Stoneridge Inc (SRI) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Stoneridge earnings conference call. I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Ken Kure. You may proceed, sir.

Good morning everyone and thank you for joining us on today's call. By now you should have received our first quarter earnings release. The release has been 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 Office; and George Strickler, our Chief Financial Officer.

Before we begin, I need to inform you that certain statements today may be forward-looking. 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 could cause actual results to differ, may be found in our 10-K filed with the SEC under the heading forward-looking statements.

During today's call we will 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 our most directly compatible GAAP measures. John will begin the call with an update of our results and his thoughts on the 2008 outlook and market conditions. 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'll then open the call to questions. With that, I'll turn the call over to John.

Good morning and thank you for joining us on today's call. I would like to provide you with an update on our progress in the first quarter of 2008 and to discuss our expectations for the remainder of the year. For the quarter, our sales of $203.1 million increased by $18.1 million or 9.8%. This is the first time the Company has reached sales of greater than $200 million in any quarter. This increase was a notable achievement in the face of a significant decline in North American light truck and commercial vehicle production. Our operating income totaled $14.1 million compared with $9.7 million in the prior year an increase of $4.4 million or 45.4%.

Our 2008 first quarter operating income included $2.5 million in restructuring charges which were the result of our Mitcheldean, United Kingdom and Sarasota, Florida restructuring efforts previously announced in October of 2007. Finally, our diluted earnings per share totaled $0.28 in the first quarter which included approximately $0.09 a share for the restructuring expenses compared with $0.21 a share in the prior year, an increase of $0.07 per share, or 33%. We are pleased to continue our progress to improve our quarter-over-quarter performance.

In regards to our market environment, the conditions in our end markets performed as expected. Production in North American commercial market declined 26% while the North American light vehicle production was down 13% at traditional domestic manufacturers. On a positive note, our largest North America commercial vehicle customers production declined approximately 15% in the first quarter which created a slightly more favorable impact for Stoneridge relative to the overall market.

Despite these challenges in North America, Stoneridge reported higher sales and earnings during the first quarter. This was attributable to our balanced end market exposures and new business wins. During the quarter we posted strong results in our European commercial vehicle business, our Brazilian joint venture continues to perform well, sales from new products improved our mix and margins in the North American market and the strength of the agricultural market continues to benefit our sales and income in the U.S. As a partial offset to our increase in our North American sales we were negatively impacted by the loss of some pressure and fluid level sensor products produced in our Sarasota facility and reduced sales and operating profits resulted from the American Axle Strike. Our sales will continue to be negatively impacted by approximately $2 million per month as long as the American Axle Strike continues.

Finally our North American sales have benefited by the continued strength in the agricultural market. Agricultural sales improved by 12.1% in the first quarter reflecting strength with a few of our key customers. Our joint venture in Brazil reported another strong quarter. Local currency revenues increased 36.5% in the quarter and our portion of equity earnings increased from $2 million in 2007 to $3.6 million in the first quarter of this year. An increase of $1.6 million or approximately 80%. Part of the U.S. earnings improvement is attributable to the strength of the Brazilian real compared to the U.S. dollar. The Brazilian real has appreciated approximately 18% against the U.S. dollar compared to the first quarter of 2007.

In addition, PST continues to report strong results in its after market business, particularly in the security products area and new business with the OEMs in Brazil. Given PST's strong pipeline of new products we continue to expect strong growth rates and results from this venture.

Our gross margins have continued to improve. In the first quarter, our gross margins reached 25.5% compared to 26% in the fourth quarter of 2007, and 23.1% in the first quarter of last year. The gross margin improvement is a result of our new business and better mix of products in North America, continued efforts to recover commodity increase, commodity cost increases in design and redesign of some of our products in North America, benefits realized from our hedging of approximately 20% of our copper requirements and some improvements in our operating efficiencies such as the reduction in scrap in our EGT product lines. As an example, our EGT production line has shown significant improvement this year with a 45% reduction in material scrap compared to last year. While our results have improved, we are still not operating with the efficiency and effectiveness levels we are striving for on a sustainable basis.

Though we have seen improvements in our operational efficiency, there is still opportunity to be gained from our operational excellence efforts. We are focusing on leaning our operations and improving our product launches which will reduce our waste, scrap, and premium freight.

While still small, our China operation continues to grow. We continue to increase penetration in the Asian market with increased sales and improved profitability and cash flow. During the quarter, we acquired a small after market company in Sweden. The acquired company will aid in expanding our Tachograph business in the Scandinavian market which represents further progress for this product line in Europe.

Our restructuring plans are on track for both Mitcheldean and Sarasota. Our first quarter restructuring effort was focused on building inventories to facilitate the move of our production line scheduled for the second, third and fourth quarters. Our inventories have increased by about $5.9 million by the end of March to facilitate production line transfers. These production line moves will be substantially completed by November for both operations. As a result, we will experience greater restructuring expenses in the second and third quarters and a lower amount in the fourth quarter.

We continue to pursue the sale of the Sarasota facility which will most likely be completed in the second half of this year. This sale is included in our previously announced restructuring cost of 9 million to $13 million for the year.

One other area of focus continues to be our inventories. Our inventories have increased by $9.2 million in the first quarter. As mentioned before, we have increased our inventories by $5.9 million due to our restructuring efforts while $3.3 million represented increases from our operations. We have stepped up our efforts to manage our inventories at lower levels, especially in our North American operations. I have challenged our organization to refocus their efforts in this area in the area of inventory and working capital management. We have substantial room for improvement in the remaining nine months.

Going forward, the macroeconomic picture continues to point towards a challenging environment in which we will operate. Particularly in our North American commercial and light vehicle businesses. The North America commercial market appears to be tracking towards the lower end of our previous expectations of a decline in the range of 25 to 35%. While many industry observers previously expected their production bottoming out in the first half of 2008 we are cautious as we have not experienced any increased orders in the North America commercial vehicle market for the second half. We will face the challenges with the same fundamental focus that has resulted in our operational progress to date. Focusing on the aspects of our business which are under our control. From my perspective, this represents the majority of what we face on a daily basis. Specifically, we will focus on our cost structure and controlling discretionary spending, achieving world class operating metrics and driving our cash flow through focused working capital management and improved profitability. From a cross structure standpoint we'll complete our restructuring initiatives by the end of the year that will reduce our manufacturing overhead structures.

The macroeconomic environment for 2008 will be challenging. Our expectation for full year earnings in the $0.75 to $0.85 per diluted share which included restructuring expense in the range of the 9 million to $13 million after the expected benefit of the Sarasota facility sale. While I am pleased with the results for the quarter, we still have opportunities in our operations for improvement and turning sales gains into improved financial performance. With that, I'd like to turn the call over to George.

Thank you, John. Before we review the first quarter, I would like to share a few financial highlights in the quarter. Our restructuring programs continue to track to plan. We are pleased with the committed effort made by Stoneridge employees at both the Sarasota, Florida and Mitcheldean U.K. facilities.

Our hedging programs are allowing us to partially reduce our exposure to commodity and currency price volatility. We have hedged approximately 20% of our projected copper buy for the year, to reduce the volatility of one of our major commodities. The cost of our manufacturing inefficiency, though still too high, has continued to improve. The first quarter of 2008 was improved by approximately $700,000, compared to the first quarter of last year.

We have commented that we want to improve our cost to capital. During the first quarter of 2008, we repurchased $11 million of our long-term bonds, it has a coupon rate of 11.5% and additional $6 million in April. We have purchased $17 million of our long-term bonds through April of this year and we will continue to pursue opportunities as the capital markets recover. We will continue to control our costs as a way to offset the lower production levels in North America to improve our financial results. And we will continue to focus on cash flow and improving our return on invested capital. As part of our restructuring program we are working to sell our Sarasota manufacturing facility which we are targeting to sell in the second half of the year.

I would now like to cover the first quarter results in more detail and then we will open up the call to questions. Revenue of $203.1 million in the first quarter represents an increase of $18.1 million, or 9.8%. Our year-over-year improvement in revenue was primarily attributable to new program sales, favorable foreign currency exchange and strong production in our European commercial vehicle businesses. These factors offset substantial declines in our North America light and commercial vehicle revenues due to production declines. For the first quarter, light vehicle revenue declined from $74 million to $70.3 million, a decrease of $3.7 million or 5%. The decline was primarily attributable to previously announced business losses of precious sensors and fluid level sensor at our Sarasota, Florida facility. But was also impacted by the 13% decline in traditional domestic production.

Medium and heavy duty truck sales totaled $104.6 million in the quarter, an increase of $19.6 million or 23% over the prior year. The significant revenue increase was driven by new government business, strong European commercial vehicle production, and favorable foreign currency exchange rates. More than offsetting the 26 decline in North America commercial vehicle production which was due to the change in emissions regulations and weakening economic conditions. Sales to agriculture and other markets totaled $28.3 million an increase of $2.3 million or 9.2% above last year. The increase in our agricultural sales was predominantly due to strong build rates at John Deere.

North American revenue accounted for 73.6 share of the first quarter revenue, compared to 71.8% for the same period last year. The percentage increase of our North America revenue reflects the growth of new business in our North America commercial markets. In the first quarter, Electronics revenues were $133.2 million, compared to $110.6 million last year. An increase of $22.6 million or 20.4%. The positive factors in the quarter were strong revenue from our North America commercial vehicle operations, due in part to new government business, strength in our European markets and currency exchange rates. Offsetting these favorable factors was the 26% decline in North America commercial vehicle production.

Revenues for Control Devices of $69.9 million declined from $74.5 million last year. A decrease of $4.6 million or 6.2%. Loss of revenue of the pressure sensor and fluid level sensor at our Sarasota facility were the main drivers behind the decrease in addition to the 13% decline in production of North America light vehicles.

Our first quarter gross profit was $51.8 million, resulting in a gross margin of 25.5%. Our gross margin increased over 200 basis points from the prior year level and was consistent with our fourth quarter 2007 gross margin. This increase was due to new business sales, and favorable sales mix relative to the prior year. Our commodity hedging programs resulted in slightly favorable offset to the first quarter copper price variances. Given the recent rise in copper prices we expected more significant impact in the second quarter, if current copper price levels remain in the current range of $3.75 to $4 per pound. Sales from low cost manufacturing locations accounted for 35% of total sales for the first quarter, compared to 36% in the prior year. Reduction is due to higher Stoneridge North America sales in the current quarter. With our China operation ramping up, and our announced production line moves from our Mitcheldean, U.K. operation to China and Estonia, and our corporatewide initiatives we expect our sales from low cost locations to grow as we relocate labor intensive manufacturing over time. We will continue to expand our presence in the three low cost manufacturing locations in Mexico, Estonia and China and our new facility in Estonia is scheduled to be complete early in the fourth quarter this year.

Selling, general and administrative expenses totaled $36.3 million in the first quarter, compared to $33.1 million in the previous year. Approximately half the increase in SG&A is due to increased design and development activities related to new product launches and business development in our European commercial vehicle units. First quarter income tax expense totaled $5.1 million, resulting in an effective tax rate of 43.9%. The higher effective tax rate is primarily attributable to restructuring costs associated with our U.K. operations, providing no tax benefit and an unfavorable impact due to expiration of the Federal Research and Development tax credit. We expect our 2008 effective tax rate to be between 38 and 41%.

Stoneridge recognized first quarter net income of 46.5 million or $0.28 per share, which included approximately $0.09 per share of restructuring charges compared with net income of $0.21 per share in the prior year. Depreciation expense for the first quarter was $7.3 million, and amortization expense totaled $100,000. For the full year, we expect depreciation and amortization to approximate $30 million. Earnings before interest, other income, taxes, depreciation and amortization were $21.5 million in the first quarter, compared to $16.9 million in the previous year. Primary working capital totaled $127 million at quarter end which increased $16.7 million from the end of the year. As a percentage of sales our working capital increased slightly from 15.3% of sales in the prior year, to 15.6% to sales in the first quarter of this year. The increase was partially due to bank build of inventory to facilitate production transfers, occurring at our Sarasota, Florida and Mitcheldean, U.K. facilities.

While we have made progress towards improving our working capital levels, our working capital balances remain above our targeted range of 12 to 13% of sales. We see significant opportunity to reduce our inventory balances in 2008 and have made this a focus area for operations. Operating cash flow net of fixed asset additions was a source of $3.1 million in the first quarter compared to a use of $11.9 million in the previous year. Our cash flow results in the first quarter represent a significant improvement over the prior year. Cash flow particularly in the areas of working capital management, will remain a focus for the remainder of the year. We continue to target primary working capital balance in the range of $0.12 to $0.13 per dollar sales. Capital investment totaled $5.5 million in the first quarter, mainly reflecting investment in new products. Some significant areas of our investment were in the emissions, sensor products and instrumentation business. For the full year we expect our capital spending to approximate $29 million.

Turning to liquidity, we currently have $83.1 million of availability under our asset based lending facility, at this time we have no borrowing drawn against our revolving credit facilities. Our quarter end cash balance totaled $88 million, compared with $54 million at the end of the first quarter of 2007. As highlighted before, we purchased $11 million of long-term bonds in the first quarter, we purchased an additional $6 million in the month of April for a total of $17 million through April the 7th. Going forward, we expect we will continue to fund our operational growth initiatives through our free cash flow generation and available cash balances.

Now I'd like to take a moment to discuss our outlook for 2008. As mentioned by John, for the full year based upon the current industry outlook, our expectations for the full year are $0.75 to $0.85 per share including restructuring charges. Our restructuring charges will be in the range of 9 million to $13 million after the expected benefit of the Sarasota facility sale. As stated in our press release, our annual guidance does not include any potential impact from an IPO transaction for our Brazilian joint venture. We have previously announced in October 2007 that our joint venture Company in Brazil had filed for an IPO transaction. Although we remain hopeful that PST can continue the IPO process this year, it is dependent on the stabilization of the global equity markets.

To date the North American macroeconomic challenges are tracking toward our expectations. Overall the outlook for our North America operations continues to trend slightly lower while our European commercial vehicle operations are tracking above expectations. Our first quarter performance reflects our ability to manage through difficult market conditions in North America, especially in the commercial truck market. We continue our work to improve our top line growth and at the same time improve our cost position with our restructuring efforts which will be substantially completed by the end of this year. These efforts are starting to be realized in our financial and operational results. Operator, I would now like to open up the call for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Catherine O'Connor from Deutsche Bank. You may proceed.

Hi, good morning.

Good morning.

Good morning, Catherine.

I just wondered, could you talk a little bit about what your expectations are for your end markets through the second half of the year and then how you think you match up versus end market performance, whether or not you have new business coming on line that would help you outperform or have business that would be rolling off where you might sort of underperform what the end market will do?

I don't think there's any business that we have that we're aware of that would roll off. Of course, if there is some contenting, that might be it. I don't think we see anything in our plans or anything from our customers that would have things rolling off that we haven't already factored in. We're looking at the markets and we're looking at North American production of cars and light trucks to be down around the 14.3 as we said before. That was below what we had put our original plans together for, our operations are working to make sure they're structured to a level of around that 14.3 million. And so I think the bigger issue is the mix and the issue for us will be the examination of what the impact of the switch from trucks, you saw GM's announcement on the GMC 900, production cuts and we're going to assess that impact on our operation because we do have product that go onto those platforms. On the commercial vehicle sector, I think as we've had indicated, we see that performing in the range that we talked about, 25 to 35% decline. One of our bigger customers, international happens to be doing slightly better than that right now. We expect that to continue so we expect to get some benefit from that. On the European side, that market still remains very robust and we're participating well, but we don't see any significant down side on that market either.

Maybe just a little bit on the military sales, I mean, I know that the first half the military sales should be stronger than the second half. Could you just give us an update on that? And then speak to whether or not the content you have for military sales, do you have content with all the OEMs or only certain OEMs whether you have contact?

We've had an initiative to expand our presence into government sales, but they include military sales and so the opportunities that we've afforded ourselves at first came on the military platforms. I don't -- we don't have a significant exposure across a broad front with many customers on that, as we've discussed before. We do think we'll see continuing emphasis on our part to expand our presence in government sales and so we would expect that maybe this year we might see some decline in the second half, based on the builds in the first half. Overall, we think that's going to be a growing channel for us.

I guess I think there are three for the vehicle I think you have the content on, I think there are three major OEMs that provide that vehicle to the U.S. Government. Are you on one, two or three of those different OE's platforms? Could you just give us some color on that?

We're with one now but we might be -- but we are always quoting others.

Okay. Great. And then in terms of the shift you were talking about, the mix shift, cars versus trucks, could you remind us what you're -- on the light vehicle side, where you are mix-wise, cars versus trucks?

I'm not sure I -- you mean in terms of percentage of sales?

Exactly.

We're about 30% pass car and light truck and we're about 50% in medium and heavy duty truck.

I guess within the -- when you were speaking to the light vehicle, I mean, in North America, when you're talking about the effect of the negative mix shift in GM taking down truck production, I was speaking more to that. Do you have a -- within the light vehicle segment, do you have what your mix is for within that segment, truck versus car?

I don't have that with me here where we split it down that level. But we are evaluating the recent releases from General Motors to understand what that potential impact could be.

Okay. And then maybe moving on to the bonds you repurchased, I guess in total you've repurchased 17 million?

That's right.

Do you have plans to continue to do that in the open market?

Well, I think it's all part of our overall capital plan that we've said before, I think our real intention is we wanted to refinance our debt but we felt that the rates were attractive and we had a limit and I think we're pretty much at that level of what we purchased so far, unless we'll re-evaluate our position.

Okay. And then I guess in terms of the Brazilian IPO filing, I know that you that can't really speak to the actual filing, but I just wondered, did you actually ever say what the use of proceeds were or were the use of proceeds stated in that filing because it's in Portuguese, obviously. So is there any way you could tell us?

For the Brazilian company, what they were going to use the proceeds for?

Yes.

The initial filing which was made does not have that requirement. We were at the point of the next filing and generally that is one of the requirements in that final filing which we never got to because of the disruption in the markets. None of that was ever disclosed. Then as you can understand, we can't really address that.

Thank you.

You're welcome.

Your next question comes from the line of Brett Hoselton from KeyBanc Capital. You may proceed.

Good morning, gentlemen.

Good morning, Brett.

George, I was hoping you could -- the sales increase in the first quarter was very substantial, much better than I expected. I'm wondering -- I know you identified some of the factors there. I was hoping you might be able to bucket some of those factors that drove the improvement in sales?

With a little more clarity in terms of -- clearly, Catherine, asked the question about the government business. That certainly had an influence in the first quarter. The European medium and heavy duty truck had a significant influence on that. So I would say it's really in those two key areas that -- and the ag markets. So those three contributed for most of the increase and then I think we did talk about the foreign currency which amounted to about $4 million. It was really wrapped in those three key areas for the top line.

As you think about -- you've got a year-over-year increase of $18 million. $4 million was due to FX. You got $14 million left. Would you bucket it evenly across those other three items, military, Europe and agriculture?

Well, I think we've talked about ag. Ag was up roughly about $3 million so that would be 3 and 7. That would be 11 and then I think you could just about split those between the two.

As you look at your guidance for 2008 and thinking about higher commodities costs, can you speak to just generally speaking what are some of the commodities that you see yourself having more exposure to in terms of risk to your guidance and what kind of thoughts have you factored into it?

Well, the primary one is really copper and we just did a reassessment of that and it's hard to tell. Part of what's driving it is the dollar. The consumption that we have in copper is our primary one. Zinc is -- we've got that fully hedged for the year. So copper could influence. We purchase about 5 million pounds a year in copper, so you can sort of swing the factor, based on the price.

As you think about your -- are you kind of assuming that copper remains at the current pricing levels?

That is built into our current forecast that we've just given a reflection of some of the copper impacts.

I guess what I'm wondering is you're not anticipating copper pricing being able to get any recoveries from your customers that might be at risk or anything along those lines?

Well, I think John mentioned that we don't get it from it direct but what we do is I think our organization is highly geared to doing design and redesign and existing products and new products and we attempt to recover it that way. We've had some success on some of our markets doing that in North America.

Thank you very much, gentlemen.

Thanks, Brett.

(OPERATOR INSTRUCTIONS) This concludes the question and answer portion of the call. I would now like to turn it over to Mr. John Corey for closing remarks.

Thank you. Well, as we said when we started here, I guess it's been now this is on our second year anniversary of the call, we put a process together and we're following that process. First and foremost in that process is the people and the team. And I think the results that you've seen us be able to produce over this period of time, are the results of that team and that team getting focused and staying paying attention to details and it's really just very basic. We focus on the operational execution, the financial execution, and the marketing execution and the team does it all. So I would like to thank team for that.

We are working in difficult markets right now. We do not continue -- we don't see any relief from those markets but I think appropriately we've been able to mitigate the impacts of those markets because some of our initiatives. We continue to see opportunities for this business both operationally and in growth areas and we will continue to focus our efforts on those things. So we're very pleased with our performance so far. We will continue to work on that and again, we would like to thank everybody for their hard work in our organization.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect, and have a wonderful day.