Stoneridge Inc (SRI) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q3 2006 Stoneridge Earnings Conference call. My name is Tony and I will be your coordinator for today. [OPERATOR INSTRUCTIONS]. I would now like to turn the call over to Mr. Greg Fritz. Please proceed, sir.

Thank you, Tony. Good morning everyone and thank you for joining us on today's call. By now you should have received our third quarter earnings release. The release will be filed with the SEC 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 on 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 reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

John will begin the call with an update on our operational improvement initiatives and his thoughts are 2007 outlook and market conditions. George will then discuss the financial details of the quarter along with our guidance for the rest of the year. After John and George have finished their forward remarks, we will then open the call to questions. With that I would like to turn the call over to John.

Good morning, thank you for joining us on today's call. I would like to briefly discuss our third quarter results, provide an update on the progress on our organizational expedient activities and discussed our expectations for 2007 in light of the 2007 emission standard change for the North America commercial vehicle market. Overall our third quarter results were solid as we reported our second consecutive year-over-year improvements in earnings per share. Our third quarter earnings were $0.19 per share compared with a loss of $0.14 in the previous year.

This quarter highlighted Stoneridge's end market diversification as we were able to report an 8.6% increase in revenues in the face of falling North American light vehicle demand. Our North American and European commercial businesses and our Brazilian joint ventures continued to perform well in the third quarter. In North America, commercial vehicle production rose 13% in the quarter, while our European commercial vehicle business experience healthy underlying demand and also benefited from new product launches. Over time, we want to build upon these diversification benefits and explore applications for our technologies in a variety of end markets to provide other avenues for profitable growth. In addition to a healthy commercial vehicle demand, our operational excellence initiatives continue the momentum established in the second quarter.

I would like to touch on some of these specific success stories across the organization. Our United Kingdom controlled [inaudible] operation posted its third consecutive quarter to quarter improvement in operating earnings. The team's focus on operations continued to show improvements in the area of later labor productivity and overhead efficiency. In addition, the operation has implemented of several material cost reduction plans which have resulted and reduce costs partially mitigating commodity price increases. While these initiatives are a positive trend, for the longer term, we need to add volume to this factory to continue its improvement.

Our two underperforming operations in Mexico have also demonstrated a substantial improvement from the prior year. Our team has implemented a broad based manufacture initiative that has resulted in significant efficiency gains. For example, our two trouble plants reported significant improvements in on-time delivery and reduction of past due orders. On average, our on-time delivery improved five full percentage points from the first quarter measure of these operations. Our past dues are under $100,000 for both plants combined. This has led to tangible improvements in our operating results. As a result, our premium freight costs have declined by 30% through the first nine months.

As I highlighted in our second quarter call, our early initiatives resulted in a 20% reduction of floor space utilization at our Monclova operation. This improvement has migrated to our Chihuahua operation where our team has also achieved a substantial reduction and plant floor space. Both plants have also improved labor productivity. Because of these improvements and the floor space reductions, we can now increase the business in these operations, further improving their performance next year. While we made good progress in our operational excellence targets, we still some areas where continued improvement is needed.

One example of this, is our slower than expected progress towards significantly lowering our inventory. The root causes of this is are in several areas from supply chain management to robust manufacturing processes. We recently started a targeted inventory initiative at selected locations to focus the efforts and produce results. The initiative will take a form similar to what was done in the manufacturing efficiencies at the Mexican operations. When we started the operational excellence initiative, it wasn't just a turnaround poorly performing operations. Our intention is to improve all of our operations. I am pleased with the progress that teams have made so far.

However, we must continue to improve our operational capabilities and performance so they are a consistent value driver to Stoneridge's overall performance. Supporting our marketing excellent initiatives in the third quarter, we formed corporate wide technology council to review and assess the merits of our company wide product development activity. Through our counsel and business reviews, we have found promising applications in the areas of vehicle emissions, various sensing applications, and software developments supporting instrumentation. These technologies offer good growth possibilities for Stoneridge in the future. Overall however, we found we're spending broadly on many individual customer applications and often not on the front end of our business.

Going forward, our intent is to allocate our resources on more focused applications where we can maintain a meaningful market share and our particular segment. One of our initiatives going forward will be to drive more the development dollars towards promising focused applications that have the potential to provide us with leading market positions and targeted applications. To this end, we will incorporate the corporate fund in next year's budget that will be utilized to invest in promising technologies of the corporate level. This initiative will not increase over spending, but will re-prioritize our spending efforts. Our development cycle is three to five years for he transition of RNB dollars will not immediately show short-term gains, but over time should improve our revenue and earnings growth.

Turning to our outlook, I am pleased to report that we are maintaining our 2006 guidance of a $0.50 to $0.60 per share, despite cutbacks in our customers North American light vehicle production schedules for the fourth quarter and elevated commodity prices that we experienced in the second and third quarter. While we anticipated some of these light vehicle production cutbacks, the current fourth quarter outlook was below our expectations. In the last few weeks, we have also seen some signs of softness in our commercial vehicle production in the fourth quarter. The market softness and commodity prices in Q4 could offset our productivity gains from operations, leading us to hold our current current guidance.

Turning to 2007, we issued guidance of earnings per share equal to our 2006 results. Underpinning this expectation are the assumptions of North American light vehicle production that approximate 2006 levels and commercial vehicle build production of 25 to 35% and stable commodity prices. In light of these microeconomic issues, our expected performance will be based on our continued drive to operational excellence across the organization ongoing cost-reduction activities and successful launches of several key products in 2007 which will significantly improve our topline in 2008 and 2009.

As we outlined our second quarter conference call, we expect our sales declined to be less than the 25 to 35% decline that is being forecast in our commercial sales as our European-based revenues and new business in North America helped mitigate the decline. Our third quarter and year-to-date results are an indication of our progress towards operational excellence across the organization. Our year-to-date earnings and operating cash flow have shown substantial improvements from our 2005 levels. While meaningful, our progress is not as quick as we would like, but we are focused on improving all aspects of Stoneridge business to ultimately improve our value.

Given the 2007 market factor I've discussed previously, we must remain focused on building upon our operational excellence progress and our cost control to ensure we are driving our earnings and generating operating cash flow that will allow us to successfully meet difficult market conditions. We are committed to build upon these improvements and drive our return on invested capital back to the 10 to 15% range. With that, I would like to turn the call over to George.

Thank you, John. Before we review the third quarter results in detail, I would like to highlight a few accomplishments in the quarter. One of the notable highlights in the quarter was the improvement in our gross margin to 22.2% after reporting a margin of below 20% in the prior year. The margin improvements are notable, despite an unfavorable $2 million impact from commodity price inflation during the quarter, which is primarily for our copper purchases.

Why we did see some volume benefit in the quarter, we also saw good improvement in our operational efficiencies relative to the prior year. The through the first 39 weeks, Stoneridge reported operating cash flow after fixed assets additions of $2.8 million. This marks an $8.2 million improvement from the prior year. One of the disappointments in the quarter relate to our working capital performance which is not acceptable levels. Our team remains focused on driving our primary working capital, receivables, inventories, less accounts payable to our $0.12 to $0.13 per dollar sale.

I would now like to cover the third quarter results in more detail and that will open up the call for questions. Third quarter revenue totaled $172.4 million which was 8.6% above the previous year. The favorable foreign currency exchange rate result in a favorable $2.1 million impact during the quarter. Light vehicle revenue declined $7.8 million to $61.7 million. The decline was attributable to a 12% decline in North America traditional domestic production, and ongoing product price reductions.

These factors were partially offset by new program launches, medium and heavy-duty truck sales totaled $94 million in the quarter, $22.3 million above the prior year with a combined improvement in North America and Europe. North American commercial vehicles demand was particularly strong ahead of the 2007 change in emissions regulations. Sales to agriculture and other markets totaled $16.6 million and were slightly below the prior year. North American revenue accounted for a 75.6% share in the third quarter revenue compared with 79.3% for the same period last year. Power distribution revenues increased 25% to $103.1 million. The primary driver behind the increase is stronger demand in the medium and heavy-duty truck segment in both North America and Europe.

Revenues for the controlled devices declined $7 million as new program revenues were offset by lower North American light vehicle builds and our traditional domestic customers and product price reductions. Our third quarter gross profit totaled $38.2 million and our corresponding gross margin was 22.2%. Our third quarter margin increased 227 basis points from the prior year level. This increase was due to higher sales volumes, relative to the prior year, and operational efficiency improvements in our U.K. operations and Mexico operations. These factors were offset by unfavorable variances in material prices and product price reductions.

While we are pleased our gross margin has improved significantly from the prior year, our organization continues to pursue material savings in all aspects of our business to mitigate the commodity price pressures we have seen, particularly in the area of copper. Sales from low cost manufacturing locations accounted for 38% of total sales in the third quarter, compared to 37% of the prior year. With our Chinese operations ramping up and other corporate wide initiatives, we expect sales from low-cost locations to grow as we relocate labor-intensive manufacturing overtime. Selling general and administrative expenses totaled $29 million in the third quarter, compared to $28.4 million in the previous year.

Excluding the impact of a favorable $1.2 million gain related to the settlement of the life insurance portion of a post-retirement benefit plan. The SG&A increase was profoundly attributable to market efforts associated with a new product launch and increase costs associated with systems implantation in Europe. Stoneridge generated third quarter benefit of $2.6 million related to reduced outflow account expenses and $700,000 related to lowering restructuring expenses. Third quarter income tax expense totaled $866,000, bringing our effective tax rate to 16%. The positive rate for the quarter is attributable to positive earnings for the quarter versus the prior-year third quarter as well as the benefit from a reduction in accrued taxes due to the expiration of certain statutes of limitation. We expect our 2006 tax rate to be between 30 and 33% for the year.

Stoneridge recognized net income of $4.4 million or $0.19 per share, compared with a loss of $0.14 per share in the prior year. Depreciation expense for the third quarter was $6.5 million, and amortization expense totaled $100,000. Earnings before interest, other income taxes, depreciation and amortization were $15.7 million for the third quarter compared to $6 million in the previous year. This brings our it year-to-date EBITDA total to $51.6 million compared to $41 million last year. Our primary working capital totaled $111.2 million in the quarter, which was down a half million from the second quarter and as John mentioned, our working capital performance is one of the disappointments in the quarter.

In particular, our inventory balances have not shown the improvement we had expected. Our result throwing are working capital reduction initiatives has not wavered. We continue to work for the goal of bringing our primary working capital balances down to $0.12 to $0.13 per dollar of sales. Operating cash flow net of fixed asset additions was a source of $3.8 million in the third quarter compared to $2 million in the previous year. Our year to date operating cash flow was a source of $2.8 million compared to a use of $5.4 million in the prior year. Capital investments totaled $6.6 million in the third quarter, mainly reflecting investments in new products and equipment.

Some significant components of our investment were in the areas of equipment for the commercial vehicle instrument panel award we announced in July and IT related investments. The at the end of the quarter we have a full availability under the $100 million revolving credit 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. An addition our quarter end cash balance totaled $46.7 million. We are comfortable with our strong liquidity metrics and will work to reduce our cost to capital going forward.

Now would like to take a minute to discuss our outlook for 2006. As mentioned by John for the full year, based on the current industry outlook, we maintained our guidance of the $0.50 to $0.60 per share. During the third quarter, our North American light vehicle customers announced production cuts as they address their interest situation. In addition, we also began to see some softness in our North American commercial bills. And as a result, we expect to see sequential decline on earnings per share as applied in our full-year guidance.

However, we do expect to record a year-over-year improvement in fourth quarter earning. For 2007, our current outlook is for results to approximate our 2006 earnings per share. The macroeconomic assumptions we have utilized including North American commercial bill decline of 25 to 35% and North America light vehicle production that is approximately flat with 2006. While we have made notable progress in the areas of operational excellence, there are many areas of opportunity moving into 2007. And Operator, I'd like to open up the call for questions at this time.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line [inaudible] with UBS Investment Bank. Please proceed.

Good morning.

Good morning.

I was wondering if he could help us. Obviously you have some head winds on the commercial truck side of the business next year. If we look at your medium and heavy truck business, it's roughly 60% of your sales, and my right? Is about two-thirds of that North America and the rest Europe?

Jeff, it's not 60% of our sales. Actually the medium and heavy truck component may have mixed that way this year, but that will fall out for the commercial side probably more like 50% of our sales for 2006. As far as North America is concerned, roughly two-thirds, that seems like a reasonable estimate for North America.

Okay. And then that North America, how much is medium and how much is heavy?

That is split roughly its more skewed toward medium for us. I think a rough estimate is about two thirds to one third medium to heavy.

Okay. And if we look at the light vehicle side of the business, when you say you expect a generally flat market, are you adjusting it at all for market share with some of your key customers, I assume?

Yes, we have taken that into consideration and looking at 2007.

Okay. And then if you just digging into 3 items that you say you plan to offset some of these headwinds with, the cost-reduction activities, the operational improvements and the new product launches, any chance you could dig into those a little bit and help us quantify, what type of savings or revenue contribution you expect? From each of those items? I just try to get a since of the give-and-take within your guidance.

What I talk about the cost side and John can talk a little bit about the market side. But on the cost side, I think you see our improvement with our operating performance, and we still have a ways to go. There are still things we can do that our operations. Were also look at curtailing some plants in North America, at least one plant, and continue our program and resourcing to low-cost locations around the globe. You've seen from recent announcements that we've realigned the company into two key groups. That was really done to better focus on our market segments, but also to improve our overall SG&A costs for the company.

We also begun to leverage our IT. I think we talked about on our first call, where we have not sort of focused on IT around a global basis. We believe we can integrate our hardware and operating systems on a global basis to become more efficient, reduce our overall costs, and then we have stepped up our emphasis in China.

We of located a senior level individual there, to really look at it as a platform for producing for the local market sourcing back into North America and Europe or other traditional markets. But our main emphasis of working and were pursuing about 20% of our spend and see what kind of activity can generate on procurement out of the China base.

The So those are sort of the broad initiatives that we start in the cost side and all have John address sort of the market. Yes, on the market side as we announced in the second quarter, we won an award that will kick off next year, so were starting work on that program right now, and that will hit probably towards the latter part of the year in North America. So that's the North American business award.

An addition, and just briefly, so we have adjusted for the market declines here. And Europe, we don't see the market's not declining and we see our product launches we had in the last year continuing to grow in those markets spaces. So we expect that from a marketing perspective were prepared for the decline in North America and we think we're going to make some additional headway in Europe.

Okay. When you go through the model and you look at 25 to 35% forecast decline according to your numbers for the North American medium and heavy-duty market, what kind of contribution margin do you assume when you're coming up with your own projections?

We don't give that up publicly, Jeff. We obviously have that but it's internal information and a little bit more sensitive.

Okay. Restructuring charges, what should we expect for Q4 and then looking into 2007?

We have no current plans for restructuring and expense of the fourth quarter. And as we indicated, will continue to explore ways to improve the overall cost position of the company. But right now we have no plans for additional restructuring expenses.

Okay. The last question. In the comments on the [inaudible] structure, you mentioned you are exploring ways to reduce the cost of your capital. Is the current plan to call your bonds when they become callable, which I think is next May?

I think the what best way to answer that is we look at our overall debt position and we'll look at ways to improve our cost to capital. And our financial performance is improving and it creates a better basis for us to really strengthen our balance sheet.

Okay. Thank you.

You're welcome.

With Robert W. Baird, your next question comes from David Leiker. Please proceed

Good morning.

Good morning.

Some number related questions here. I may have missed some of this along the way, but where do you think your tax rate ends up, the balance of this year and next year?

I think we can run at any level, David, between 30 and 33%. That's what I anticipate it will be in that range for this year and maintain that next year.

Okay. And the commercial vehicle volumes that you saw here in the quarter, how much of that can be attributed to the build rates in total as opposed to you picking up new business and that market?

Well in the third quarter, its build rate predominately. New Business awards that were talking about start next year.

Ok so that's all the volume related at the moment there?

Although in Europe, David, we have been able to add some share with new products. But when you look of the North American markets, it is exactly right, bulk of that's going to be volume.

You don't have a commercial vehicle business in Asia all yet do you?

No.

The international piece in Europe is predominately Volvo?

No, it's a mixed across a broad range of Volvo and [inaudible].

Okay. At the time that you gave your guidance, the $0.50 to $0.60 back at the end of July, how did this third quarter come relative to where you thought it was going to be at that time?

Well, we didn't give specific third quarter guidance, as you know David, but I did it's fair to say some of the public production cuts that you saw in the fourth quarter, it's fair to say that commercial vehicle volumes in the third quarter were probably above our expectations as well. If that provides you with a little bit of color.

Yes. I'm trying to gauge what changes, because at that point we were expecting third and fourth quarters to be pretty comparable and now obviously the third quarter is a lot better than the fourth quarter. I tried to figure out what changes sequentially here.

A couple would be tax rate would be one. If you look at what our tax rate implies sequentially from our third quarter level and we also noted a gain in the third quarter of $1.2 million. A onetime type game. So thos two figures probably help you a little bit looking into the fourth quarter and obviously automotive production, the significant cuts from the Big 3 were really geared more toward the fourth quarter.

If I'm doing my math right, you're still applying a fourth quarter numbers here that's right around breakeven?

I think that's what the numbers would move to, David.

Okay. I guess that's all I need right now. Thanks.

Your next question comes from Jonathan Steinmetz with Morgan Stanley. Please proceed.

Thanks, good morning everyone.

Good morning. How are you doing, Jonathan?

Doing well, a few questions. You commented sort of that in the fourth quarter you had seen some signs of weakness in the commercial vehicle side. Can you elaborate on that? Was there something greater than you had expected at this point in time?

We were unsure of how the production builds were going to play out in the fourth quarter, so we kept our forecast that we had in the third quarter. But we've recently seen as there's been some modification, not a significant decline, but a reduction of what we're going to build, what we thought we were going to build in the fourth quarter. So as the truck companies are balancing, look at their projections, they're starting to balance their production forecast but certainly not in the 25 to 35% range.

How do we think of the timing and terms of the truck production, it is decent in the first quarter, because the can still build the trucks with the old engines.? In terms of supply chain, when the expect to start to see the fall off? Would it be pretty realtime or is it before that?

I think it's probably realtime for me. We've got guys were looking at their schedule and were pretty much because of our processes tied closely into what their production cycle is.

Okay. And do you have an explicit forecast? You gave 25 to 35% expectation for medium and heavy. Given a lot of medium concentration. Do have a number on medium you could share?

What we said in the past, Jonathan, is we expect medium to be on the top end of that range, meaning the lower decline and the heavy to be a little bit larger decline next year.

Okay. And the insurance settlement, that was an insurance settlement that $1.2 million?

No, we had a curtailment of our life insurance program.

Okay, and that's a pre-tax number?

That was a pre-tax number.

Okay, thank you very much.

You're welcome.

[OPERATOR INSTRUCTIONS]. Okay, gentlemen, we have no further questions in queue.

I will I'd like to thank you all for attending the call and needless to say, you all know it's a very difficult environment that's going into the transportation markets. We're pleased with our progress to date on what we're doing and we have got continued progress to be made here. And I think, the team is focused. We're continuing to drive towards those results and conscious of what's happening in the market and are going to adjust to the change. With that, I'd like you all to thank you all for attending.

Thank you for your attendance in today's conference. This concludes our presentation. You may now disconnect. Good day.