Stoneridge Inc (SRI) 2006 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q [technical difficulties]. [Operator Instructions]

I would now like to turn the presentation over to your host for today's call, Mr. Greg Fritz, Director of Corporate Finance and Investor Relations. Please proceed sir.

Thank you [Shanika] and good morning everyone. By now you should have received our second quarter earnings release. The release will be filed with the Securities and Exchange Commission and has been posted on our website at www.stoneridge.com.

Joining me on today's call are John Corey, our President and Chief Executive Officer, and George Strickler, our Chief Financial Officer.

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 actual results may differ materially.

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

During today's call we will also be referring to certain non-GAAP financial measures. Please see the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

For the remainder of the call John will provide his thoughts on the quarter and our outlook, and George will discuss the financial details of the quarter along with our guidance for the rest of the year.

After John and George have finished their formal remarks we will then open up the call for questions.

With that I would like to turn the call over to John.

Good morning and thank you for joining us. I would like to comment on our second quarter results, our thoughts on the impact of the 2007 emission standard change for North American commercial vehicle market, and update you on the status of our organizational excellence efforts, which have contributed to these results.

I am pleased to report second quarter earnings per share of $0.21 compared with $0.12 in the prior year. This 74% increase in EPS is our first year-over-year increase in earnings per share since the third quarter of 2004.

This is a notable accomplishment for Stoneridge and is a tribute to the dedication and hard work of our team. We are driving towards a performance-based organization and all our divisions are contributing. This performance is not the result of an exceptional few but an across the board improvement.

When I arrived at Stoneridge in January, we had five troubled plant operations on my contain list. As of today, all of these operations have moved into the controlled phase and are continuing to make progress towards operational excellence.

While we are not satisfied with the current performance, the team has demonstrated a clear progress towards our long-term operational goals.

I would like to highlight some of the notable areas of improvement. One of the areas of weakest performance in 2005 was turned in by our United Kingdom operation. On the first quarter call I noted this operation showed a strong improvement from the prior year. The team in the U.K. continued to build upon this performance and recorded an operating profit during the second quarter.

This operation has reported substantial improvements in operating efficiency metrics such as freight and labor. Augmenting these improvements were aggressive cost saving initiatives in the area of material and overhead cost.

Our U.K operation has demonstrated continuous improvement over the first half of the year.

Our Mexican operations also made good progress in the quarter. They achieved significant freight cost reductions, improvements in on-time delivery, and increased efficiencies during the quarter. In addition, our Monclova facility has implemented lean manufacturing that has led to a 20% reduction in floor space utilization at the facility.

These gains will help us in our overall manufacturing plans as we increase capacity within the existing facilities.

Turning to our outlook, I mean pleased to report that we are raising our guidance to $0.50 to $0.60 per share based on improvements in operations from the 30 to 40%-- cent share despite the ongoing unfavorable impacts of commodity price increases and general market uncertainty around the North American light vehicle production.

We continue to expect that North American commercial vehicle market demand will remain strong through the year. Offsetting this impact is the ongoing softness expected in our light vehicle production schedules of the traditional domestic automakers.

Overall, we expect to maintain the strong momentum we have generated in the first half of the year and continue to report year-over-year improvements in earnings per share.

There has been much concern in the industry regarding the emissions change impact on the North American commercial vehicle market. Before I comment on the outlook for this trend, I would like to state that it's still very early to forecast specific 2007 industry production schedules for the commercial vehicle market.

Currently, the general expectation is for a 25 to 35% decline in the North American markets. I'd like to give some perspective on how we are planning for the expected downturn. First, medium and heavy truck sales are expected to represent 47% of our total 2006 revenues, and European revenues represent approximately 20% of our total sales. Nearly all of this 20% is commercially vehicle derived.

Our current outlook is for our European commercial vehicle revenues to remain relatively stable in 2007. As such, approximately 30% of our medium and heavy truck sales are North American based and subject to the EPA mandated emission standards.

As we have announced this morning, we are launching our second major instrument panel program beginning in 2007. While this program will not reach full production in 2009, we do not-- we do expect to have an incremental contribution to our 2007 results that will partially offset the expected production decline.

When taken in combination, we expect our 2007 revenue will decline at a rate substantially lower than the 25 to 35% that is expected in the marketplace.

As we do prepare for this decline, our businesses are taking steps to improve our cross structure through ongoing productivity improvements.

Our second quarter results demonstrate continued progress towards our goal of operational excellence. Our earnings showed sequential improvement from our first quarter results and mark another positive data point in our improvement plan.

Now that all of our operations are in a controlled state and working on continuing improvement, we are on the journey towards financial and marketing excellence. With the improvement in operations we can focus on our marketing efforts and enter into value added investments in our next generation of products and technologies. We are committed to build upon these improvements and drive our return on invested capital to the 10 to 15% range.

With that I'd like to turn the call over to George.

Thank you John. Before we review the second quarter results in detail, I would like to highlight a few accomplishments in the quarter.

We made progress during the quarter in leveraging the corporation to improve our efficiency and effectiveness as an organization. Our progress in the areas of information technology and tax management was solid during the second quarter.

With respect to taxes, we have reduced our expected 2006 tax rate guidance to 30 to 33% from 30 to 37% in the previous quarter.

We continue to build our cash position during the quarter with 30-- $43 million on hand. We believe we can build upon this level as our efforts in the area of working capital management gains traction. Specifically, we are working to reduce our past due accounts, evaluate our terms with certain customers, and work to reduce our inventory levels.

We are specifically targeting bringing our accounts receivable, inventories, and accounts payable down to $0.12 to $0.13 per $1 sale.

I would now like to cover our second quarter results in more detail and then we will open up the call for questions.

Second quarter revenue totaled $185.5 million, which was $5.2 million above prior year's total. And our second quarter results were impacted by unfavorable $900,000 foreign currency exchange translation effect.

Light vehicle revenue declined $700,000 to $72.7 million. The decline was attributable to unfavorable product mix from our primary customers in North America and ongoing product price reductions, and was partially offset by new program launches.

Medium and heavy-duty truck sales totaled $90.7 million in the quarter, $5 million above the prior year with a combined improvement in both North America and Europe. The increase is mitigated by unfavorable foreign currency exchange translation effects.

Excluding the foreign exchange impact on medium and heavy truck sales were approximately 7% above the prior year. Sales in agriculture and other markets totaled $22.1 million, compared to $21.4 in the prior year. Stronger demand from our agricultural customers drove the increase.

North American revenue accounted for a 77.3% share of second quarter revenue, compared with 78.9% for the same period in 2006.

Power distribution revenues increased 6% to $105.5 million. The primary driver behind the increase is stronger demand in the medium and heavy-duty truck segment and stronger agriculture equipment sales.

Revenues for the controlled devices declined $700,000, as new program revenues were offset by unfavorable mix from our traditional domestic customers and product price reductions.

Our second quarter gross profit totaled $44.44 million and our corresponding gross margin was 23.7%.

Our second quarter margin increased 50-basis points from the prior year level. This increase was due to higher sales volumes relative to prior year and operational efficiency improvements at our U.K. operations. These factors were offset by unfavorable variances in material prices and product price reductions.

Our focus remains returning our gross margin to historical levels for direct material procurement on a global basis, product price management, and operational excellence.

Sales from low cost manufacturing locations accounted for 38% of total sales in the second quarter, compared to 35% in the prior year. And we will continue to locate labor-intensive manufacturing in low cost locations, which will improve our percentage over time.

Selling, general and administrative expenses totaled $31.2 million in the second quarter, compared to $30.2 million in the previous year. Excluding the impacts of a favorable commercial settlement in the prior year, and unfavorable costs relating to a consulting agreement with a former employee, our SG&A expense declined year-over-year as a result of our cost reduction efforts.

Stoneridge generated a second quarter benefit of $200,000 related to our previously announced restructuring plan, which was a decrease of $2 million from the prior year. Second quarter income tax expense totaled $1.9 million, bringing our effective tax rate to 28%.

This rate compares favorably to the 39% effective tax rate reported in the previous year.

The improvement is primarily attributable to the improved performance of the U.K. operations and a corresponding decrease in the amount of value [inaudible] that was provided against our deferred tax assets.

We expect our 2006 tax rate to return to a more normal rate between 30 and 33% for the year.

Stoneridge recognized net income of $4.9 million or $0.21 per share compared with $0.12 per share in the prior year. Depreciation expense for the second quarter was $6.4 million and amortization expense totaled $200,000.

Earnings before interest, other income, taxes, depreciation, and amortization were $19.3 million for the second quarter, compared to $15.6 million in the previous year.

Working capital, excluding cash, ended the quarter at $85.4 million, up $6.4 million from the first quarter balance of $79 million. The higher levels of working capital are primarily attributable to higher accounts receivable balance in the quarter. We are intent on reducing the level of working capital employed at all our businesses. Our initiatives include reducing our past due accounts receivable, enforcing our current payment terms with certain customers, reducing our inventory levels through our operational improvement initiatives.

Operating cash flow net of fixed asset additions was the use of $600,000 in the second quarter, compared to a use of $2 million in the previous year. Capital investment totaled $6.6 million in the second quarter, mainly reflecting investment in new products.

Some significant components of our investments were in the areas of equipment for the commercial vehicle instrument panel award announced this morning and investments at our mission controls applications.

At the end of the second quarter, we have full availability under the $100 million facility.

Our capital structure is currently comprised of 200 million of senior notes due in 2012 and an undrawn revolving credit facility of $100 million.

In addition, our quarter end cash balance totaled $43 million.

We are comfortable with our strong liquidity metrics and we'll work to reduce our cost of capital going forward.

Now I'd like to take a moment to discuss our outlook for 2006. For the full year, based upon the current industry outlook, we have increased our guidance to $0.50 to $0.60 per share. And as John noted, our operations have made strong progress towards achieving their operational excellence goals.

In the first half we are pleased with the improved performance of our underperforming businesses and plants, but we are disappointed with our progress on working capital and the resulting impact on our cash flow. We continue to have a focus on reducing our working capital to the $0.12 to $0.13 per $1 sale for the year. We feel that this improvement, along with our revised earning expectations, will allow us to drive strong cash flow and improve our cash balance by year-end.

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

[Operator Instructions] Brett Hoselton of Keybanc Capital Market.

Hey guys, this is [Brandon Farrell] for Brett. Good quarter. As far as SG&A goes, looks like we saw about 130-basis point improvement year-over-year and I think you talked about some of the one-time items in there. Is there more room to go on SG&A on a go-forward basis as far as the basis point improvement year-over-year? And what do you guys think about that line going forward?

Well, we've talked about it in the past. We do believe that there is continued progress to be made in the lines of SG&A and we could set some goals for our business units to start addressing those targets. So, yes, to answer your question, there will be continued improvement in our SG&A reduction efforts.

Okay. And I didn't quite catch how you guys ran through your commercial expectations for next year and how the business broke down in Europe and North America. Would you guys mind going over that again?

Right. If you look at the commercial vehicle segment, it represents about 47% of total Stoneridge sales. And then if you look at our European business, that represents about 20% of Stoneridge sales. Almost all of that 20% is related to commercial vehicles. So that leaves about 30% for what we'll call North American commercial vehicle.

Okay. And then you had mentioned the emission control applications and some of the investments you guys have made there. Could you go through those investments and coming out of that what type of products are we talking about there?

Emission controls investments we're going to EGT sensors that we see some opportunistic growth patterns developing in that for next year and beyond. And then on the commercial vehicle segment we have really started to plan for this new award months ago, now we've gotten it and we're moving into the implementation phase now and so that should help mitigate some of the downward pressure that's going to be experienced in the market as a result of the new emissions standards.

Okay. And then one last quick one. The new contract, how do you see the cadence of that playing out? Is it weighted towards 2009 or how does that play out.

It tends to be more weighted Brandon towards 2008, 2009 but there will be some coming in late in 2007.

Okay, thanks a lot guys.

[Operator Instructions] [James Brandell of Brandell Capital].

John, back in February on the Q4 conference call for '05, you mentioned the possibility of taking some Stoneridge technology and products into some additional markets adjacent to the transportation industry. I was wondering if there's been any progress on that front? And also could you elaborate what kind of product markets you were referring to?

Well, I would have to say first, that was an objective of a little longer term than the first six months. I think our objective in this first six months and for this year has been on operational excellence and getting our plants back up to operational excellence.

As we look at taking our products into adjacent markets, the sensing market there should be applications for us in industrial markets. If you look at temperature sensors, for instance, that can go into industrial markets. We're also looking at other transportation market segments that we may go into such as a company called JLG, a leader in manufacturing telehandlers and other types of aerial lift equipment. So we can start to go into those markets and start to broaden our horizon.

But right now, I want the Company to still stay focused on driving the operational improvements.

Thank you.

There are no further questions in the queue at this time. I would like to turn the call back over to management. Please proceed.

Well, we would like to thank you. We're very pleased with our results in the second quarter. Again, I will reiterate, it is a result of an entire team working together on some focused objectives to drive value propositions into our businesses. This is a very difficult market, as you know, and I think that we're quite pleased with our performance and at the same time we know we have to continue to drive forward on this performance plan. So with that, if there are no other questions I'd like to say thank you.

Thank you for your participation in today's conference. This concludes the presentation.