Stoneridge, Inc.
Q3 2008 Earnings Call Transcript

Published: 25 Nov 2008

[Operator:]

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Stoneridge earnings conference call. My name is [Clarisa] and I will 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 call. (Operator instructions) I would now like to turn the presentation over to your host for today's call, Mr. Ken Kure. Please proceed.

[Ken Kure:]

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 has been filed with the SEC and has been posted on our Web site at www.stoneridge.com. Joining me at 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 may be forward-looking statements. Forward-looking statements are those 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. Additionally, additional information about such factors and uncertainties could cause actual results to differ and may be found in our 10-K filed under the Securities and Exchange Commission under the heading "Forward-looking Statements.” During today's call, we will also be referring to certain non-GAAP financial measures. Please see the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. John will begin the call with an update on our results and his thoughts on the remainder of 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 will then open up the call to questions. With that, I would like to turn the call over to John.

[John Corey:]

Good morning and thank you for joining us on today's call. Since our last conference call, the outlook for the markets has changed rapidly and dramatically both in North America and Europe driven by the impact of the credit shut down. Binds[2

[George Strickler:]

Thank you, John. Before we review the third quarter, I would like to share a few financial highlights in the quarter that applies to the original plan we shared with you previously into which we are executing or will execute once the equity in capital markets are more stable. Our restructuring programs announced in November 2007 continue to track the plan. As John mentioned, we have announced additional majors in the third quarter just for market downturns in North America. We are focused on cash flow, maintaining our liquidity and improving our return on invested capital. Compared to the third quarter of 2007, we have improved our gross debt to debt plus equity from 57% to 44.8%, the net debt to equity from 45% to 24.9%. We have strengthened our balance sheet to manage in the difficult market conditions. With the uncertainty in the financial markets, we have repositioned our North American and European cash investments to protect their assets. Our liquidity remains very strong. We have nearly $90 million in cash at September 30, 2008 after repurchasing nearly $17 million of our 11.5% long term bonds to the end of May of this year. Our assets backed revolving credit facility of $100 million remains un-drawn and have no restrictive performance covenants. The 11.5% long term bonds have long term maturities through May 1, of 2012. We have established hedging programs to reduce our exposure to commodity and foreign exchange rate volatility. With the continued volatility and drop in the commodity market, we are executing hedge contracts that minimize the volatility and improve the results for 2009. The cost of our manufacturing inefficiency, though still too high has continued to improve. The cost for quality in the third quarter of this year improved by $1.3 million compared to similar sales level in 2007 and $2.3 million through the year. We are targeting to continue to improve it in 2009 by $5 million. We continue to monitor the capital markets and we will pursue recapitalization opportunities when the capital markets recover. [15

[Operator:]

Ladies and gentlemen (Operator Instruction). Your first question comes from Brett Hoselton - KeyBanc Capital Mkts.

[Brett Hoselton:]

Restructuring, is this going to take you the additional and incremental restructuring, is this going to take you where you need to be? Or do you think there is more to go in 2009?

[Ken Kure:]

No, I think when we finish with this footprint that we will have then three plants in the north; we will have a one plant facility up in Canton, We will have one in Lexington which is a consolidated of Sarasota and then we will have our Portland facility which does not, and that is the kind of footprint that we envisioned going forward. Certainly, if market conditions change dramatically we might look at something different, but right now I do not see that and then the rest of our facilities in North America, of course are in all of our Mexican operations except for cross border warehouse facility in El Paso. In Europe, the opening of the Estonian facility will allow us to transfer more products into that facility and we continue to look to expanding in China. So, I think, pretty much in terms of physical relocation of products right now I think we are finished once we get through that.

[Brett Hoselton:]

On your business backlog, I believe it is $200 million over the next three or four years? As you guys have said in the past. Has that changed due to this environment, or is it still growing?

[Ken Kure:]

Well, our order book, we have forecasted our order book, but, when we win new awards the issue is of course, when the volume goes down despite the expected amount of those awards will go down too. But it will also come back up when the market goes through that down cycle and then up cycle. For instance, if you are to look at awards that are coming on screen in Europe last year based on the outlook for the European market, I think, those awards, the dollar amount of those awards would be higher just on a pure volume basis. Now, I think because of what is going in Europe it will be somewhat lower. The real question for us though is to make sure we are still winning the awards, still supporting the business because as the markets turn and come back, then we will reap the benefits of that.

[Brett Hoselton:]

And last, did you guys say that you expect North American commercial vehicle to be moderately up next year?

[Ken Kure:]

Well, I think that changes all the time. But, I mean I have been looking at the forecast that we have seen; we expect there to be a slight improvement in our internal projection and that is what we are looking at. But, we are not structuring our business for that. We want to make sure our business stays lean and looks it until we actually do see the improvement. Because, as you will recall in 2008, this year, we thought there would be an improvement over 2007 and that has not happened. Our businesses were smart enough to stay lean and stay focused, and so we did not have a significant impact from that lack of volume going through.

[Brett Hoselton:]

But beyond the forecast, speaking to your customers, you are still seeing it steady enough and moderately higher. You still expect that?

[Ken Kure:]

Well, I would tell you but the only problem with that is that the customers forecast change rather quickly. If you looked at what was for instance, if you look at Europe three months ago and Europe in the commercial vehicle market, I do not think anybody who is really staying there would be as dramatic as they have seen it now. Now, we are seeing in the last three months rapid shifts. If you look in North American market, I think the same thing can happen here or has happened. Strictly on the automotive side, look at our October sales result, they were well down, I think 25 year low and commercial vehicle also if we do not get some kind of economics stimulus past in this country moving forward, we are going to have some, when they have issues in that segment.

[Brett Hoselton:]

Thank you.

[Operator:]

Your next question comes from analyst for David Leiker – Robert W. Baird & Co., Inc.

[Analyst for David Leiker:]

A couple of quick questions here, if we look at revenue, it is probably going to fall over the next several quarters, what are some of the actions that you have been taking? What is your downside contribution margin at right now? What is some guidance there?

[Ken Kure:]

Well, it varies by business group Keith but on average, we tend to look at somewhere on the range of 20% to 30% per product line. It will vary by the different businesses and product lines.

[Analyst for David Leiker:]

If we look at SG&A going forward after some of the restructuring actions we were at about 18% run rate in the quarter that is including the design and development. And what kind of changes can we expect in that level going forward after we have implemented a lot of the restructuring actions?

[Ken Kure:]

Well, I think as we have said before, is that our SG&A to get under 10% by 2010. About a half of that was going to come from sales increase. The other half is going to come through reduction. So, we intend to spend at the same level of D&D or reduced, but we would have an improvement on percent of sales based on the volume and then the cost side on the non – I would call the discretionary SG&A – half of that would be sales growth, the other half would be the actual reductions of cost.

[Analyst for David Leiker:]

And we talked a little bit about the outlook for PST. Is there any reason to expect that that business would not slow down in 2009?

[Ken Kure:]

Well, it will really – it depends, I would say that if you wanted to be prudent that is where we are looking at to say that that business will slow because I do not think anything is not linked in this global economy. However, the markets down there continue to be fairly strong. That business would get immediate outlook because they sell right into the aftermarket so they can monitor almost on a daily basis. Their sales have started to spot the decline and they just appropriately do it. But I think it is prudent for our forecasting that we look at some impact from a slower economy.

[Analyst for David Leiker:]

I think I missed the earlier call that you were just talking about the new business backlogs. What was the numbers there?

[Ken Kure:]

I think we were talking about, we had announced previously that we had that $200 million order booking which is the largest in the company’s history and if that spreads out over the next three to four years, the question was that, how was that going to be impacted, are you seeing any cancellations of that. I said, we are not seeing any cancellation to those orders yet, but what we will see is that, depending on what the volume forecasts are that amount could be less than $200 million because it was based on projections from last year or current projections for early this year. However, if the cycle improves again, it will go back up, so, the important thing is that you won the business and that the business still that we continue to make sure that the business is profitable, profitable contribution to our overall company.

[Analyst for David Leiker:]

Then, can you quantify what sort of volume of business might be launching next year?

[Ken Kure:]

I would hesitate to do that, we believe that it would make one last pass to our budget reviews that are coming up and also go back and assess from our customers their look at it. Certainly, as you saw, one of these we have done, though and this is kind of contrary, we told our organization to try to stay ahead of where they think the customer is going to be in terms of their design and development expense. By that we mean, let us make sure that if we were working on programs that the customer is also working on those programs and not just saying they are working on a program and have no intention of launching it. As we look at things, we are seeing customers push out some of their program timing and development. So, we have already started to adjust our spending to adapt to that. So, what we are trying to do is just stay ahead of this and I think as we almost on a monthly basis, you will see customers adjusting their development efforts. You might recall that GM recently announced about two weeks ago that they were reducing some of their D&D spending in certain areas, well, we were already talking about, what the implications of that would be on our business and what we have to do. So, what we are trying to get our organization focused on is this, customers shift their priorities. Let us focus on what we can do to drive the near term revenue opportunities back into our businesses by taking those resources that were formally working on a longer lead item, put them on our shorter lead item.

[Analyst for David Leiker:]

And then the last question. Clearly your electronics program with the military has been a pretty strong driver of results here in 2008. Is this some thing that completely goes away in 2009 or do we expect to up feel an offset that would new business at launching.

[Ken Kure:]

Well, I think that when we look at some impact from the military business in 2009, we continue to see some we have won some awards as international and others that won some awards, so, we will continue to have some benefit of that in 2008 and actually impart in the international, they believe that their military business contributed about $3.5 billion to their company this year. They expect that they, and as major initial to them, they expect that next year, if the wind down in Iraq happens though, they will still be in Afghanistan, they still see continued needs for some of the vehicles that they are producing. And so, we would expect to be supporting them in that.

[Analyst for David Leiker:]

Are you guys are on number of different military products with Navistar?

[Ken Kure:]

I would not say a number, I do not want to; that is always subject to debate. We are on the most significant ones. Let us put it that way.

[Operator:]

At this time there are no further questions in the queue. I would like to turn the call back over to management for closing remarks. Please proceed.

[Ken Kure:]

I would want to thank everybody. These are very difficult times. I think the turmoil that everybody is seeing – it is just spreading out. What turned out be initial start with few high fuel prices and then the credit markets etcetera has really expanded from a North American issue to a global issue. The encouraging news here and the things that I want to talk about is we have adapted our organization, and the key now is to be fast and flexible and to be prudent and we are sitting on $90 million of cash. We have engaged our organization on a variety of dialogs, of how we look for opportunities and how we continue to generate cash and how we continue to reposition our business. I am not sure, anybody today can tell you where our markets will end up, or what will happen in the transportation sectors. What they should be telling you is how they are attempting to respond to these stuffs, I think that is what we tried to demonstrate throughout these year and going in the next that we got a mind set that allows us to quickly go after opportunities and hopefully quickly resolve the problems we have. So, I think, the company is fairly positioned in this difficult market environment and as the upturn comes, we should see a continuing improvement and I think that a tribute to the team and the employees of Stoneridge. With that I would like to thank you all for joining us on the call, and we look forward to improvements in our markets.

[Operator:]

Thank you for your participation in today’s conference. This concludes your presentation, you may not disconnect. Good day.