Stoneridge Inc (SRI) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2005 Stoneridge earnings conference call. My name is Anthony and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]. I would now like to turn the presentation over to your host for today's call, Mr. Greg Fritz, Director of Corporate Finance and Investor Relations. Please proceed.

Thank you, Anthony. And good morning, everyone. By now you should have received our fourth 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 Officer, and George Strickler, our Chief Financial Officer.

Before we begin I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties and actual results may differ materially. Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-K filed with the Securities and Exchange Commission under the heading "Forward-Looking Statements." During today's call, we will also be referring to certain non-GAAP financial measures. Please see the "Investor Relations" section of our website for reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. For the remainder of the call, John will provide you his initial thoughts on the business, and George will also provide an overview and 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.

Good morning, everyone. And thank you for joining us this morning. Given this is our first conference call together, I will take a few moments to give you some of my initial impressions about the Company after my first month on the job. Stoneridge has leveragable strengths from its products to its people. Over time, we will demonstrate the results which will validate this statement. From a product focus standpoint, the Company is committed to the electronics component of the Vehicle Architecture, and this is one of the fastest growing segments in the transportation industry. This focus can provide the Company with the ability to add value to our customers through differentiated products and systems. We also enjoy end market diversification with 57% of our sales to the Commercial Vehicles segment, and 43% to the Light Vehicle segment. This inherent diversification is a key differentiating point for Stoneridge relative to some of our competitors. For the most part, I've been pleased by the quality of the people throughout the organization. We are fortunate to have a strong team to work with to accomplish our goals, and finally, there are clear centers for excellence throughout the organization, which we can build upon.

Now, having just said what I have said, the question is, Why has the Company's performance faltered? Well, first, they're in a market dynamics, which confronted many automotive suppliers. These are share loss and volume erosion from the former big three, and this effect was particularly acute in the light and the full-size and mid-sized sports utility segments where Stoneridge maintains a high content. Compounding the volume erosion was the financial distress in this sector, which led to several bankruptcy filings by our customers. Another factor has been the rapid raw material escalations that all suppliers have experienced over the past two years. From steel to resins, the cost increases overwhelm many purchasing departments, including Stoneridge's ability to control and offset. These market dynamics are not easy to change over the short-term, but we can influence some, such as, materials and over the longer term we can change them through product redesign and customer realignment.

Second, there are the management dynamics, and most of all of the problems at Stoneridge fall in this category. Many Stoneridge employees and operations had solid performance in 2005, however, these were overshadowed by poor operational execution in a few areas. The market dynamics, and more importantly the operational execution -- executional failures resulted in the financial deterioration of 2005. So where does that leave us for 2006 and beyond? Looking forward, our road map to success will be based on four areas of excellence, and these are operational, financial, marketing, and personal. While there's no single point that is not dependent on the other, operational excellence will be our predominant focus in 2006 because we can't return to our prior performance without all of Stoneridge achieving operational excellence. Some units are well along in this goal, others have a long way to go. We will be focusing on the ones that are further behind in 2006.

We must reverse the issues that we have experienced in 2005 that weighted our operating performance and financial results. In the first few weeks, we have identified five focused facilities for immediate improvement. We will operate on the basis of first contain, then control, and then improve at each of these locations. We will achieve this improvement through immediate actions that will include selectively deploying talented individuals from across the organization to address key issues in the underperforming facilities. We will also use outside resources as necessary if they can enhance the speed of implementation. We have several best practices in Stoneridge, which we will transfer across the operation and organizations to insure that we are fully utilizing the talents and successes of our process leaders, and the organization will be aligned based on achieving results, not on process. We will also prioritize for the greatest impact in terms of operational and financial improvement the actions that we'll take, and we'll balance these against the time and resources required. Finally, I will stay personally involved with all of these initiatives to expedite decision making and monitoring. I would like to emphasize the fact that in my assessment of our operational challenges over the last several weeks I have seen nothing that cannot be addressed and fixed. Through focussed and disciplined efforts I believe we can put many of these operational issues behind us in 2006.

Financial excellence is superior cash flow, profitability, and balance sheet management that's better than our competitors. Our immediate focus will be on cost control and achieving the benefits from operational improvements. Stoneridge has historically generated above-average margins and cash flow, and we expect to bring the Company's performance back to these levels over time. As George will discuss in more detail, there are many areas where we have identified -- many areas we have identified over the past several weeks for cost improvement. In addition, we will be examining our capital, and design and development investment for efficiency gains. Those investments in capital, and design and development will be the key to drive our topline growth and to develop a pipeline of new products. One of the bright areas in 2005 is that we have booked future business at a record rate. We must continue to do this to offset the uncertainties of [decontenting,] early end-of-life, and other volume declines, which are difficult to forecast. In reviewing our capital investment programs, we will insure that we are maximizing our equipment utilization across the enterprise, designing products and equipment for common usage where possible, and evaluating the labor and capital trade-offs in our investment process. To help us achieve our financial excellence goals, we have reorganized our financial reporting structure to enhance the speed and implementation of these initiatives. Our division finance organizations now report directly to George. In addition, George will assume the oversight role for our purchasing and IT counsels. We believe that these actions will allow us and the organization to progress more rapidly and to leverage benefits across the enterprise. In addition, with senior management leadership and involvement, we will focus on the critical initiatives for purchasing and IT.

As I mentioned previously, our customer and market diversification was the core assets of Stoneridge relative to our peer group. However, I do believe that we must improve this diversification over time. Within our automotive segments, our revenues do not reflect the current realities of the market place. Geographically, we lack the substantial presence in the European and Asia-Pacific regions. Currently we generate approximately 21% of our revenue from countries outside North America, compared to 75% of worldwide light vehicle production. Our exposure to the North American market must be expanded beyond the traditional domestic manufacturers. We will also explore the application of our technologies outside the automotive industry, if it is possible to leverage our investment and improve returns. To achieve this marketing excellence, we will sharpen our focus on redefining markets and opportunities and challenge -- and channeling our investment accordingly. We must select our markets based on growth characteristics, alignment with our core competencies, and our ability to -- or our ability to obtain the required core competency. Our resources must be -- must concentrate in those areas where we can meet or beat the competition.

Longer term, I will challenge the organization to look beyond traditional markets, customers, and technologies. In reviewing applications for our products and technologies, we need to look at markets and product adjacencies for possible low-cost entry and investment. Business development must focus on targeting customers based on their ability to win, not our historical relationship with a customer. We have a great interest in helping our customers succeed in the marketplace, as our success is directly tied to their success. As you can probably tell, we have significant work ahead of us as a management team. From what I've seen so far, I am confident the team is up to the challenge. We need to fix the businesses that are not up to the levels of our performance. We are looking forward to bringing the organization back to operational, financial, and market excellence. For 2006, our primary focus will be on operational excellence because it is the foundation for our financial end marketing excellence. With that, I would like to turn the call over to George.

Thank you, John. Before we cover the 2005 results in detail, I would like to provide you with my perspective on the opportunities at Stoneridge. As John touched upon in his comments, we have strengths with our decentralized businesses in terms of people, product, technology, strong customer base that has been fostered by an entrepreneurial spirit. And we do not want to lose the great foundation that has been created over the years, but we will focus on leveraging the organization to improve our profitability and maximize our returns. We will focus on some very immediate areas to leverage the corporation to improve profitability, reduce our cost, improve returns, return cash flow to positive, and approve return investment of capital to the 10 to 15% range. These actions will be taken with the thought to improve our financial results on a longer term sustainable basis. One of the key leverage points that I would envision for Stoneridge is through our direct purchase of raw materials and services. Raw materials represent slightly less than 50% of our total cost. We will work with our suppliers to improve our cost and materials, while maintaining quality and improving service levels. We will pursue sourcing on a global basis. Our suppliers can assist us to improve designs, and substitute materials to lower costs. We can improve service levels while reducing cost and lowering inventory levels with programs, such as, vendor-managed inventory.

Our SG&A will be an area of focus. Our design and development expense has been increasing over the past several years. We need to evaluate our expenditures to guarantee that we'll add to our topline on a profitable basis. This will improve our return on invested capital as we will evaluate our expenditures for both design and development and capital. We will manage our discretionary SG&A expense to insure the expenditures add value, or we will reduce the cost. We will pursue opportunities to improve our cost to capital. We are developing a global cash management plan to optimize the use of our global cash in coordination with a global tax plan. Our support efforts for such things as procurement and information technology will be assessed for operational efficiency, and improving the performance of our businesses. Capital expenditures in design and development will be measured on a return on investment basis. Our 2005 performance on return on invested capital was slightly less than 5%. We need to improve our ROIC in the range of 10 to 15%, restoring it to historical levels at Stoneridge. We had a negative cash flow in 2005. We need to improve our profitability, working capital, and cash flow for the businesses that John mentioned earlier. We'll focus on our working capital as one of the ways to improve cash flow in 2006. Our working capital is currently running at $0.15 per $1 a sell for the Company. To become a first class supplier we need to shoot for the range of $0.12 to $0.13 per $1 a sell.

While turning to the 2005 results, we finished the year with earnings per share of $0.04 compared to our guidance of $0.10 to $0.20 per share. The most significant impact relative to our previous guidance was our effective tax rate. Our full year effective tax rate was 79%, well-above our previous guidance of 50%. The differential resulted in an unfavorable earnings per share impact of $0.06 per share. And I will discuss the tax rate in more detail in a moment. Fourth quarter revenue of 151.7 million was 11.7 million below the year-ago period, and softness in both the North America light vehicle market and the medium duty truck market drove the decline. Light vehicle revenue declined 4.1 million to 69.4 million. The decline was attributable to a 1% decrease in North America traditional domestic production, as well as price reductions. Medium and heavy duty truck sales totaled 62.9 million in the quarter, 7.1 million below the prior year. The decline was predominantly attributable to a 5% decline in production and our largest customer during the quarter, and lower revenue from a product phaseout in Europe. Sales to agricultural and other markets totaled 19.5 million, compared to 20 million in the prior year. North America revenue accounted for 78.5% of fourth quarter revenue, compared to 78.2% for the same period in 2004. And our Power Distribution revenues decreased 10% to 77.5 million. Decreased commercial vehicle production and price reduction is in a product phaseout where the primary factor is in the decrease. In Control Devices, revenues for the control devices declined 3.3 million on lower traditional domestic production and price reductions.

Our gross profit declined 11.9 million in the fourth quarter to 30 million. Margins were equal to the third quarter level despite lower volume. On a year-over-year basis, decline in our gross profit is primarily attributable to lower revenue, operating inefficiencies, product price reductions, and unfavorable raw material variances. We we will focus on the areas of direct material procurement and operational excellence to improve our gross margin going forward. Sales from low cost manufacturing locations accounted for 37% of total sales in the fourth quarter. Our selling, general, and administrative expenses totaled 28.1 million in the fourth quarter, compared to 32.4 million in the previous year. Lower design and development spending and reduced Sarbanes-Oxley compliance cost accounted for the majority of the decline.

Our previous year's design and development spending include heavy spending to achieve the EU certification of our Next-generation Digital Tachograph. Given we achieved this certification last spring, we did not incur these costs in the fourth quarter. Stoneridge incurred fourth quarter charges of approximately $100,000 related to our previously announced restructuring plan. For the full year, we incurred 4.8 million related to our restructuring actions. These actions were taken to improve the manufacturing overcapacity in our U.K. operations, and will benefit our 2006 results by $5 million. However, as John discussed, we will continue to evaluate actions to improve operational efficiency and other ways to improve profitability beyond our current restructuring plan. The Company recognized a tax benefit of $180,000 in the fourth quarter, to bring our effective tax rate to zero. For the full year our effective tax rate was 79%, well-above our previous guidance of approximately 50%. Because of our continued losses in our U.K. operation we were required to establish a valuation allowance to offset certain deferred tax assets that were established in prior years. We will recognize the tax benefits in future years as our U.K. operation makes money. And we expect our 2006 tax rate to return to a more normal rate between 35 and 40%.

For the fourth quarter, Stoneridge recognized a net loss of $3 million, or $0.13 per share. For the full year, net income totaled $933,000, or $0.04 per diluted share. Depreciation expense for the fourth quarter and full year was 6.1 million, and 25.9 million respectively. Earnings before interest, other income, taxes, depreciation and amortization was 8 million for the fourth quarter, and 49 million for the full year. Working capital excluding cash and the current portion of long-term debt finished the year at 75.9 million, up 2.8 million from the third quarter balance of 73.1 million. The higher levels of working capital were primarily attributable to lower accounts payable and accrued expense balances at year end. As I mentioned in my earlier comments we believe there are opportunities to reduce the amount of working capital employed in the future. Operating cash flow net of fixed asset additions was a use of 4.5 million in the fourth quarter, compared to a source of 14.6 million in the prior year. Lower net income, higher levels of working capital, and increased capital spending all contributed to the year-over-year decline. Capital investment totaled 8 million in the fourth quarter reflecting investment in new products. Some significant components in our investment were in the area of emission sensors and solenoids, safety-related sensors and speed sensors. Our capital structure is currently comprised of 200 million of Senior Notes due in 2012, and an undrawn resolving credit facility of $100 million. In addition, our year-end cash balance totaled $40.8 million. We are comfortable with our strong liquidity metrics, and we'll work to reduce our cost of capital going forward.

Now, I would like to take a moment to discuss our outlook for 2006. For the full year, based on our current industry outlook, we expect to earn between $0.30 to $0.40 per share. And this compares with our 2005 results of $0.04 per share. In closing, I want to underscore our focus of improving our performance going forward. As John noted earlier the organization is going to be intensely focused on restoring our financial performance. Our two areas of near-term focus will be cost control and working capital management. We believe that improving our return of invested capital is a key metric to drive value for all of our stakeholders. With that, I'd like to open up the call for any questions that you may have.

Ladies and gentlemen, [OPERATOR INSTRUCTIONS]. Our first question comes from Brett Hoselton from KeyBanc Capital Markets. Please proceed.

Hey, guys, this is Brandon Ferro at KeyBanc Capital Markets.

Good morning, Brett [sic].

I had a question. You guys talked about the U.K., and obviously, I guess that's an issue. Could you guys kind of give some more detail on how things are progressing there? And I think in the third quarter you had talked about some of the inefficiencies peaking, and potentially margins, or gross margins could improve going into the end of the year, and we kind of saw a decline there. I was wondering what you are looking for there going forward and some of the swing factors that might have effected that?

Well, I'll start with the U.K. operation in that, that is an operation that we'll define as the contain and the control. I think we're past the contain state in that. I don't think there will be further deteriorations from the operations. But we're still in the control state, which is we still have some improvements that we have to make in that operation before, I think, it -- before I think we're clearly out of the woods there.

Now, I will say that operation has a combination two of things. It's a combination of volume, and then it's a combination of operational and efficiencies. And so we will have to address both of those, but first it will be the operational and inefficiencies. For 2006, again, that will be one of the operations that's targeted to receive additional attention. Now, I will say from the early outlook that we have seen, that the management team is -- has tasked themselves with the right challenges to turn that business around.

Okay. And what's your kind of directional outlook for gross margins? Do you think -- is there a potential for any improvement there going forward? How should we think about that?

Well, I would prefer to hold off on that question until I visit that operation. That's an operation I haven't visited. I would like to get to the floor and see what is going on in the floor to make sure that what they're telling me is indeed accurate. I think that, as far as that goes, I think, George, if you want to comment on that.

Well, for the whole Company in total, we are looking for improved margins for next year, but clearly SPL, our U.K. operation is one that they've stabilized. As you know, we consolidated three plants into one. Their margins were adversely effected by the restructuring and the additionally costs from the inefficiency. So we are anticipating improvement in margins for this year. And, in fact, after January, it's starting to show trends in that light. I think one of the key things is what John mentioned is the volume piece of ramping up under the new GM900 program is important. As that unfolds out, we'll add some volume and we'll also support the operation and improve margins.

Okay. Yes, that's good. And could you, I guess, give some background on the harness production, the transition to Mexico, and are you guys seeing an abatement of some of the turnover in training issues you had had down there a while back?

Well, I would just simply -- we have visited those operations, and so I have been down on the floor in those operations, and I'm not at all satisfied with what the progress is that we've made down there. Those will be a couple of operations that get some of our quick hit teams to go down there and improve those processes.

The turnover that we have, relatively high turnover in the Mexican operations, not inconsistent with what other Mexican operations experience, but I think we can do some things that we've already instructed the organizations to do which will assist us in improving that. One of those things, quite simply, is that if you know you've got 10 people that leave a week, make sure you have got in your training class -- and it takes you two weeks to train them -- make sure you have got 20 people a week in training, and then define that down to specific functions that they may go to on the floor. So we will start those processes and make sure that we can try to alleviate some of that turnover.

As far as operational improvements, that again, part of that relates to turnover. So we have got to make sure that when we teach somebody a skill set that's valuable to us in the operation, that then we retain that person and expand that -- and expand his training across the floor, and those are some other projects and programs that we'll undertake. But I think for 2006 the Mexican operation is going to get a lot of attention and focus.

Okay.

And, Brett [sic], to add on that, is that is our number one focus as we see it from the results, and it's also adversely impacted because of the complexity of the business, the number of changeovers and models that they have. We need to improve that with vendor management program. We're currently in the process of looking at that between our production and scheduling and our forecast, and then we also need to really get the IT conversion in process that they started last year. Those three dovetailed together in really trying to streamline and make that operation more efficient.

Okay. One quick last question. I guess, in your '06 guidance, what would you guys say to some of the swing factors, and what are your expectations maybe for mid-size SUV production, particularly, the 300 platform?

We continue to see the market being somewhat sluggish for next year, clearly light truck, and we're seeing that in some of the schedules in the first quarter a little bit lighter. I guess the question mark is where do we all believe it's going over the course of this year. We're sensitive to that and monitoring it month-to-month because it is an important part of our business.

Okay. Thank you, guys.

Our next question comes from David Leiker from Robert W. Baird. Please proceed.

Good morning.

Good morning.

Hi, David.

Hi, George.

How you doing?

Doing well, thanks. I've got one question, that is kind of two parts. This company over the years, last three or four years, clearly has struggled. And I was wondering if you could take a three or four year find perspective here for us looking backwards and kind of characterize for us whether the issues -- put them in three buckets. The products, are they in the wrong spot in terms of product cycle, your customer exposure, and the cost side of the equation. Let's kind of talk about how you would rank those as issues contributing to what the struggles have been over the last couple of years. And then I have just a follow-up on that.

Okay. Well, the products -- I don't think the products have really been the problem, other than maybe that if you looked at, for instance, the tachograph that was -- we had the product, we couldn't get the U.K. -- or the EU was late in coming forward with approval. That still seems be to be an issue. So from a product perspective, I think that we have got some very good products that we can take to the marketplace. I'm not very concerned about that. What we may do in the future is look at alignment of our product offerings to achieve some of our other marketing goals, but I don't think products would be the issue.

From a customer's expectations I think clearly the fact that we are heavily weighted on the big three in North America is an issue for us that we will, again, try to address through the combination of products, to the taking products to new customers and selected offering of those products. I think our biggest problem here really as far as I can see has been in the way we quantify it as the cost side, but it's really in the operational improvements that the business needs to have. I think in the past, it's no different than what happened in 2005. We have some very good performing businesses that were over -- their performance was overwhelmed by some underperforming segments. And I think that, from what I've been able to tell from 2000 going forward is a combination, so we've seen this mix. So what we have to do is get everybody kind of to a level playing field moving forward operationally, and then moving onto the other objectives.

Okay. And then the second item, this is the third management team here at Stoneridge in two years. And just give us some perspective of what it is that you bring to the equation here. I mean you're talking about the same things that everyone has talked about for the last four years. What's different? Why is it different?

Well, that's a good question. Why is it different? I think -- well, you only can backup your talk with action. So, I mean, you're going to have to wait until we get through a couple of quarters, and you're going to have to see and determine if the action that we're undertaking is the correct action and is starting to produce the results. I think that is an issue for us as an organization. We are process rich; and results poor. Well, we're going to change that.

I like the processes, love them, we'll take them across the corporation, but we're all based on results and that's what has to be driven down into the organization. So, and starting next week we'll have a meeting with our senior -- or this week, actually, we'll have a meeting with our senior people, and we will start to redefine the approach that we're going to take, which is results first. That's what makes everything else happen.

Are there any milestones that us on the outside can watch to track whether you're progressing towards that or not? Well, what will be --?

Well, I think the first, the most obvious one is our forecast and what our commitment is. Then I think as we have these calls later on, we'll probably start to incorporate some additional metrics that you can track and measure.

Okay. Thank you.

Our next question comes from Joseph von Meister from Jefferies. Please proceed.

Hi, guys, I just had a couple of housekeeping items. Depreciation expense in the quarter or in the year, whichever way you would like to give it. Can you hear me? Hello?

Yes, in the quarter it was 6.1 million, and in the year was 26 million, as we laid out -- and I think we mentioned that earlier, Joe.

And availability on the revolver continues to be close to the facility amount?

We are working with our line of credit. The total amount is available with the conditions we're discussing with the banks.

What kind of LOCs did you have drawn at the end of the year?

We have maybe 3, $4 million in letters of credit. That was it.

Do you have a -- access to the remaining 96 million?

At this point, we do not. We are working with the banks, and we will have something finalized by early March, which would have -- give us full availability under the line. I might add, though, that in leading to the questions is the first priority in terms of this organization we are not going to be using or borrowing money. We are going to reduce costs and improve profitability. So our goal is to really not have any effectual use on this line during the course of 2006 in terms of performance turnaround.

Where do you see CapEx in 2006?

Right now we're in the range of around $34 million, but I can tell you from both John's and my viewpoint is we are going to reevaluate all expenditures made both in capital and design and development. I mean their -- if you look at -- and we're doing a lot more competitive benchmarking, but we're spending as high as anybody in the industry in design and development at close to 6%, our cap is at 31, and what we got in insure and guarantee is, one, it's bringing topline growth, and secondly, it's profitable topline growth.

How much of your business turns over every year due to program runoffs? Is it like the 20% industry average?

Our average life cycle appears to be in the range of 5 to 7 years. And it's one of the things that we are really addressing with our business teams is that, one, we've got to get better at bringing models on, and secondly, we have got to track net new business, not just gross additional business. We have got to win at the topline. That means we have got to add new business on top of what may be replacement product, or replacement programs.

You guys, obviously need to target significant improvements to your EBITDA line to be able to support 6 million of interest expense, and maybe another 7, or $8 million a quarter -- 6 million a quarter of interest -- 7, 8 million a quarter in CapEx. Do you think that you can operate -- can you -- care to give us any view as to whether or not you think you can get the EBITDA back up into --?

If you look at the historical performance of the Company, and we've run the numbers, and if you look at the range that we need to operate in, 10 to 15% return on invested capital, that puts us back in a range where Stoneridge did operate over the last five to seven years, that's very doable from our perspective. It's just a question of when we formulate the full plans and how fast it unfolds but, yes, we believe that we can get in that range of return invested capital 10 to 15, and it's got to be driven on operating earnings as the basis.

Is the decline in revenue and profitability then largely due to the mix of business that you have and price-downs?

Yes, I would say price-downs -- well, two factors on the operational side. It's price-downs, and then it's the rapid escalation of material costs. If you looked at the resins and metal costs, those are things that impacted the business rather significantly. So -- and it's not unlike other suppliers. So those are the two biggest impacts.

But I won't overshadow -- one of the other big impacts, as we talked about, is some less than perfect operational execution on some of our plans. And so I believe that's where we've got to focus first. Those are things that we can contain first. I can't contain commodity prices. I can do things to help offset those, and we'll work on that. But I can start working on the operations and get those things to get focused on. What are the critical factors that they have to achieve, and start with the short-term ones, which have the highest impact and then work our way through.

Now, can you say no to price downs?

You can selectively try to push back on price-downs, and we will do that. Pricing is a science -- I mean it's an art, it's not a science. There will be a whole range of things, but I mean some of these things are contractually committed in our contracts, and it's very difficult to push back on those. I think what you end up doing is you end up maybe substituting. So if we try to go and substitute, if they want a price down, we have had a material escalation. We try to offset some of this stuff, or if our contracts call for a certain amount from value-added value engineering, we try to substitute in on things like that. But we will have to selectively try to push back on pricing.

I guess GM's current call is 20% price declines, or -- yes, it's 20% in three years, right?

I'm not sure what their latest one is. I know that over -- they've moved that target around quite a bit. If you look at General Motors, they've got their own issues to deal with. I think that the supply base is pushing back to them, and what's reasonable and what they can accomplish.

Well, good luck, guys. Thanks for the detail.

You're welcome.

[OPERATOR INSTRUCTIONS]. Our next question comes from Preston Dickerson from Guggenheim. Please proceed.

Hi.

Good morning.

Good morning. Talking about commodity prices and raw materials, has management -- have you guys outlined any sort of plan going forward to kind of address what's going on with copper and resin right now?

Well, I think our first issue is that we're going to start looking at ways to -- once we've locked -- to have the costs locked in for us. And I think in our future contracts, we'll have to look at ways to do that, also, so that's the most immediate thing. I mean I think this year, as we're already starting to see it, George is going to -- George, maybe you want to cover some of the areas that you're looking at.

Well, as John and I first came in, we got to a couple of the businesses that are high users of copper, zinc, and we will also look at doing some forward buys or locking in prices over the course of the year. These are things that are vehicles in the market that are available, and we have not done any of that in the past. But I think we'll use that to lock ourselves into positions that we feel comfortable with our pricing and maintain our margins.

Yes, I think longer term, so that's the short-term goal, longer term you have to look at redesign of the product to use less of the material content, if possible, and so that will be something we'll be talking with the organization about, also.

Right, without sacrificing quality?

Right. Quality has to be a given, you're right. And we've started looking more globally, and the organization has begun that process, but I think we'll be a lot more active in that area than we have been.

Okay. And I guess my other question is regarding SG&A. You guys have spoken a lot about how you're going to address basically streamlining operations and how the business can run more efficiently going forward. How -- as I'm looking at SG&A as a percentage of sales, it has historically been between the 15 and 17% range, it has crept up quarter-by-quarter here in the past year. Moving forward, have you guys sort of looked at -- as a percentage of sales that you want to move it down to, or is it just kind of quarter-by-quarter see what happens as your plans are implemented?

Well, we do -- I don't want to quote a target yet. I think George has a target in mind. What we first have to do is get our hands around what it takes for the organization to achieve what I call the operational performance goals, and once we get to that level, then we can start to look at how we allocate SG&A. Some of those areas, such as, the R&D costs will come under scrutiny right away as to what this drives in terms of our immediate future and our long-term future, and so we may reallocate or reduce as the case may be. In terms of traditional SG&A around the organization, we're not -- we haven't been around all of the organization yet to be able to fully assess that.

Okay. I guess it's -- in the near-term are there any new product launches that could kind of create some additional cost in the near-term?

We do have product launches, I don't think that that's just a state of our business. I don't think there's any one that's significant out there that could have additional costs. But, again, that -- I think that from what we've seen in looking at and reviewing these launches, that we're in fairly good shape, I think, from every aspect. And this also falls under one of the areas of operational excellence, which will be our ability to launch new products effectively and efficiently.

Okay. Thank you.

You're welcome.

Our next question comes from Blaine Marder from Loeb Partners Corporation. Please proceed.

Good morning.

Good morning.

I'm just hearing a lot of questions, but I'm just not understanding the answers. I guess, since 2000, revenues are up about 10 million since the year 2000, costs are up 30 million, and this is excluding the gross margins. I'm just talking about operating expenses. So I'm trying to understand either on an absolute dollar basis, what kind of reduction are we talking about, number one? According to my estimates your operating margin this year was about 4.3%, excluding all the one-time items, it was about 8.5% the prior year. I mean what kind of operating margins would you like to get back to in the near-term, in the long-term? I mean can you get us a little -- give us a little more help there?

Well, if you look at long-term, very capable automotive suppliers sometimes get an operating margin, I would say, in the 9% range, 9 to 10, maybe even 11. Unless you've got some very significant technologies, you can command higher prices for that. But I think if you're in the range of 8 to 10% long-term, that's probably a very good range, or acceptable range. Again, if you have unique technologies, you can even be higher than that.

I think in the short-term, if you looked at what happened to us and you look at the margins, the operating margins at 4%, I mean, it really is a combination of three things, operational inefficiencies, price-downs, and rapid material cost escalation. We will, short-term work on the one that we can fix, which is operational inefficiencies, and then in the medium term, go and look at these price -- these commodity costs and see how we can either negotiate longer term contracts, consolidate the supply base, redesign the product, a variety of factors that we will look at to bring those under control. And then as I said, start to look at where we can push back or have constructive dialogue around the pricing equation.

Okay. And a lot of the product development spending, past management has said that we will see some of the benefit of that in '07. I mean is that the case, or can we expect some benefit of all this spending to eventually come out, or no?

I think that part of the record bookings that we had in 2005 are a result of some of that past spending, and so I think you will see the benefits of that, and I think those benefits you will see continued benefits in '07, as we start to launch some of these new programs. Our objective here is to look at all of that spending, and look at how that fits into where we want to position the Company in the marketplace, and how we're going to get there for both the market and the customer, and then we'll align our research and development spending towards that. A lot of our spending in R&D this year is committed for programs that we'll launch or have been awarded them to be launched in '07 and beyond.

Okay. And then the capital budget is going up again in '06. You mentioned 34. So that's an increase of, what, $8 million or something? I mean where is the increase, and can you breakout your capital budget as to core maintenance versus growth, or however else you want to break it out?

Well, right now of that -- and I have to tell you, all that will be reviewed and under scrutiny, but new product really represents between 50 to 55% of that. Cost reductions are another big piece, which I think we need to really evaluate capital, make sure that costs is a priority item that we have. So you're really looking at capital being in the range of about 65 to 70% for new products, new product launches, and cost-downs. Our maintenance spending is less than 10%, and then we have some that we've been doing on system development for IT, but we will re-evaluate all those capital expenditures and development and design projects for this year.

One of the things in our capital -- some of our capital is on relatively long lead items. You might have to start development work two to three years out before you get the PPAP approval -- and start a production, I should not say PPAP, before you get the start of production. And so we have to look at ways that we can minimize the exposure on the assumptions going forward. So if we're spending the capital today, we're assured that three years out, we're going to have the same results in terms of sales and profitability. And one of those ways, quite frankly, is to look at where we can take this technology into adjacent markets not just into the transportation industry, and see if there's alternatives there for us. But the whole capital equation will be one that takes us a little longer to get focussed and aligned behind where we want to take the Company to generate the returns that we've talked about.

Okay. And then the gross margin decline of about $12 million, can you quantify that 12 million down possibly into pricing or plan inefficiencies, raw material costs? I mean how -- what is the relative impact of those items?

Well, we haven't -- to tell you the truth, Blaine, we didn't look -- I haven't looked at what's the impact. I've gone from this time that we've started here in the last month and said, Let's focus on what's not working. I mean I know the price-downs, I know all the -- I'm not interested in what the history was, I'm interested in changing what we're going to do going forward. So I haven't spent a great amount of time under that.

We are grabbing -- we are developing under George's direction a listing of all our commitments in terms of pricing, and so we'll have a good understanding of what those commitments are. And then we are also, through the purchasing council, which George will chair, set some new goals on that as far as material cost, and then on the other side would be the operational inefficiencies, which we'll address with the quick hit teams. So our focus has really been on assessing what the problems are today and what we can do to fix those problems now.

Okay. And John you start with a clean piece of paper here, which is good. Do you see any perhaps non-core assets in the Company that perhaps you would consider selling, number one; and number two, how do you feel about your joint venture operations in India, and wherever else going forward?

Yes, I've had a chance to meet with the -- as far as the non-core operations, I haven't made any determinations yet on that. There will be -- there may be selective sales of assets. I mean, I think you all know that our -- as we've consolidated up in our Boston location, that we've gotten that operation, one of the plants up there is for sale. There may be some other things like that that go on.

As we look at our joint venture opportunities, I had the chance to meet with our joint venture partners both from India and from Brazil. I'm less familiar because I didn't spend as much time with the guys from India, I'll get more involved in that later on. But the Brazilian joint venture, should be -- it looks like it's going to have a great year coming forward. It's had a good year in 2005. I think the problems or maybe the issues in the marketplace and other things down there have been turned around. Business looks like it has got a very good plan and a growth plan going forward, so I expect that operation to be a positive attribute in 2006. I would also say I expect the Indian JV to be the same thing. I'm just not as experienced with that right now, so.

Okay. And finally, has your Board been approached by any private equity or industry players? I mean at some point you can take out costs, but perhaps you do it -- you fix the Company as a private company. I don't know, but I certainly assume that you're Board would take that responsibility on itself to explore all alternatives.

Yes, I'm not aware of the Board being approached by any of the firms that you've mentioned, or any of that. I'm sure that our Board -- having been on the Board and having been there historically, I think that they do take -- would take seriously any indication of -- from a -- from any source as to how we can best create value for the shareholders going forward.

All right, guys. Thanks.

You're welcome.

Our next question comes from Paul Ross from ING. Please proceed.

Just a couple of housekeeping items. In the $26 million of capital spending in 2005, and the 34 million that you're talking about for 2006, what portion of that is spent outside North America? And I have a follow-up question.

That one I don't know, Paul, if we have that at the tip of our tongue, but we can certainly -- Greg can come back and give you a breakdown of that.

And the second item, you're balance sheet shows about $41 million of cash. Could you tell me how much of that is in the United States, and where the balance is?

Right now about 25 to 30 million, it fluctuates because it is international and the rest is domestic. We are working, and I think we will develop a global cash management plan that we have better access and quicker access to our cash. And we will push, as Blaine mentioned, some of our operations, our joint ventures are doing well. We will continue to push them to have a natural flow of cash among our foreign operations to our domestic company.

Thank you. And lastly, I'm not sure I fully understood when you said when the question was asked earlier about the availability of your revolver, that you were working with your banks and expected to have new terms in early March.

Right.

Could you put some more hair on that at least for me, please?

Well, what -- as you know we have against our revolving credit agreement, we have four conditions or covenants with that. We're currently working with our bank to provide us more flexibility in relation to those. We're almost complete with those discussions. John and I got into it very late, but we've had the meeting with the bank. We have got the large bank meeting next Wednesday, and they pretty well agreed with our assessment and that would make our line fully available to us of the whole $100 million.

Thank you very much.

You're welcome.

Our next question comes from Daniel Gagliardo from Oppenheimer Funds. Please proceed.

Good morning. Actually I -- most of my questions on the revolver were answered, but at this time, how much is currently accessible?

We have one condition that caps a usage of our line, and the bank has already agreed that that condition will be modified and changed for the full utilization.

Okay. Okay, thank you.

You're welcome.

Gentlemen, we have no further questions. I'll turn it back to you for closing remarks.

Well, I guess the question that everybody asked is, and is on everybody's mind is: Okay, we've seen the performance of this Company historically, what's going to change going forward? And I think that this is -- there are things that can be accomplished in the short-term, there are things that can be accomplished in the intermediate term, and then there are longer term issues. The focus of the management team initially is going to be on going after the short-term fixes, things that we can do and get implemented right away because those are what I call the inhibitors. They drag on our performances, so we'll get those fixed, and then we'll address maybe the intermediate and longer term issues.

I would go back and quantify, I said, the Company does have good products. It has got some nice products that can be taken to the market. We are in the automotive sector and we have got to confront that reality every day. But we can improve our performance in that sector because there are companies that do that and have done that. And they've done that over a period of several years where they've put together a sustainable platform that allows them to achieve that. I envision we'll do the same thing here at Stoneridge, and we'll be taking to our management team and giving them an example of a company that has done that and how they've been able to do that. So I think that that would be our objective.

And finally, How do you measure the performance? I mean you can only measure the performance as we go forward by if we're meeting our targets and we're producing our results. We are committed to improving shareholder value and we will drive that into the organization. And that value starts with first meeting what we committed to do. So our basic watch word here is going to be, you've committed to this, we build trust based on achieving our commitments, and that's not only trust internally with our internal people, but it's also trust externally with a greater public. And so that's the focus for 2006, let's meet our commitments, understand that not everything goes the way it should go. So the question then is: What are you going to do to overcome that or offset that and start building that and driving that down into the organization? So we can get an organization that's focused on results, and more focused on results and less focused on process. We'll use process only to the extent it can drive results. Okay? Thank you very much.

Thank you.

We thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Everyone have a wonderful day.