Stoneridge Inc (SRI) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Stoneridge First Quarter 2005 Conference Call. [Operator Instructions] I would now like to turn the presentation over to Mr. Greg Fritz, the company’s director of corporate finance and investor relations. Please proceed, sir.

Thank you, Matt. Good morning everyone. By now, you should have received a first quarter earnings release. The release has been filed with the SEC and has been posted on our web site at www.stoneridge.com. Joining me on today’s call are Jerry Pisani, President and CEO, and Joe Mallak, VP and CFO.

Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties and that actual results may differ materially from the forward-looking statements.

Additional information about such factors and uncertainties that cause actual results to differ may be found in our 10K filing with the Securities and Exchange Commission under the heading “Forward-Looking Statements.”

During today’s call, we will be referring to certain nongap financial measures. Please see the investor relations section of our web site at www.stoneridge.com for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

Gerry Pisani will first provide an overview of the quarter and full-year outlook, and then Joe will discuss the financial details of the quarter in our guidance. With that, I would now like to turn the call over to Jerry.

Thank you, Greg. Good morning, everyone, and welcome to our first quarter earnings call. To begin today’s call, I’m going to make a few brief comments about the state of our business. Our net sales increased $4.8 million or 3% to $180.8 million compared with $176 million for the first quarter of 2004. The increase in sales was primarily because of the continued strength of the commercial vehicle market which more than offset the decline in the North American light vehicle production. Our net sales were also impacted by favorable foreign currency translation, which added approximately $1.9 million to our top line.

Our earnings per share for the first quarter was $0.19 cents per diluted share, which was in line with our previously-announced guidance. Today we announced that we revise our full-year guidance to $0.40 to $0.50 cents per diluted share, which was the result of several factors.

First of all, while we expect the commercial vehicle market to remain strong for the remainder of the year, we are pessimistic about the North American light vehicle market based on the announced production cuts of our leading customers.

Second, we are experiencing higher than expected inefficiencies related to our plant consolidation activities. In January of 2005, the company announced that it would be undertaking restructuring initiatives related to the rationalization of certain manufacturing facilities in the high-cost regions of Europe and North America.

Unfortunately, these plant consolidations have not progressed as planned. For example, in the UK more employees than expected declined transfer offers to our new facility and instead elected to take statutory severance. While this will result in a younger, less costly workforce, the immediate affect is higher operating variances.

Also affecting both our earnings and cash flow projections is a delay in the planned sale of one of our North American facilities. While we have experienced short-time inefficiencies with these consolidations, we feel strongly that these actions are necessary to ensure our competitiveness in the future. We expect to begin seeing the benefits of these actions in 2006.

Finally, we have experienced the delay in the launch of the next generation digital tachtograph in Europe. We worked very hard to meet the EU’s mandated implementation date of April 2005 and are pleased to report that our product was certified by the EU in this month. This required significant engineering and consulting expenses into April of this year.

Unfortunately, however, with EU member countries now asking for a delayed implementation, the launch of this product this year is in question, and we have had to reduce our forecasted OEM and after-market sales accordingly. Despite this timing adjustment, we believe that this product presents us with an opportunity to increase our market share in the European tachtograph market.

Despite these short-term issues, I feel it is important to remain focused on our long-term goals and objectives. I have previously outlined for you a well thought out business development program to complete the globalization of Stoneridge and to expand our automotive customer base. This plan includes gated product development programs focused on our traditional applications areas and on the emerging applications associated with occupant safety, emission controls and ride stability control.

To accomplish our long-term goals and to drive future value for our shareholders, we are making substantial investments in product development. During the first quarter of 2005 we spent $11.1 million, an increase of $2.2 million year over year. Our product development programs are primarily customer driven, and we are seeing an increase in volume of quotation activity.

We have committed additional sales and marketing resources to develop more business in the Far East and Europe. These initiatives will not show results in one quarter or even one year. Acquisition of new business, which requires considerable effort at the front end, can take six to nine months. Product development and launch can take 12 to 24 months. Our design and development in sales and marketing investments are crucial ingredients in our goal to achieve our 8% compounded annual growth rate target over the next five years.

As we previously stated, acquisitions are a part of our growth plan as well. I am therefore disappointed to report that after successfully negotiating the acquisition of Vimerkati, an Italian full-service switch product supplier for the automotive industry, a minority shareholder has exercised his preemptive right to match our offer, and it appears unlikely at this point that we will close the transaction.

I will say, however, that Vimerkati is not our only acquisition target, and as such I want to reaffirm our interest in acquiring companies in Europe and Asia that bring us customer diversity, complementary technology, and have the potential to become quickly accretive. We have worked hard to strengthen our balance sheet and we intend to use this leverage prudently.

In closing, I would like to highlight what I believe are Stoneridge’s strengths. As a technology provider, we enjoy certain strategic advantages to make our business model more sustainable – first-to-market pricing, differentiated solutions, shorter product life cycles, or planned obsolescence of our own products, frequent engineering changes driven by the customer which allow us to recapture our margins, and proprietary know-how. We are a company driven by innovation that invests in the future.

Our structuring and business development programs are gaining traction, and I will not let short-term market conditions or operating difficulties deter us from our longer-term goals, especially the restoration of revenue growth.

I will, however, personally track the effectiveness of these efforts and reallocate the spending where appropriate or reduce it if progress cannot be demonstrated. We are all excited about Stoneridge’s future. We have a comprehensive plan, and we are convinced that it will improve shareholder value.

I will now turn the call over to Joe so that he can provide his prospective on the company’s first quarter results. Joe?

Thank you, Jerry. Our revenue for the first quarter of 2005 totaled $180.8 million compared to the revenue of $176 for the corresponding period of 2004. During the first quarter of 2005 North American medium to heavy-duty truck production increased 30% year over year. It was the main factor behind the sales increase.

Our sales were also impacted by a favorable foreign exchange rate, which added approximately $1.9 million to the top line. These positive factors were offset by 8% decline in traditional North American light vehicle production. North American revenue of $140.4 million decreased 2% from 2004, while non-North American revenue increased 21% to $40.4 million.

In North America, the decrease was primarily due to North American light vehicle market and price reductions by our customers. The increase in European sales was primarily due to an increase in commercial vehicle volume, as well as favorable currency exchange rates. North American revenue accounted for 78% of our first quarter revenue compared to 81% for the same period in 2004.

Hard distribution revenue increased 18% to $92.5 million. Increased commercial vehicle production and to a much lesser extent favorable currency exchange rates were the drivers behind the sales growth. Revenue for control device segments decreased 10% in 2005 to $88.3 million, primarily due to a decrease in light vehicle production and price reductions.

Total passenger car and light-truck revenues were $75.8 million in the first quarter of ’05 by medium and heavy-duty truck sector revenues were $85 million. Sales to agricultural customers totaled $19.8 million and other revenues were $4.7 million.

Gross profits totaled $45.2 million for the first quarter, compared to $47.8 million for the same period in ’04. The corresponding margin rate was 25%, down 2% from ’04. The decrease in our gross profit margin is mainly attributed to price reductions, operation inefficiencies related to our restructuring efforts and reduced light-vehicle volumes partially offset by a combination of higher commercial production volumes and the company’s continued focused 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 years. Selling general and administrative expenses were $30.4 million for the first quarter of 2005 compared to $28.1 million for the corresponding period of 2004. The increase in SG&A expenses primarily reflect increased investment in the company’s product development activities and increased sales and marketing efforts.

As previously announced in January, the company is undertaking restructuring initiatives related to rationalizing of certain manufacturing facilities. In connection with these plans, the company recorded restructuring charges of $2.1 million for the first quarter of 2005 and expects the total cost of this restructuring effort to be approximately $6 to $7 million in ’05.

Interest expense for the quarter of $6 million was $300,000 below the 2004 level. The reduction in interest expense is a reflection of our lower debt balance. The company recognized the tax provision of $3.3 million or 43% of the pretax income in the first quarter of 2005 compared with $4.6 million or 33% of pretax income for the first quarter of 2004. The increase in the effective tax rate was primarily due to an impact of foreign losses for which tax benefits could not be provided. We anticipate a full year tax rate to appropriate approximately the first quarter levels.

The company recognized net income for the first quarter of 2005 of $4.4 million or $0.19 cents per diluted share compared with net income of $9.2 million or $0.40 cents per diluted share for the same period in 2004.

Depreciation expense for the first quarter of 2005 was $6.6 million. Earnings before interest, other income, taxes, depreciation and amortization was $19.4 million for the first quarter of 2005, compared to $26 million for the comparable period in 2004.

Working capital excluding cash and current portion of long-term debt was $86.3 million at the end of the first quarter of 2005, which was $22.5 million above the first quarter of 2004 balance of $63.8 million. The higher level working capital are predominantly due to a decrease in accounts payable, accrued expense balances, as well as an increased inventory to satisfy customer requirements as the company started up in operation in Mexico and is in the process of consolidating manufacturing facilities in both the US and the United Kingdom.

Operating cash flow, net asset addition was a use of cash of $9.4 million for the first quarter of 2005 compared to a source of cash of $2.2 million for the corresponding period in 2004. The increase in cash used for operating activities this quarter was primarily due to our decrease in net income and an increase in cash used for working capital requirements.

Capital investments totaled $4.1 million in the first quarter of 2005, reflecting investments for new programs in the areas of power distribution and comfort convenient switches. Total debt as of the end of the first quarter of 2005 was $200.2 million. Total debt less cash as of April 2nd was $157.8 million, down 9.7% from the prior year levels, and up 6.7% from December 31st.

The revolver of $180 remains undrawn at this time and our cash balance as of April 2nd decreased to $42.3 million from $52.3 million as of December 31, 2004.

As Jerry mentioned, we face many challenges for the remainder of 2005. The revision of our guidance to $0.40 to $0.50 per share from $0.95 to $1.05 per share reflects several factors. The most significant factor in this reduction is operating inefficiencies related to our restructuring activities. These issues have resulted in lower operating earnings, as well as substantially higher tax rates in 2005. Other factors impacting our full-year outlook include the delay of previously-expected building sale, reduced North American light-vehicle production schedules, and a product launch delay.

While our restructuring actions have resulted in a negative variance for 2005, we feel that upon completion these actions will provide Stoneridge with an annual savings of approximately $5 million, beginning in 2006.

With that, I would like to open the call up for questions. Operator?

Okay, Matt, we’d like to open up the call for questions now.

(OPERATOR INSTRUCTIONS.) And your first question comes from the line of Steven Weiss (ph) with Midflow Capital Investment.

Yes, Steven.

It will be just one moment. Mr. Weiss, you may proceed. And Mr. Weiss, you may proceed with your question.

Yes. Hello?

Hello.

Can you hear me?

Yes, we can, Steve. Go ahead.

Okay, great. Congratulate on a good quarter. What I’ve noticed, though, over the last couple of months, a lot of your competitors have recently been implementing some new strategic initiatives for technology to help them reduce their sourcing costs with their suppliers, establish better lines of communication and collaboration with their suppliers, to reduce those costs and pass them on to the bottom line. What are you guys doing? What are some of your processes used and procedures if you could provide some color on that, and you’re looking to implement or have already started implementing to help reduce those sourcing costs and establish better communication with your suppliers?

Okay, it’s a good question, Steve. I hope you can hear me. You’re coming through kind of faint. Can you hear me?

I can hear you okay.

Okay. As we’ve mentioned before, because Stoneridge is organized into decentralized investment centers, historically we have not taken full advantage of our purchasing leverage. But for the last couple of years we have moved to a matrix organization where we form commodity teams under the direction of a strategic purchasing executive, and so we pool our commodity purchases across the corporation.

This has given us more leverage in negotiating with our supply base. In addition, this program also is putting certain matrix on the supply base to determine who the best performers are, not only on costs, but also on support of pre-design activity, pre-launch activity, and also supporting us by following the same lean Six Sigma and quality systems that we implement internally. We offer these strategic suppliers support in this activity as well.

We are identifying those suppliers who will be our long-term strategic suppliers, and we’re looking for approximately a 10% reduction in the supply base per year as we go forward until we reach a strategic grouping of suppliers for the long term.

In addition to this activity, we’ve opened a purchasing office in Shanghai, China, to help service an expanding source of low-cost commodities. We purchase approximately $30 to $40 million of our materials in China at this time. And we’ve been able to achieve significant cost reductions there, so we see this operation also expanding and supporting the corporation in these commodity teams.

I think that addresses most of your question. Is there anything I missed?

No, not really. How long have you guys had this implemented and have you been pleased with a lot of the results or have you found any kinks that you’re trying to improve on?

Well, the toughest part of this is, of course, the rationalization of the supply base, reducing it down to a more manageable number. I think most companies are finding this to be difficult. You can’t transfer tooling overnight, so very often you put some of these suppliers on business hold until they get down to a smaller percentage of your business, and then you end up transferring tools. That’s the biggest problem. The transitional problems.

I think we’ve learned to operate in this matrix organization. We’ve become more effective, and we’ve seen significant savings in areas of electronic components, printed circuit boards, and magnetic materials. But of course we are still facing, as everyone else is, inflation in some of the base commodities, the resins, the steels, the coppers, copper alloys. So the bottom line doesn’t always get the full impact of these programs, but we’re far better off for having implemented these programs.

I agree, Gerald. Congratulations on a good quarter. Continued success down the road.

Thank you very much.

Thank you. Next question comes from the line of Brett Hoselton with Keybanc Capital Market. You may proceed, sir.

Hi, Jerry. Hi, Joe. Hi, Greg.

Hi, Brad.

Good morning.

Joe, the $0.55 reduction in your guidance you broke down, I believe, four different items: Operating inefficiencies, delay in the building sale, North American light-vehicle production cuts, and product launch delay. I think those are the four reasons for the reduction, is that correct?

Yes, it is. Well, and that is the lion’s share of the $0.55.

Okay. Is there any way that you can kind of give us a sense of amongst those four what the impact might be? I mean, is it like 50% operating inefficiencies or that sort of thing?

I’m not going to break it down into that detail, but I can tell you that the largest one is the issue we are having in the UK with operational inefficiencies with the consolidation. But we’re not going to break it into specific components at this time.

Okay. And then the reduction guidance, obviously when I think about these different things, the operating inefficiencies, any sense of timing in terms of resolution for that?

What we anticipate in dealing with the operations, the lion’s share of the restructuring over there is going to be completed after the second quarter. But as Jerry stated, we are training a bunch of new people and we feel there is going to be continued to be transition issues there for the remaining portion of 2005. But we also feel very confident that going forward that this will become an excellent operation and that these tax consequences that we had to take this year will be benefits to us in the future.

Okay. Yeah, the building sale delay, I mean, is this a matter of like a month or it just a matter of a multitude of quarters? Did we lose the buyer?

No, it wasn’t so much that. Actually, it’s a building that’s in a very excellent location in the Boston area.

Yep.

It just comes down to zoning and exactly what kind of use of the building it’s going to be, and these things are taking a little longer than we anticipate, so we don’t see that being sold this year. It’s going to go into next. It’s not a matter of finding the buyer; it’s a matter of getting the structure right.

Okay.

It’s a very marketable property, very desirable, because it has three and a half acres. The issue is there may be multiple uses for the property and we underestimated the bureaucratic process to allow potential buyers to petition for zoning variances.

And then the delay of the digital tachtograph.

Yeah.

Can you talk a little bit about what are possible scenarios for that? I mean, is there a possible six-month delay, year delay? I mean, what are we thinking about there?

That’s not possible for us to answer today. The EU has pressed for this added security on tachtographs. This digital smart card design eliminates much of the tampering with the traditional tachtograph. And after two years of pushing the legislation through and getting the OEMs to commit, ourselves and others, to commit to the design and development of this product, I think there’s only a very remote chance that they will back off on this regulation.

The problem is that it requires the member countries to issue smart cards, which are in effect electronic licenses for the drivers. And they did not monitor their programs apparently as well as we did in developing the product, and they’re not prepared at this time to issue these licenses, so they’ve asked for a delay. This will be handled by the committee that’s the EU that’s responsible for this tachtograph legislation, and they will be meeting in the next month, but we don’t have a good feel for how much leeway they will give these countries. It is possible to implement it in several countries and still exempt it in others, so we don’t know what the outcome will be.

Okay. And then in terms of just revenue growth outlook and kind of apart from production changes and some of the uncertainties revolving around the product launch delay and that sort of thing, as you think about just the organic net new business this year, next year, and going forward, what are your expectations?

Well, that is the reason we’re investing the money we are in the product development and in the sales and marketing. Right now is you’re seeing a lot of the light-vehicle market and things like that have been reduced, and we’re attempting to find every pocket of sales and profitability that we can go after and also bring new technology to the market. So right now, we’re not putting forward an estimate, but as Jerry said in his presentation, our target over the next five years is 8% compounded growth going forward with a combination of organic and acquisitive growth.

Okay, at this time it would be very difficult to get you a net new growth projection, because the specific launch of these vehicles and some of these are optional items. The content on the vehicle is still in question. And rather than give you inaccurate numbers, we’re withholding that projection.

But I will say, as Joe has mentioned and I have mentioned, we see a higher activity of quotations and we see a lot of interest in some of our newer technologies, newer sensing technologies particularly. So the activity you are seeing affect our SG&A is customer driven. A very small percentage of this is to develop, let’s say, a capability without a targeted account.

Excellent. Thank you very much, Jerry and Joe.

Thank you.

And your next question comes from the line of Doug Forsythe (ph) with Nicholas Applegate. Sir, you may proceed.

Thank you. This question was actually partially asked by Brad, but just to be clear. You did break out the restructuring charge of the $2.1 million?

Correct.

And the guidance of $0.40 to $0.50, that includes what you broke out in your formal comments of $6 to $7 million.

Correct.

So that’s about $0.30 of the reduction.

No.

No?

You’ve got to use the tax rate. Well, actually keep in mind we did announce the $6 to $7 in the first quarter call, so that was in our original guidance.

Oh, okay. All right. Just wanted to break that out. Thank you.

Yes.

Okay. Your next question comes from the line of Laura Thurow with Robert W. Baird. You may proceed.

Good morning.

Good morning.

I just wanted to follow-up on the question on some of the purchasing you’re doing in China. You said you’re currently purchasing $30 to $40 million of materials there. Can you give us a sense of the magnitude of savings you’re getting there, what that would be if you were to purchase it here?

Of course, that varies with commodity, but some of the numbers you’ve seen published 20% to 30% savings sourcing out of China, those are good benchmarks. But, of course, you have to include in that the cost of the staffing in China to administer the relationship with the supplier and the logistics cost to ship into the US, and there may be actually some inventory carrying costs to protect your supply line.

But where the material content is not too great, where there isn’t a big, high duty to bring the material into China, you can see 20% to 30% reductions in some of these commodities. We see this very often on printed circuit boards. The raw board itself. And for some reason we see it on magnetic materials, too.

Okay. Then I just wanted to follow-up on the operating inefficiencies that you’re seeing from the consolidation. The fact the increased costs of severance because employees aren’t taking a transfer is it training new employees? Are there other manufacturing issues? If you could just give a little more color on that.

What it has to do with is more of the training the new people we anticipated, because we didn’t move. We moved, I believe, 18 miles away from where we were. We anticipated more of our highly skilled and the different employees to come with us and it didn’t happen. And it’s not so much a severance. It’s more getting new people in there, training them, getting them up to speed that these people who have been in these jobs for years, and that’s what’s driving the problem.

Also, we have been utilizing some of the people and bussing them back and forth from the location which has driven expenses, and so we ended up with more employees than we anticipated during the transition.

We’ve had to work more overtime because of the additional training, and we’ve experienced premium freight on goods outbound because of the training and inefficiencies of using the younger and newer operators.

We’re seeing significant improvement as we go through April. We’re seeing more stability in the work force, and reduction of some of these variances. But it will take some time to bring these people to the same efficiency level as our more experienced operators, who were laid off in the original site.

Does that mean it takes a couple months, a couple quarters?

Like I said earlier, we see the transition going through the end of this quarter, the lion’s share of it. And then we believe there’s still going to be inefficiencies through the rest of this calendar year. And beginning in ’06 going forward, we think that it will be in turning around and being much more effective as we anticipated when we did the consolidation in the first place.

Okay. And then just two housekeeping questions. Sorry, I missed the numbers you gave on the power distribution and the control device sales this year versus last year. Could you repeat those?

Sure. Just a second. All right. Power distribution revenue increased 18% to $92.5 million and the control device decreased 10% to $88.3 million.

Okay, thanks. And just last question. Did your change in your fiscal year have any impact? I’m sorry, in your reporting period have any impact on the quarter, any extra days or a few days this year versus last?

There was one day.

One day more--

One day. There was one day more.

Great. That’s all I have. Thank you.

Okay.

(OPERATOR INSTRUCTIONS) Okay, then at this time, sir, you have no further questions.

All right. I’d like to thank everyone for joining us for the conference call. We appreciate your participation, and we look forward to talking to you next quarter.

(OPERATOR INSTRUCTIONS)