Stoneridge Inc (SRI) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Stoneridge Fourth Quarter 2017 Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

It is now my pleasure to hand the conference over to Mr. Matt Horvath. Sir, you may begin.

Thank you, Brian. Good morning, everyone, and thank you for joining us to discuss our fourth quarter and full year results. The release and accompanying presentation 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-K, which we 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 for questions. (Operator Instructions)

With that, I will turn the call over to Jon.

Thanks, Matt, and good morning, everyone. I'm happy to join you today from Stuttgart, Germany, where last night, on behalf of Stoneridge, I had the honor and the privilege to accept 1 of 3, 2017 supplier awards given by Daimler Truck at their Annual Key Supplier event. This award is recognition from a key customer that we are providing compelling technical solutions to help ensure their success in all regions of the world.

This morning, we will review and discuss our fourth quarter and full year results. We delivered another quarter of strong financial performance, concluding a very successful year for the company.

Let me begin on Page 3. 2017 was a tremendous year for Stoneridge. We've gone through a significant amount of transformation during the year from changes in our leadership team to the acquisition of Orlaco. These changes helped accelerate and solidify our long-term strategy. Additionally, our awarded business backlog increased by 14.9% in 2017 to almost $3.5 billion.

Our customers recognize our commitment to providing high-quality solutions across the world that will lay the foundation for long-term sustainable growth. I believe that all segments are well positioned to continue to deliver profitable growth in 2018 and beyond.

Let me provide some additional detail regarding our financial performance for the year. Our 2017 sales of $824 million resulted in an adjusted gross margin of 30.3%, translating to an adjusted operating margin of 8.1%. Adjusted EPS for the year was $1.57. For comparison purposes, utilizing our 2017 adjusted tax rate in 2016, 2017 EPS improved by $0.56. This represents EPS growth of 55% on revenue growth of 18.5%. Detail on adjustments made to our reported financial information can be found in the appendix of our presentation that has been posted to our website.

This morning, we are also issuing our 2018 full year guidance for sales, margin and earnings per share. We continue to expect strong performance in 2018 across each of the segments. Bob will provide additional detail on our guidance later in this discussion.

Page 4 summarizes the improvement in our key financial metrics in both quarter-to-quarter and year-over-year periods. In addition to the strong annual results, I want to highlight another quarter of double-digit revenue growth and improved profitability relative to the fourth quarter of 2016.

Sales in the quarter increased by 20% over the same period in 2016. Adjusted EBITDA increased by 44% with adjusted EBITDA margin improving by 180 basis points, resulting in a margin of 11.3% of sales. We continue to see improvements in both our gross and operating margins with increases of 170 and 150 basis points, respectively, resulting in a fourth quarter adjusted earnings per share of $0.42. We continue to focus on margin expansion through operational efficiency and continuous improvement, and the results are clear.

Turning to Page 5. Stoneridge has undergone a tremendous transformation over the last 3 years. As we've discussed in the past, none of my 10 direct reports are either new to the company or in new roles. Having the right leadership team in place has laid the foundation for the organizational transformation that we are undergoing.

Our leadership team is comprised of seasoned professionals that know what good looks like and can work collaboratively to transform Stoneridge. Our functional leaders are driving operational efficiency, material cost savings, focused business development, a robust talent management system and a world-class financial organization to support strategies for growth driven by our segment leaders.

This transformation of the organization has helped us deliver consistent financial performance based on a culture of continuous improvement. By building the right team, we are best prepared to drive sustainable, profitable growth.

As we move forward toward our goal of top quartile financial performance relative to our peers, we will continue to ensure a solid foundation capable of delivering value to our shareholders. As Bob will discuss shortly, we will continue to focus on growth opportunities through deployment of our available capital to drive organic and inorganic growth.

We expect growth to come from expansion of our served markets, the addition of strategic technologies and focused advanced product development, building on our existing core competencies.

On Page 6, there are few keys to success in each segment that will be critical to our ability to achieve our 2018 financial goals. The midpoint of our 2018 guidance suggests sales growth of 3% as well as EBITDA margin improvement of 140 basis points to a midpoint of 13%.

As we have discussed previously, we expect to grow revenue at 2 to 3x our underlying markets over the business cycle. Based on the midpoint of our 2018 guidance, we are implying a 10.5% compound annual growth rate from 2016 to 2018. This compares to an approximately 4% compound annual growth rate in our underlying markets over the same period as defined by our weighted exposures to the global passenger car and commercial vehicle markets.

We expect our actuation and sensing product segments to continue to grow, highlighted by the launch of our soot sensor running in Europe in the first half of 2018. We expect revenue for Control Devices to remain relatively flat year-over-year, as a result of forecasted reductions to Shift-by-Wire volumes in the second half of the year. This comes prior to the ramp-up of certain Park-by-Wire programs in 2019 and 2020, which will drive additional revenue growth for the segment.

It is important to keep in mind that this comes after growth of 10% for Control Devices in 2017 relative to a reduction in the North American passenger car market of approximately 4%. We expected and planned for the ramp down in Shift-by-Wire, and have considered it in our previously disclosed backlog.

Despite relatively flat revenue for Control Devices, we expect operating income growth in the segment, and primarily due to improved operational efficiencies, resulting in reduced overhead costs and improved quality-related costs. Regarding our Electronics segment, commercial vehicle markets in North America and Europe are forecast to experience growth in 2018.

We have a number of product launches across our portfolio of products in 2018 and expect continued growth for Orlaco. In particular, 2018 will be an important year for MirrorEye as it relates to both commercialization of our retrofit solution as well as being awarded programs by our OE customers, that we'll launch in subsequent years. These factors should contribute to strong top-line performance for Electronics. Additionally, we continue to focus on engineering efficiency in all facets of our business to support the growth in this segment.

Finally, PST has had a transformational year in 2017. We expect continued success in 2018. Macroeconomic factors appear to be stabilizing, providing for top line growth and fixed cost leverage that should drive performance for the segment. Additionally, we are leveraging our strong financial position, robust product portfolio and local capabilities to drive growth in our base track and trace business, and also to support our OE commercial vehicle customers as they look to expand in Brazil.

Considering moderate economic improvement, continued fixed cost leverage, we expect both top line and bottom line performance to continue to improve for PST in 2018. Each of our segments is poised to contribute to our financial success in 2018 and beyond.

Turning to Page 7. We expect Asia to provide significant opportunities for growth for Stoneridge. In particular, China and India represent 2 of the fastest growing major vehicle markets in the world. As local customers continue to demand advanced technologies in both the passenger car and commercial vehicle segments, we feel we are well positioned to take advantage of growth opportunities in the region. Specifically, we see tremendous opportunity for growth in India, a market that we serve through our unconsolidated joint venture with Spark Minda. The joint venture of which we own 49% and is reported as equity earnings in our financial statements, primarily serves the motorcycle passenger car and commercial vehicle markets, providing sensors and electronics to our OEM customers in India.

As customers are demanding higher-tech solutions in their vehicles, we expect growth through increasing demand for our intelligent driver information systems. Additionally, more stringent emission standards will be enacted in India in April 2018, which will create requirements for additional and more complex emission systems. Our joint venture, MSIL, is well positioned to take advantage of the upcoming regulations to help our customers achieve the requirements under the new legislation.

In China, as we have discussed previously, our awarded business backlog implies a compound annual growth rate of over 20% from 2016 to 2020. Additionally, in 2017, it was a record year for new business awards in China, which will support continued growth beyond 2020. To support that level of growth and to expand our local engineering and manufacturing capabilities, we are evaluating options for a new facility in China. This facility would increase our manufacturing capacity and allow for expanded in-house R&D and product testing. This facility would not only support our short- and medium-term needs but act as a catalyst for sustainable growth in the region. In short, we are well positioned to recognize growth through increasing demand for our products in Asia as a result of both customer demand as well as regulatory changes.

Turning to Page 8. I'm pleased with our achievements in 2017. As an organization and a leadership team, we delivered results consistent with our commitment to continuous improvement in all areas. Not only have we driven sustainable profitable growth in our base business, but we are continuing to expand our core business through inorganic growth opportunities such as Orlaco and through expansion of our served geographies. 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. Turning to Slide 10. Net sales in the fourth quarter were $207.4 million, an increase of 20% relative to the fourth quarter of 2016. Adjusted operating income of $15.3 million or 7.4% of sales, represented a 50% increase over the same period last year.

Strong bottom-line performance was driven by an increase in gross profit of 28% with adjusted gross margin increasing by 170 basis points versus the fourth quarter of 2016. More specifically, Control Devices net sales of $109.6 million increased by approximately 6% quarter-over-quarter, resulting in operating income of $17.3 million or 15.8% of sales, which is an increase of 18% relative to the fourth quarter of 2016.

Electronics net sales of $84.6 million increased by 52%, resulting in adjusted operating income of $5 million or 5.9% of sales. PST's net sales of $24.4 million increased by 9%, resulting in adjusted operating income of $1.9 million or 7.6% of sales, an increase of $1.1 million relative to the same period of last year.

This morning, we are providing guidance on our 2018 financial performance. We expect continued top-line growth due to product launches in our Control Devices and Electronics segments as well as continued strong performance by PST. We are guiding 2018 revenue to a midpoint of $850 million, an increase of approximately 3.1% versus 2017.

As discussed previously, we expect continued margin improvement this year through improved operating performance. We are guiding adjusted gross margin to a midpoint of 31.5% of sales, an improvement of 120 basis points versus 2017. Similarly, we are guiding 2018 adjusted operating income to a midpoint of 9.5% relative to 8.1% last year. In addition, we are guiding adjusted EBITDA margin to a midpoint of 13% in 2018, an improvement of 140 basis points versus last year.

In 2018, our expected top line growth and continued margin expansion resulted in midpoint adjusted EPS guidance of $1.80, which does not include the positive impact of U.S. tax reform and is comparable to our 2017 performance of $1.57. We expect U.S. tax reform to reduce our effective tax rate to 20% to 25%, resulting in 2018 adjusted EPS guidance inclusive of U.S. tax reform of $1.90 to $2.10.

Page 11 summarizes the improvement in our key financial metrics in both the quarter-to-quarter and year-over-year periods specific to Control Devices. Control Devices sales increased by 6% relative to the fourth quarter of 2017. In 2017, Control Devices revenue increased by 10%, driven by strong performance in our actuation and sensing products and continued expansion in China.

Looking to 2018, we expect continued strong performance in our product lines, highlighted by the launch of our soot sensor line in Europe as well as continued growth in China. Growth outside of the U.S. will be largely offset by the expected ramp down in Shift-by-Wire volume on certain platforms later this year.

As discussed previously, we have been awarded a number of Park-by-Wire programs that will continue to provide top-line growth in 2019 and 2020. As well as continued global penetration of Control Devices products and content growth through advanced sensor systems and actuation products.

Adjusted operating income increased by 18% and operating margin increased by 160 basis points in the quarter relative to the fourth quarter of 2016. For the full year, operating income has increased by 17% and operating margin has increased by 90 basis points relative to 2016. This is a result of reduced overhead as a percentage of sales, slightly offset by increased design and development expenses related to planned launch activities and product development.

Control Devices continues to deliver strong financial performance through top-line growth and continuous improvement, leading to strong bottom line performance. Looking forward, while we expect relatively flat sales for Control Devices in 2018, we expect continued operating margin improvement and strong momentum into 2019 and beyond.

Page 12 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 2017 as well as improved performance in our legacy Electronics operations. Electronics sales increased by 52% relative to the fourth quarter of 2016, an increase of $29 million year-over-year. Electronics revenue increased by 35% or $83.3 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 fourth quarter, which brings our total earn-out liability very close to the maximum payout, a year earlier than expected.

Our legacy business continues to perform well with strong commercial vehicle volumes driving top line performance during the quarter. We expect our Electronics segment to continue to deliver growth in 2018 as forecasts are suggesting a robust commercial vehicle market in Europe and North America that will drive volume increases throughout our product portfolio. In addition, we anticipate continued strong performance in the aftermarket by Orlaco and the addition of MirrorEye retrofit revenue later this year.

Adjusted operating income increased by 82% and adjusted operating margin increased by 100 basis points in the quarter relative to the fourth quarter of 2016. For the year, operating income increased by 61% and operating margin increased by 120 basis points relative to 2016 as a result of favorable product mix, reduced overhead as a percentage of sales and reduced direct material costs.

While we will continue to incur launch costs across our product portfolio and design and development cost related to MirrorEye in 2018, we expect Electronics margins to continue to improve this year. Electronics continues to deliver solid financial performance led by a strong product portfolio, which will deliver growth above the underlying margins.

Turning to Page 13. PST had a very successful year in 2017. Quarter-over-quarter, PST has increased revenue by 9%, driven by macroeconomic stabilization as well as growth in our track and trace business. PST ended 2017 with 15% revenue growth. In addition to strong top-line growth, PST continues to drive improvement in margin. Adjusted operating margin more than doubled relative to the same period in 2016 from 3.2% to 7.6% in the current quarter, resulting in over $1 million of additional operating income.

Adjusted operating margin improved 970 basis points in 2017, resulting in adjusted operating income improvement of $8.7 million relative to last year. We remain cautiously optimistic about macroeconomic conditions in the region and expect PST to leverage revenue growth in 2018 and to improve bottom-line performance. Additionally, we continue to explore opportunities to drive growth in Brazil by leveraging our capabilities at PST to increase market penetration for our products in other segments as well as opportunities to utilize PST's capabilities to drive product development globally.

PST is growing, driving profitability and margin expansion, paying down local debt and looking for opportunities to expand. We are pleased with the segment's performance in 2017 and will carry that momentum forward to drive continued performance this year.

Turning to Slide 14. U.S. tax reform had a significant impact on our tax rate in the fourth quarter as the generally negative impact of one-time transition taxes were more than offset by the impact on our deferred tax liabilities, resulting in a substantial tax benefit in the fourth quarter. We recognized $9.1 million of net one-time tax benefits related to tax reform that resulted in a negative 46.8% tax rate in the quarter and a full year 2017 tax rate of 14.3%. Excluding the impact of tax reform, our fourth quarter tax rate was 23.5%, resulting in an annual rate of 31.6%.

Looking forward, we expect the tax reform will increase the earnings potential of the company due primarily to our significant earnings generated in the U.S. and reduction of the U.S. corporate tax rate. As I briefly mentioned previously, we expect our 2018 tax rate to be between 20% and 25%, considering the impact of U.S. tax reform.

Turning to Page 15. Our financial success in 2017 allows us to continue to improve our balance sheet, reducing our net adjusted EBITDA leverage below 1 turn. As we utilize our strong free cash flow profile to offset our outstanding debt, we are continuously looking for opportunities to deploy our available capital to drive return for our shareholders. As we have discussed in the past, you should expect us to investigate opportunities to use acquisitions to accelerate our long-term strategy through the addition of strategic technologies, through continued geographic expansion or expanding our customer base. In addition to pursuing inorganic growth opportunities in 2018, we will continue to utilize our available capital to drive organic growth through investment in our base business and investment in development activities that will drive future growth.

Turning to Page 16. As I discussed previously, this morning, we are providing guidance on our 2018 financial performance. We expect midpoint adjusted EPS improvement of $0.23 or 15% in 2018, prior to the impact of U.S. tax reform, considering the same tax rate as last year. We expect tax reform to provide additional tailwind to our earnings potential for the year, resulting in 2018 midpoint adjusted EPS guidance of $2 per share, which is an improvement of 27% relative to last year.

Top-line growth, as well as continuous improvement throughout the business, will lead to expansion of our markets throughout the P&L. We are guiding to a midpoint adjusted gross margin for the year of 31.5%, an improvement of 120 basis points over 2017. Midpoint guidance of 9.5% for adjusted operating margin and 13% for adjusted EBITDA margin implies 140 basis points of expansion in both metrics versus last year. We expect each of our segments to contribute to our 2018 improved performance and expect another strong year for Stoneridge.

Moving to Slide 17. In closing, I want to reiterate that we are pleased with our performance in the fourth quarter, in which we delivered strong results for all of our key financial metrics. Our 2018 guidance suggests continued top-line growth, coupled with margin expansion to drive strong adjusted EPS performance. In addition to the improvement in the underlying business in 2018, we expect the tax reform will have a positive impact to earnings this year. We will utilize our available capital to accelerate the growth of the business and drive shareholder return. Stoneridge is committed to driving shareholder value and that focus will remain at the forefront of everything we do.

With that, I will open the call for questions.

(Operator Instructions) And our first question will come from the line of Christopher Van Horn with B. Riley FBR.

So just want to ask about margins and what really -- what was -- what's driving this continued increase in your margin profile? If you could give us a sense of is it mix, volumes, cost reductions you're seeing in the plants? And then maybe looking out, do you see a continued opportunity for these margins to move, maybe not in a similar fashion, but certainly move higher as you broaden that mix and volume profile?

Chris, thanks for the question. And I'll -- excuse my voice, I'll try to do my best to answer some of them, and I'll let Bob step in. We see the opportunities both with mix and with performance in the plants. We've talked multiple times on these calls about what we're trying to do to sell higher value-added products, more technology and really transform the product portfolio that Stoneridge has with more and more smart products, and those things give us the opportunity to drive additional margin. Secondly, as the execution of the new launches and driving the growth which thins our fixed costs. And then third is really the focus that we have on continuous improvement, that is, driving results within our plants and driving results in the supply chain to take cost out with our supply base and just drive efficiencies. What you see -- and answer to the question on, do we see it going forward? I think you can tell based on the trend line that we had between 2016 and 2017, but then also into our guidance for 2018, that we are confident that we will continue to drive performance both on top line growth and more importantly on bottom line growth. So this isn't a one-off. We have been talking about it with regard to continuous improvement as long as I've been here. And I think the quarter-over-quarter data and the year-over-year data show it.

Yes, I will just add to what Jon said. Really, I talk about it every quarter on the call about the culture and the environment that we're building at Stoneridge around continuous improvement. So Chris, what you're going to see is just an improvement in the underlying base business as a result of really just continuing to look at our performance quarter-over-quarter and just driving improvement in everything that we do across the P&L. And then in addition to that, with the growth that we're seeing with the product portfolio as we continue to expand in smart products and more electronics, we're going to see the positive -- we're going to see the benefits of that as well.

Okay, great. And then for my follow-up, you mentioned capturing MirrorEye opportunities and it sounds like 2018 might be an inflection point for this product category, both on the retrofit and the OEM side. I just wanted to see if you'd update us on the pipeline and what the customers are saying around their timing and some of the highlights of what's going on in the pipeline for MirrorEye?

Yes. Chris, let me try to answer that. First, the -- we've been -- as we've talked about, we've been in fleet trials in the U.S. with some partner fleets for us really to try to get feedback in the marketplace and the feedback both from our OE partners as well as from the fleets has been incredibly positive. It's allowed us to continue to refine our product, but the responses have been just nothing short of tremendous. What we're seeing from a timeline perspective is that 2019, 2020 timeline from a MirrorEye implementation on OE applications, we still think is about right. We have multiple customers that we're working with in the final stages of our acute processes. Nothing to talk about there yet with regard to awards, but we have customers that we're working actively with. But what we see right now is the opportunity to expand our fleet trials with some initial retrofit activities. It won't be huge revenue, but it's a good opportunity for us to get more product into the field to learn and to start really to create a pull for this technology in the space. And I can tell you that during the discussions here in Stuttgart yesterday that the customers see MirrorEye more and more every day as a tool to help them as they're trying to make their commercial vehicles smarter. So it's not just solely a fuel economy play, it's safety play, but it's really as a tool to make their vehicles smarter.

Yes. I would just add 2 things to what Jon said. So it's important to note that on MirrorEye, we've gone over 0.5 million miles, well, on fleet trials right now on the MirrorEye system. So we've been with our fleets. We've been partnering with them for a while. And we have 0.5 million miles under our belt already, and we continue to make improvements with respect to the system. And the other thing I wanted to mention, Chris, I think it's really important for people to understand, when you look at our backlog, we estimate the OE opportunity for the market on MirrorEye at about a $250 million opportunity at full run rate, and we haven't incorporated that -- any of that into our backlog at this point in time.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. So now, it's my pleasure to hand the conference back over to Mr. Jon DeGaynor, Chief Executive Officer, for some closing comments and remarks. Sir?

I just want to thank everybody today, our investors and members of our organization for participating in today's call. I can assure all of you that our company is committed to driving shareholder value through strong operating results, profitable new business and focused deployment of our available capital. We're confident that our actions will continue to result in success in 2018 and beyond. And we look forward to talking to you again very soon.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.