding margin rate was 25.4% down 1.3% from '03. The decrease in our gross profit margin is mainly attributed to the change in product mix, price reductions, higher raw material costs partially offset by a combination of high production volumes and the company's continued focus on lean manufacturing utilizing Six Sigma principles.

Sales from low cost manufacturing locations accounted for approximately 35% of the total sales compared to 33% in the prior year.

Interest expense for the quarter -- excuse me. Sales selling general administrative expenses were $33.5 million this quarter compared to $26.4 million in the fourth quarter of '03. The increase in SG&A expense primarily reflect the increased investment in the company's product development activities, increased sales and marketing efforts. Compliance costs relating to Sarbanes-Oxley, internal control environments are negatively impacted our SG&A this quarter.

As previously announced, our fourth results included a pretax non-cash charge of $183.5 million for impairment of goodwill in connection with our 1998 acquisition of our Hi-Stat manufacturing. With that, it is important to note that Hi-Stat remains a strong company, however it is anticipated growth no longer justified the previous accruing value of its goodwill.

Our operating margin for the fourth quarter of 2004 excluding the goodwill impairment charge was 4.9% compared to 9.3% for the same period last year. The decrease is reflective of our prior commitment -- comments regarding gross profit margin and SG&A.

Interest expense for the quarter of $5.9 million was $1.2 million below the 2003 level. The reduction in interest expenses is reflective of our lower debt balance. Our full year interest expense was $24.5 million. The company recognized tax benefit of $2.7 million in the fourth quarter excluding the effect of goodwill impairment charge compared to a tax provision of $2 million for the fourth quarter of 2003. The decrease in the effective tax was primarily due to a change in the mix of a foreign earnings along with international tax initiatives. The increase is also a attributed to research credits that were reinstate and more heavily weighted for the fourth quarter of 2004. The company recognized the net loss for the quarter of $114.9 million or $5.07 per diluted share.

Net income in the fourth quarter excluding goodwill impairment charge was $4.8 million or $0.21 per diluted share compared to net income of $5.1 million or $0.22 per diluted share in 2003.

Depreciation expense for the fourth quarter was $6 million, slightly up from 5.7 in the prior year. Earnings before interest, other income, goodwill impairment, taxes, depreciation, amortization was $14 million for the fourth quarter of 2004, compared to $19.8 million for the comparable period in 2003.

Working capital excluding cash and current portion of long-term debt was 71.1 million on December 31. Working capital was $22 million above the fourth quarter 2003 balance of 49.1 million. The higher level of working capital are predominately attributed to higher sales level resultong in increased accounts receivables and increased in inventory to satisfy customer requirements as the company combined three plants in the United Kingdom and started an operation in Mexico and prepared for new product launches.

Operating cash flow, net fixed asset additions was a source of cash $14.7 million for the fourth quarter of 2004, compared with $6.6 million for the fourth quarter of 2003. The increases in our operating cash flow this quarter was primarily due to timing of working capital and a decrease in CapEx. Capital investment totaled $5.8 million in the fourth quarter and $23.9 million for the full year reflecting investment for new programs in areas of information display, tachographs and occupancy safety.

Total debt as of December 31, 2004 was $200.2 million. Total debt less cash as of December 31, was a 147.8 million, which is 12% less than last quarter and 16.3% less than balance as of December 31, 2003. The revolver of $100 million remains undrawn at this time and our cash balance as of December 31 increased to 52.3 million from 32.1 million last quarter and 24.1 million as of December 31, 2003.

2004 was a strong year for Stoneridge, however, as previously reported the fourth quarter was challenging as we experienced a weakening in light vehicle production environment. Going forward, light vehicle market bears the most risk to our 2005 outlook, although, we expect the production to begin to pick up in the second half of the year. As such our full year guidance is at $0.95 to $1.05 per diluted share and our first quarter guidance is $0.12 to $0.20 per diluted share. Jerry?

Thank you, Joe. To sum up I would like to state again that we are excited about the future and we enter into a transition year and position ourselves to begin recognizing the benefits of our strategic growth initiatives in 2006 and 2007. Like everyone in our industry, we have been operating in a difficult environment, but our management team will continue to focus its efforts and the efforts of our associates on the same strategic objectives across the entire enterprise. With that, I would like to open the call for questions.

Thank you very much, sir. [Operator Instructions]. Our first question comes from the line of Monica Keeny (ph) of Morgan Stanley. Please proceed, ma'am.

Good morning. Can you give us the EPS guidance, can you give us that on a EBITDA basis on the first quarter and the full year?

Can we get back to you on that? We don't have it in front of us right now.

Okay. Then could you talk broadly about the bridge then for earnings this year and next year in terms of what would be the negative piece and how much do you think raw materials will hit you in the first half of the year and pricing for example you know you mentioned on your press release, is that worse than normal or is that sort of the similar level that you have seen historically?

Regarding the tax level?

No, regarding price downs from the OEM's. I know you sort of talked about that in the press release and then raw materials. I wonder if you can talk about what the negative impact is going to be for the coming year and coming quarter?

In general what we have seen is our customers are not achieving the price downs they historically have been able to get from the supply base. Our sales and others are pointing out the pressure from material price increases and this tends to have a moderating effect on the expectations of price downs, but the risk is on the material inflation side. While I think we escaped most of that last year because we are not heavily dependent on steel, we are seeing the effects of petroleum prices relative to resins and it has takes some time because we had annual contract buys. So we are starting to see upward pressure on resin prices.

I think material costs are a risk to our earnings, however, I'd point out that being an engineered products company, we have certain means to reduce this risk. We can enter into engineering changes and material substitutions. The life cycle of our products tend to lower and in addition to that we are still in the implementation stage of our worldwide purchasing consolidation effort. We call it our commodity team approach that allows us to leverage our purchasing across the enterprise. And this is still showing us year over year benefits.

I remember in the last conference call, there was lot of discussion about resin. You had said that basically, 50% of your resin buy is under contract? Is that correct?

Yes.

So, can you refresh our memory of what the dollar amount of resin is that you buy and of that -- the piece contracted, how much have you seen those contract go up by? I guess because the question I ask is on the stock market, it looks -- the resins -- the components for the chemicals that go into resin are up meaningfully year on year. So would we be mistaken to kind of look at the stock price as an extrapolate from there or should we think on a lower basis because your contracts are rolling off and only up a certain percentage and the stock market would be misleading to look at.

Year over year, it's difficult for me to give you a weighted average for the price increases. In fact, in many cases we are still negotiating these price increases. I think the stock (ph) markets you are looking at are probably indicative of the inflation that's rolling through.

So, some of those are up very, very meaningfully year on year. 20%, 30%, is that what you would see on a contract basis as well. Should we use that (indiscernible) a proxy?

I think that's high. I don't think we have seen that dramatic of an increase, but it's not unusual to see them in the 15% to 20% range.

On a year on year?

Yes. Basically what we have seen is a percentage of sale. We have seen our resins go up to become 9% from 7% of a cost to good sold. So we have seen an increase overtime.

Also back to your EBITDA comment, just to let you know, we are not giving guidance on that, but we are utilizing a 28% tax rate, so you should be able to back into the number from there.

Okay, then last question. Do you have a free cash flow and target for the year and what would be the intention to build up cash in the balance sheet? It just looks like you probably don't need 50 million to operate. Right?

You are correct. About this time as Jerry spoke about, we are actively looking at different acquisitions and opportunities for us to grow the company. Also regarding cash, we are not giving a cash flow number out at this time either.

Okay. Thank you.

Monica, I would mention one more thing when we talk about material inflation. We have seen a growing content in electronic components as many of our mechanical products move to the electronic generation of product. It's still a buyer's market for electronics. So fortunately we have some offsets to the increases in the base materials.

Great. Thank you.

Thank you very much, ma'am. Ladies and gentlemen your next question comes from the line of Kirk Ludsky (ph) of JP Morgan.

Good morning, guys. I had to hop off just at -- when you were about to describe your exposure on resins. I'm sorry to ask again, but what is your annual buy in resins? Maybe you didn't.

We didn't give out an annual buy. We have seen between a 1% to 2% in total cost of resin, over the course of the last year.

In 2004 versus 2003?

Correct.

And what do you think that will be in 2005? Do you have a sense?

What we are budgeting at this point is that we are going to be able to maintain our current cost structure that we had at the end of the year going through the rest of the year. We are not anticipating going up a lot at this point forward.

Our resin buys on an annualized basis might be as much as $40 million, but I don't think -- that's a ballpark number.

Is that resin you buy raw resin?

This is before we convert.

Then there is probably resin in the purchase components as well, right?

That's all in number that would be the resin that our suppliers buy and our own -- internally --

Okay, that's all. Okay and you are assuming in your guidance you are able to one way or another offset whatever --

Correct. Through our different initiatives that we have going forward.

But rest assured that we are having difficulties offsetting this and as everyone else is. There is going to be some effect, but our program so far has been working successfully.

And as you saw in the fourth quarter, there has been price pressures with our operating profit coming down. But we feel we can maintain at the current level going forward. We don't anticipate the erosion to get any worse than it already has.

And what percentage of your resin buy is now resolved?

I would say about 70%.

You are pretty far along. Okay. And you mentioned that you are able to -- you are going back to your customers and asking for relief on price downs in light of all this material pressure. I'm curious, what do you think the average price down will be this year on the light vehicle side?

That's a hard number to predict. Historically I think it's run effectively about 2.5%. When all is said and done, it's finally negotiated, we expected to see that number decrease because of the material inflation factor. We are not talking about contractual price downs. Those are going to be enforced, but our customers have come back and asked for additional price downs in the course of the typical year.

Right. But the 2.5% it reflects both of those types of resins (ph)?

Yes.

You will still going to get some price here, but not as much as 2.5%? It is going to be less then 2.5%?

We are going to try very hard.

What percentage of those negotiations are done?

They are continuing on throughout the year.

Contractually it is what it is. Our customers use various strategies during the year to come at us with additional demands. Sometimes that involves negotiation around the new business and sometimes it's just a flat demand. So, I can't tell you what the strategy will be this year. They are well aware of the supply base situation with regard to material.

Okay. I got you. Did you share a net new business number with us?

No, we did not. We said we feel over the course of the next five years, we will be able to maintain through acquisitions and organic growth, roughly an 8% growth rate.

Okay, so that's over five years, so is there any kind of range you can give us on '05? In terms of just organic growth.

We are not putting that information out at this time.

Okay. Then is there -- do you have a CapEx number for '05?

It's going to be in line with where we are at this year, it might be slightly up, but it is going to be right in the $23 million to $25 million range.

I noticed that you said something about cash restructuring cost during your prepared remarks. What do you think those will be?

We put an announcement out prior that said our restructuring cost would be between $6 million to $7 million this year.

That's still the number?

Yes it is.

I will let someone else get going.

Ladies and gentlemen, your next question is from Mike Kender of Citigroup. Please proceed, sir.

One thing that jumped out at me when I looking at the income statement was that SG&A really jumped third quarter sequentially from third quarter to fourth quarter. It looked like you are closer to 29 million in the third quarter. How much of that 4 million jump was product initiatives versus -- were there any unusual items in there?

Actually 2.5 million of that was design and development. Selling and marketing was an additional half a million on top of that.

And was there anything one-time in nature in there ? Any charges or restructuring or severance anything like that?

Nothing from the restructuring side.

Okay. The 33 million run rate is that what we should expect going forward for the quarter? Or was it an unusually high quarter?

That might be little bit high for our quarter. We had some Sarbanes-Oxley costs and things in there also that we will not be seeing going forward because we have stuff in place in executing going forward. It should be down from that going forward.

Any feel for what a more normalized run rate would be?

Not at this time.

Okay, thank you

Thanks very sir. Ladies and gentlemen your next question comes from the line of Brett Hoselton of KeyBanc Capital Markets. Please proceed sir.

Hi, good morning, Jerry. Good morning Joe.

Good morning Brett.

Good morning.

The first quarter in the 2005 guidance, does that include the 6 million to 7million of restructuring.

That's part of that 6 million to 7 million.

And so it's included in there, right?

A portion of that we will be spending in the first quarter is, correct.

Yeah. Do you have any sense of the 6 million to 7 million when it's going to be spend? Is it primarily front half loaded, back half loaded or fairly even?

We are trying to accelerate that as quickly as we can because we want to get benefits back for our shareholders. We know that these costs are reducing our EPS this year compared to last year. And so we are trying to, as Jerry said, we are going to try everything to try get some benefit in the fourth quarter you know towards the end of this year so that next year we get a full benefit.

Okay. So, did that -- that suggests that more of that 6 million to 7 million would be incurred in the first half than the second half?

We are going to accelerate as much as we can. Absolutely.

Okay. Looking at the year-over-year earnings, the decline of around $0.14 to $0.24 from the $1.19 earned in 2004, you are citing lower light vehicle on higher commodities cost. Just in terms of trying to quantify that, is there any way that you can give me an order of magnitude as to how much of that -- how much of the $0.14 to $0.24 decline is represented in one or the other? Is it a greater portion in the higher commodities cost?

I think we were affected at both sides pretty strongly. I think that the commodities hit everybody. Brett if you want to mention it its pipe in, but it's like you know we are getting -- we are going to get hit from both sides. It's the reason it was hit like it was.

The last quarter you gave us an impact of the commodities cost on I think earnings of about $300 million excuse me $300,000. Do you have a similar number for the fourth quarter here?

It was significantly higher this quarter. Yes, we had a material impact in the fourth quarter of roughly $1.5 million.

Okay. Is that a pretax or after tax number?

That will be a pretax number.

Okay. And the -- you talked about acquisitions, Jerry...

Yes.

...and I guess the question I would have is, is there an expectation that you might have an acquisition to announce sometime in 2005 or is this more along the lines of something that you would like to do and you really don't have any prospects at this point of time?

Well, we never speculate on the stage of any of our acquisition activities, but we remain optimistic and we are actively evaluating all situations that come our way. Certainly it's something it's high on our priority and we spend a lot of time on it.

Thanks a lot. Good enough. Thank you very much gentlemen.

Thank you very much, sir. [Operator Instructions]. And your next question comes from the line of David Bitterman of Deutsche Banc. Please proceed sir.

Hi, good morning.

Most of my questions have been answered, but Jerry relative to your acquisition appetite, you know, understand your desire to be interested in Minneapolis, but I guess what assurances can you give your investors that you won't look to sort of be over your skis on getting some done even as it is sort of a high priority for you?

Well, I think we have learned a lot through our acquisition activity in the 90's and I think we are better equipped to do our due diligence. We have some very specific criteria as to what we are looking for. It has to bring us customer diversity; it has to bring us geographic diversity. And it has to bring us next generation technologies. Those are pretty demanding criteria.

And we have a very diverse team that goes out to do the evaluation on anything that comes our way. I think our expectation of generating about half of our growth through acquisition is digestible and affordable with our current debt structure and with our cash flows.

And Jerry, are there any thoughts in that process you know given just the challenges of the business, particularly on the light vehicle side? Any opportunities out there that you would explore in terms of market diversification and not just customer diversification, but actually it's slow in different markets?

I'm a firm believer that you have to stay pretty close to your core competencies. If you get too far a field of what you are good at doing, you tend to dilute the management effort. And if you look at the history of those types of acquisitions, I don't think they have been as good. And obviously we have two major sectors that we serve. Commercial vehicle, which includes off-highway that's a very attractive market to us.

We bring a systems integration type of capability to that user, that lower volume market. We can deal with the highly customized vehicle builder. We would look at that sector as being growth -- having growth potential for us through acquisitions and also automotive. But going much beyond that, we are not interested in getting out of the transportation or vehicular markets.

Great. Thanks Jerry.

Thanks very much, sir. Ladies and gentlemen, your next question comes as a follow-up from Brett Hoselton of KeyBanc Capital Markets. Please proceed sir.

Hi, Jerry, you talked a little bit about China. And I guess my question to you would be how do you see China affecting your business going forward? Do you see it as a growth opportunity for your company? Do you see it as a potential to lower your cost? Do you see it as a potential threat from some Chinese suppliers? How do you see it affecting your business over the next three or four years?

That's a wide-ranging question. But let me see if I can respond briefly.

From my observations and my recent trip to China, they don't have a well-established engineered products supply base. They are good at commodity products and you see most of our system -- our tier one customers, the systems integrators, moving there facilities over there. So, I think there is an opportunity for companies like Stoneridge to produce engineered products to move in and either establish themselves independently or through joint ventures because they are looking for regional content.

They don't want to keep importing these types of products. So, I think we have an opportunity there and we have been approached by several Chinese companies to license or join venture to bring our capability there. So I think there is growth in the region. I think as you point out, there are some aspects of the region that are low cost, which allows us to bring mature product there and export out to other markets. And I think we have do look at the projected growth in this region. Over the next five years it's expected that China will produce five million more vehicles. That by the end of the decade, the Asian region will be responsible for 40% of the global vehicle production.

So, I think there is a substantial market developing there. And we want to be part of that. And that's the driving factor. Now in the short-term, we are getting the benefits of using those component suppliers, those process providers to buy our materials at lower prices. We have been importing printed circuit boards for example and good portion of our tooling is now coming from China. Since they have a major initiative to produce tooling for both stamped and molded parts and they are receiving support from their government to put the capital in place to have the latest technology to produce tools. So, there -- we see this in the short-term as a place to source components and in the not too distant future, a place to manufacture some of our products.

Okay. Thank you very much, gentlemen.

Thank you very much, sir. [Operator Instructions].

At this time we have no further questions. I would like to turn the call back over to our speakers for today for any closing remarks they may have. Gentlemen?

We would like to thank everyone for tuning in and we are looking forward to building our shareholder value in 2005 and seeing our strategic plan through to its conclusion. Once again thank you and we will be talking to you next quarter.

Thank you very much, ladies and gentlemen for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a good day.