Stoneridge Inc (SRI) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Stoneridge Third Quarter 2017 Conference Call. (Operator Instructions) I would now like to introduce your host for today's presentation, Mr. Matt Horvath. Sir, please begin.

Great. Thank you. Good morning everyone and thank you for joining us to discuss our third quarter release and accompanying presentation as well as our 10-Q, was filed with the SEC yesterday evening and is posted on our website at www.stoneridge.com in the Investors section under Webcast & Presentations.

Joining me on today's call are Jon DeGaynor, our President and Chief Executive Officer, and Bob Krakowiak, 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-Q 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 appendix for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

After Jon and Bob have finished their formal remarks, we will then open up the call to questions. I would ask that you keep your question to a single follow-up.

With that I will turn the call over to Jon.

Thanks, Matt, and good morning everyone. Yesterday evening we released our results for the third quarter in which we delivered another quarter of strong financial performance.

Let me begin on Page 3. Each of our segments exceeded expectations for the quarter. Control Devices exhibited strong top line growth, highlighted by continued growth in China which I will discuss in additional detail later in the call.

Our Electronics segment was driven by strong performance at Orlaco as well as the ramp up of certain driver information system programs. Finally, PST continued its financial success through both top line growth and margin expansion.

In addition to our strong financial performance I want to highlight a couple of important events that occurred during the quarter. We were happy to host our inaugural Supplier Summit at our headquarters to recognize excellence by our supplier partners. Our suppliers play an integral role in Stoneridge's goal to deliver world class products to our global customers and the event recognized the best among our partners. Additionally we welcomed Bob Willig as the new President of Control Devices. Mike Sloan, the former President of the segment announced his retirement planned for early 2018. I will provide additional detail on the transition and Bob's background later on this call.

Let me provide some additional detail regarding our financial performance for the quarter. Our third quarter sales of $203.6 million resulted in an adjusted gross margin of 30.7%, translating to an adjusted operating margin of 7.7%. Adjusted EPS for the quarter was $0.36.

Gross margin, operating income and EPS had been adjusted to account for the step up in the earnout liabilities related to the acquisitions of Orlaco and PST due in part to continued strong performance by each business.

This morning, we are also increasing our 2017 full year outlook for sales and earnings per share as results of outperformance this quarter as well as our expectations of strong finish to the 2017 fiscal year. Bob will provide additional detail on our guidance later in this discussion.

Page 4 summarizes the improvement in our key financial metrics, both in the quarter-to-quarter period as well as year-to-date. In addition to the strong quarterly results I want to highlight the tremendous growth in the business year-to-date which has -- which compounds the margin expansion we have driven in each segment.

Year-to-date sales have increased by 18% over the same period in 2016. Adjusted EBITDA has increased by 38% with adjusted EBITDA margin improving by 170 basis points resulting in a margin of 11.7% of sales. We continue to see improvements in both our gross and operating margins with increases of 240 and 190 basis points respectively. We are delivering on our commitment to drive financial performance through consistent execution, cost reduction and implementation of our long-term growth strategy.

On Page 5 I would like to formally welcome Bob Willig to the team replacing Mike Sloan as President of the Control Devices segment effective the 23rd of October. Mike announced his planned retirement but will continue to support the leadership transition as well as work on other special projects with the company before we retires.

I want to take a moment to recognize Mike for his dedicated years of service, building a strong and capable business. Mike has significantly contributed to the success of Stoneridge and has positioned our Control Devices segment for continued strong performance.

I'm excited to have Bob join the team. Bob's understanding of vehicle technology, his leadership capabilities, his past experiences growing profitable businesses and his commitment to customers and commercial excellence make him a valuable addition to the Stoneridge team.

Bob's value-based leadership will build on the success of Control Devices and help prepare the business for continued success. With the addition of Bob over the last 2 years, 8 of 10 leaders that report directly to me are either new to the company or in new roles with increased responsibility.

Our leadership team has established a culture of continuous improvement, well defined goals and ability to execute as world class organization. This leadership team will drive our strategic plan forward and continue to deliver shareholder value.

Turning to Page 6. Our -- to reiterate our discussions from previous calls, we expect revenue growth to exceed our underlying markets by 2 to 3x driven by our focus on intelligence, emissions, safety and security and fuel efficiency. We continue to drive our strategy not only in our existing products and geographies but also through continued portfolio expansion and evolution focused on these key megatrends.

Moving to Slide 7. In previous calls we've highlighted technologies within the drivetrain that we believe will drive future growth opportunities. In addition to our drivetrain actuators I want to highlight a similar evolution of our axle- and suspension-based smart actuation devices.

Our Front-Axle Disconnect and smart Bar technologies combine an electromechanical actuation system with software to allow for increased fuel economy as well as improved vehicle capability. These applications are currently specific to 4x4 and high performance off-road vehicle and are supplied both through Tier 1 and Tier 2 relationships.

The next iteration of our axle- and suspension-based actuation technology is on-demand torque coupling otherwise known as E-Axle. And it's application specific to both hybrid and electric propulsion systems and drivetrains. Our actuation devices will be an integral part of these systems.

I'm pleased to announce that Stoneridge has been selected by a leading global OEM to assist in the development of an E-Axle application inclusive of our actuation technology. We expect E-Axle applications to represent a large market opportunity and continue to develop solutions for other OEM and Tier 1 applications.

As discussed later -- in the last quarter in relation to our park-by-wire, the hybrid and pure electric vehicle markets are forecasted to grow substantially over the next 5 years according to IHS. E-Axle actuation as well as our park-by-wire technology will help our customers to seamlessly transition from conventional powertrains to the electrified powertrains in the future.

Our E-Axle actuation products are one of the many exciting examples of how Stoneridge is leveraging its expertise in drivetrain actuation to develop new products and solutions that enabled the drivetrain systems of the future.

Moving to Slide 8. Our product portfolio continues to evolve as we accelerate our growth in strategic regions by addressing industry megatrends that are particularly relevant to the local market. There is no better example of the growth opportunities for our product portfolio in other geographies than in China as evidenced by a revenue growth of more than 50% year-to-date relative to the same period in 2016.

As emissions regulations continue to tighten both in legislation and enforcement we believe our exhaust and evaporative emission systems will continue to drive strong growth in this region. Additionally, as we are seeing globally -- as we are seeing globally, driver information systems are becoming increasingly complex, leading to content growth for our locally produced products.

Our recent performance in backlog of awarded business implies a compound annual growth rate of more than 20% in China from 2016 to 2020. This growth will be driven by our continued commitment to serve the Chinese markets through our Asia-for-Asia strategy, which includes both world-class manufacturing as well as strong local engineering capabilities intended to address local market needs. By continuing to focus on regional market demands and trends we are confident that Stoneridge China will provide a platform for continued above-market growth.

Turning to Page 9. I'm pleased with our achievements during the quarter. As an organization and a leadership team we continue to deliver on our commitments with a focus on continuous improvement in all areas.

Our focus on industry megatrends is driving an evolution of our product portfolio which combined with our investment in strategic geographies will help us achieve our growth commitment of 2 to 3x that of our underlying markets. We will continue to execute on our long-term strategy and drive shareholder value through strong financial performance.

With that I'll turn it over to Bob to discuss our financial results in more detail.

Thank you, Jon, and good morning, everyone. Turning to Slide 11. Net sales in the third quarter were $203.6 million, an increase of 17% relative to the third quarter of 2016 with adjusted operating income of $15.6 million or 7.7% of sales, representing a 32% increase over the same period in 2016.

Strong bottom line performance was driven by an increase in gross profit of 26% with adjusted gross margin increasing by 210 basis points over Q3 2016.

More specifically, Control Devices net sales of $108 million increased by approximately 4% quarter-over-quarter, resulting in operating income of $16.2 million or 15.1% of sales which is an increase of 6% relative to the third quarter of 2016.

Electronics net sales of $80.3 million increased by 40%, resulting in adjusted operating income of $6.7 million or 8.4% of sales. PST's net sales of $25.5 million increased by 14%, resulting in adjusted operating income of $1.5 million or 5.8% of sales, which is an increase of $1.5 million relative to the same period last year when this segment was roughly breakeven.

This morning we are providing revised guidance on our 2017 financial performance considering our year-to-date performance and revised view for the remainder of the year. In addition to narrowing the ranges for both metrics we are increasing the midpoint of our sales guidance by $12.5 million and increasing the midpoint of our adjusted EPS guidance by $0.07.

Page 12 summarizes the improvement in our key financial metrics in both the quarter-to-quarter period as well as year-to-date specific to Control Devices. Control Devices sales increased by 4% relative to the third quarter of 2016 despite quarter-over-quarter reduction in U.S. light-vehicle production of 13.6%.

Year-to-date Control Devices revenue has increased by 12% while U.S. production has declined by approximately 7.8% relative to the same period last year. As we discussed last quarter, while Control Devices primary end market exposure is to North American passenger car and light-truck platforms, more than half of that exposure is to light truck, crossover and SUV platforms that are outperforming the passenger car market.

As Jon discussed earlier, our existing axel- and suspension-actuation products are just some of the many products that we supply on light trucks, crossover and SUV platforms. In addition to the strength of the platforms to which we supply, growth in the Control Devices segment can be attributed to content growth related to our actuation systems and advanced emission sensing products. Additionally, growth in the emission sensing market in China, as Jon mentioned earlier, is accelerating growth for this segment.

Adjusted operating income increased by 6% and operating margin increased by 40 basis points in the quarter relative to the third quarter of 2016. Year-to-date operating income has increased by 17% and operating margin has increased by 70 basis points relative to the same period in 2016 primarily as a result of reduced overhead as a percentage of sales.

Control Devices continues to deliver strong financial performance through top line growth that outpaces the segment's underlying market and continuous improvement, leading to improved bottom line performance.

Page 13 highlights the substantial time-over-time growth in both revenue and adjusted operating income in our Electronics segment, driven by both our acquisition of Orlaco in the first quarter of this year as well as improved performance in our legacy electronics operations.

Electronics sales increased by 40% relative to the third quarter of 2016, an increase of $23 million. Year-to-date Electronics revenue has increased by 30% or $54.4 million. Orlaco continues to outperform our expectations as we again reported a relatively sizable step up in the fair value of the earn-out liability in the third quarter.

Our legacy business continues to perform well with new driver information system product launches driving growth during the quarter. Adjusted operating income increased by 80% and adjusted operating margin increased by 190 basis points in the quarter relative to the third quarter of 2016.

Year-to-date operating income has increased by 56% and operating margin has increased by 130 basis points relative to the same period in 2016 as a result of favorable product mix, reduced overhead as a percentage of sales and reduced direct material costs. Electronics continues to deliver strong financial performance led by a strong existing product portfolio which remains a platform for continued growth.

Turning to Page 14. PST has continued its trend delivering 14% revenue growth over the third quarter of 2016 and 17% improvement year-to-date. Our business has historically exhibited strong correlation with sales in the local light-vehicle and motorcycle markets.

We are beginning to see positive indicators in these markets which is driving top line growth at PST. We remain cautiously optimistic that stability in the underlying markets will continue.

In addition to strong top line growth PST leadership continues to drive improvement in margin. Adjusted operating margin improved from breakeven in the third quarter of 2016 to 5.8% in the current quarter. Adjusted operating margin has improved 11.7 percentage points year-to-date compared with the same period in 2016, resulting in adjusted operating income improvement of $7.6 million.

We are utilizing the cash flow generated at PST to reduce our local debt. Currently we have $9.5 million of external debt which has been reduced by more than 40% since the beginning of 2017.

We expect to continue to utilize the cash generated by PST to reduce our local, external debt to not only improve PST's leverage profile but also to improve PST's flexibility to strategically invest in growth opportunities. We are encouraged by the performance of PST and pleased with the segment's ability to generate cash.

Moving to Slide 15. This morning we are increasing our full year midpoint outlook for sales and EPS. It should be noted that current IHS and LMC forecasts are suggesting that production levels for U.S. passenger cars and European commercial vehicles have been reduced relative to the view last quarter.

That said, we are revising our sales guidance up to a midpoint of $817.5 million implying a midpoint-to-midpoint increase in our guidance of $12.5 million reflecting our outperformance of expectations in this quarter and current views for the remainder of 2017.

We expect to outperform the growth in our underlying markets and continue to drive margin expansion throughout the business driving both top- and bottom-line performance. As such, in addition to increasing our sales guidance, we are also revising the midpoint of our full year EPS guidance up by $0.07 to $1.51 to reflect both current quarter outperformance and our expectations for a strong close to the 2017 fiscal year. Overall, we expect continued strong financial performance across the business for the remainder of 2017.

Moving to Slide 16. In closing I want to reiterate that we are pleased with our third quarter performance. We continue to drive growth and profitability across each segment as we position Stoneridge to achieve top quartile financial performance relative to our peer group of automotive suppliers with revenue below $2 billion.

We have increased our full year 2017 guidance for sales and EPS considering our strong performance to-date and our revised view for the remainder of 2017. We are confident that we will continue to deliver on our commitments, resulting in profitable growth at each segment and value creation for our shareholders.

Thank you for joining us today. Now I would like to open up the call for any questions.

(Operator Instructions) Our first question or comment comes from the line of Brian Colley from Stephens, Inc.

So you guys are seeing pretty solid margin improvement across the business this year and I was just wondering if you could talk about how we should be thinking about margins as we look forward moving into 2018 and kind of where you see the most room for improvement.

So Brian, thank you for the question. And this is Bob. In terms of where we see margin going, we will be providing some guidance at the Deutsche Bank Conference in January. So I'm not going to say anything specifically relative to margin performance at this point in time, but we will continue to say what we've said all along that we are -- we're building an organization that is absolutely focused on continuous improvement. And if you look at the margin enhancement that we've achieved as a company, we're seeing it really across the board in all the categories and that's the change we're leading. We're seeing it on the revenue side, we're seeing it on the cost side within sourcing, within manufacturing, productivity programs and improved quality. We also -- during the quarter we had some -- on the SG&A -- on the SG&A front we had some one-timers during the third quarter that impacted us. We had an ERP startup in North America, so we had some startup costs that impacted us during the third quarter. And then in addition to that when you go through the Q you'll see that we had a warranty settlement from product that we produced over 10 years ago. That was a little over $0.5 million. In addition to that we have adjusted our incentive compensation because of the larger-than-average movement in the – positive movement in the share price during the quarter. So you see a slight uptick in the SG&A line for the quarter, but that's really not indicative of where the run rate is. We had a number of kind of one-timers in that during the quarter that impacted that.

And then just looking at your commentary on the driver information systems in China, I thought that was interesting. I was wondering if you could just elaborate on what exactly that is, and you know, what the opportunity looks like there?

Thanks Brian. It's Jon. What we're seeing both on the passenger car side as well as in the commercial vehicle side is you're seeing really the maturation of the Chinese market going from -- with regard to commercial vehicles going from really do they have a truck to what they expect with regard to a commercial vehicle. So the level of driver interface, the level of performance of the vehicle is really becoming more and more toward a global standard. And as we see that happen then that creates greater opportunities for us both on the Electronics side as well as on the Control Devices side to help the OEs and the engine manufacturers there really deliver world-class product in that market.

Our next question or comment comes from the line of Christopher Van Horn from B. Riley FBR.

I was hoping to get some commentary on shift-by-wire and what the product category look like during the quarter and maybe what's going on in the pipeline for that product?

Well, Chris, I mean, we -- obviously we don't break out the product categories. As we've talked to you before. Some of it comes down to our end customers' mix between their passenger cars and light trucks. So that impacts us. But in the quarter nothing that was unforeseen with regard to that mix. And again, just to remind everybody, passenger car -- North American passenger car is less than 50% of our total sales. And of that less than 50% SUVs and trucks represent more than half of that. So our exposure as the market moves and decides what they're doing with regard to light trucks versus passenger car, it may impact the take rate for shift-by-wire but it's an opportunity for us.

Yes. So, Chris, one thing -- this is Bob. One thing I like to add to that, I think one thing that's important for everyone to know is both of our shift-by-wire programs from the launch perspective, I mean, we've -- in terms of the full impact of the run rate for the launch, we have -- we've gone past that period where we've been 12 months running at the full run rate. So in terms of the growth that we've seen in our revenue it's not -- during the quarter it's not a result of a -- of shift-by-wire programs where we haven't seen the impact of full annualization. That's already occurred. So I think it's important to point that out.

But I'll just jump back in. As we've talked to you -- talked to the, our investors before, shift-by-wire is really not just a couple of programs, it becomes a platform for other things. So as our customers transition from conventional drivetrains to more electrified drivetrains the park-by-wire activities that we have and some of the other actuation like we mentioned today E-Axle, some of the other actuation systems that we're selling really are built on the success that we've had with regard to shift-by-wire and the trust that we've built with our customers that we can provide them with a viable, high-quality, high-performance solution. So shift-by-wire is really a platform for future programs.

Okay, great. Thanks for the color there. And then you've obviously had significant margin expansion and not to dwell too hard on that, but are margins benefiting a little bit from the actual production cuts in passenger car? Because I imagined content per vehicle might be higher on a truck or an SUV or CUV and maybe some of these production cuts are cutting some lower margin business. It's coming from off base there.

Yes. For us, Chris, that sort of mix we don't really see that as a benefit one versus the other. Our margin expansion, beyond the ramp up of certain products, our margin expansion is really driven by –- as we talk about, is really driven by our continuous improvement focus in our -- improvement in all of our plans and our improvement in the supply chain. So this is not about something that's happening inorganically to us. It's about the organic improvements within our total supply chain, within our engineering, within our execution as an organization that drive that performance, not a mix-related activity.

And then just on follow-on if you don't mind. With the kind of expansion of electric vehicle offerings or the content that you'll be able to get, I imagine that's higher-margin type content. Do you -- is this becoming kind of space race, if you will, of competitors in this or do you guys kind of have an incumbent advantage in your view of getting on to more of these electric vehicles?

Well, so what I would say to you, and it goes back to the answer I gave you with regard to shift-by-wire. Certainly we have very capable competitors. And we work very hard with our customers to demonstrate our capabilities. And the successful launch of shift-by-wire helps solidify that. The awards that we've won from customers from a quality perspective show that. So what we're doing is trying to get further upstream with our customers working with their advanced drivetrain development activities as to make sure that the solutions that we're providing anticipate the needs that they have. So, yes, it's a -- it's more technology, it's further upfront but our organization is well positioned for that and it's part of the transformation that Stoneridge has gone through, which is getting closer to the customers, being further upfront from a development perspective and having those solutions ready to go before the customers need them.

(Operator Instructions) Our next question or comment comes from the line of Irina Hodakovsky from KeyBanc.

A question for you guys on [PST] operations. You've covered that in your opening remarks quite a bit. Just wondering if you can perhaps talk about the outlook there. We know that that market has been doing good, automotive demand is going up. However, in terms of the outlook and what do you think is driving the momentum, economic conditions, employment? And then as a follow up to that, if you do expect this momentum -- positive momentum to continue, historically PST margins were higher than the rest of the company's average. Would you expect contribution margins from that business to be higher now than the company average, or is there any reason to believe that that would not play out?

PST is, obviously it's been a source of a lot of conversations over my entire tenure here and it's nice to be able to talk about the growth at PST and really the future outlook for PST. So just to remind everybody that while that is primarily an aftermarket and a OE service business, our revenue growth there is highly correlated with the market expansion, so be it pass car, commercial vehicle or the motorcycle space. So as we see the economy in Brazil and really in all of South America start to improve, we expect to grow with that. So that's piece number one. Secondly, the cost cutting and the efficiency improvements that have been driven in PST over the last 2 years and particularly over the last 18 months give us the ability as we drive top line to really drive margin expansion and drive overall margin much faster than we see the top line growth. So you'll continue to see quarter-over-quarter and the year-over-year progress that you see shown here in Q3, you'll continue to see that going forward and we're very confident in PST's future.

Yes, Irina, I would just add that -- I mean, in summary, the conversation with PST has transitioned from what are we doing about PST to PST is fixed, PST is becoming a significant contributor to the company. And we're very – again, we haven't assumed really big improvements in the macroeconomic environment in Brazil. But we feel, again, looking at our -- looking at the culture here that we're building a continuous improvement and still have significant opportunity to continue to add significant amount of value down in PST. So we're very excited about that.

Thank you. I'm showing no additional audio questions in the queue at this time. I would like to like to turn the conference back over to Mr. DeGaynor for any closing remarks.

Thanks very much. And thank you all for participating in today's call. Just want to remind everyone that our next investor event will be at the Stephens Conference in New York on Tuesday, November 7, which will be available via webcast. In closing, I can assure you that our company is committed to continue driving shareholder value through strong operating results, profitable new business and focused deployment of our available capital. We are confident that our actions will result in continued success in 2017 and beyond. Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.