Stoneridge Inc (SRI) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Stoneridge 2006 fourth quarter earnings conference call. At this time, all participants are in a listen only mode. We will conduct a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS).

As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to the Director of Corporate and Investor Relations, Mr. Greg Fritz. Please proceed, Sir.

Good morning, everyone, and thank you for joining us on today's call. 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 made 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 different 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'll 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 operational improvement initiatives and his thoughts on our 2007 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.

Good morning. Thank you for joining us on today's call.

I would like to review our accomplishments in 2006 and to discuss our outlook and major initiatives for 2007. This call marks the first-year anniversary of our new management team's tenure. Last year, when we began one of the questions asked was what would be different with this management team from previous teams. At that time I indicated you would have to wait and judge from our performance and action. For the full year read reported earnings per share of $0.63 compared to $0.04 in the prior year. These results are indicative of the turnaround we are making at Stoneridge. Part of that turnaround is to meet our commitments. One of the key values we are dispelling throughout our organization every date is to meeting our commitments. Also of note we generated 46.5 million of cash flow from operations. This is a marked improvement from our 2005 performance and more representative of Stoneridge's home ships to store call performance. Our cash generation will continue to the a focal point for us going forward. Our performance improvement in 2006 is demonstrated Stoneridge is moving toward our long-term goal of operating margins in the 8 to 10% range and return on investment in the range of 10 to 15%. We believe accomplishing these goals will lead to greater shareholder value.

2006 marked the achievement of several important milestones for Stoneridge. First we focused on the near-term areas of operational excellence and second we begin to long-term initiatives to position Stoneridge for future success. Last January we focused on improving our five underperforming operations. It was apparent that our results would be significantly hindered by poor operational performance and execution. Two of our underperforming facilities were in Mexico.

After multiple visits to our Mexican operations and deploying (indiscernible) focused teams we made significant progress at these facilities. One of the key operational measures that demonstrates notable improvement is in the area of on-time deliveries. Our 2006 improvement in on-time delivery was seven percentage points over 2005. This resulted in a significant reduction in our premium freight at these facilities.

Another benefit from our operational focus of these facilities was the amount of manufacturing floor space we have freed up as a result of our lean initiative. This will offer as the opportunity to grow and leverage our cost structure at these facilities going forward.

Improvement in our underperforming operations assisted us in expanding our full year gross margins by 30 basis points from the prior year in spite of substantial headwinds from higher commodity prices and product price reductions.

The improvement in operations is by no means over. Customers demand flexible low-cost manufacturing with continuous improvement and product cost, quality and supply capabilities. We must structure operations to meet these demands.

While our 2006 performance improved we are not satisfied and we'll remain focused on improving our operational capabilities from product launch to the ongoing delivery of products. While the majority of our focus was in the near-term category, we also made progress on our long-term objective of expanding our global manufacturing footprint instituted a more efficient management structure and beginning to process to more effectively utilize our design and development resources.

In an increasing global marketplace, Stoneridge must have the capability to provide our products to customers around the world. As many of you know, the growth in the automotive segment is projected to increase significantly in the developing world. India and China are expected to grow at over 50% in the next five years as their economies develop. Stoneridge has made progress in two notable areas to better position us to take advantage of these opportunities.

First we shipped our first product from our start up facility in Suzhou, China. This operation represents our first manufacturing efforts in China and will provide us with a platform for growth in the region. The three main thrust of our China effort are domestic business development, manufacturing capability for global operations and component procurement.

In India we increased our stake in the Minda Stoneridge joint venture to 49% during the third quarter. This venture continues to progress and will provide us with an entre into the Indian market. While this venture will be predominantly focused on the electronic instrumentation for commercial vehicles, we are also pursuing opportunities in the automotive markets.

Finally, one of our global success stories in recent years has been our PST joint venture in Brazil. PST contributed $7 million in equity earnings to our 2006 results. Our the past four years PST has grown revenue at a compound annual rate of over 30% and maintain a net margin of over 10%. In addition we have benefited from $6 million in dividends over these last few years.

PST continues to build upon its leading market position in the areas of security products and expects to serve every OEM in Brazil by the end of 2007.

During 2006, we also made several key changes to the Stoneridge organizational structure. We created two President's positions to oversee our control devices and vehicle management and power distribution businesses. As a result of this change we eliminated the chief operating officer position.

In addition we dedicated a senior executive to our Chinese start up operations. This realignment was designed to increase focus in key areas such as manufacturing, sourcing, product development and component sourcing. This will accelerate our efforts to leverage functions across our business to be more efficient and more effective.

Finally we initiated a process to more effectively deploy and utilize our Design and Development spending. At nearly 6% of sales, our Design and Development spending is on par with some of the most innovative companies in our industry. However, historically, we have not had the number of homerun products and a robust pipeline of new products we would like to see.

We need to broaden our perspective on the potential applications outside of our traditional market space. In its current state, the bulk of our D&D spending is focused on launching new products and managing existing products. The customer focus has been historically very narrow and has not produced the exposure to new domestic manufacturers we desire.

Over the next several years, we will realign our product portfolio and design development spending to improve our organized growth.

Turning to our outlook, we formally issued 2006 earnings per share guidance of $0.45 to $0.55 per share. This guidance is in line with our indications in October. As we have discussed throughout 2006, the major unfavorable macroeconomic factors behind our 2007 performance is the projected decline in the North American commercial vehicle market. We are maintaining our prior expectation of a 25 to 35% decline in commercial vehicle production.

To date, we have begun to see softness in the first quarter commercial vehicle build schedules and expect this trend to continue through the first half of the year. On the automotive side, initially we expected production schedules will be flat in North America. Over the past three months, however, we have seen deterioration in this outlook. Our current expectation is for approximately 3% decline in North American's traditional domestic light vehicle production.

In Europe, however, we continue to expense healthy commercial vehicle demand for our products. In Brazil, our PST joint venture continues to deliver strong level double-digit revenue growth and solid profitability. PST was a big contributor to our results in 2006 and we expect these types of growth rates and returns to continue in 2007.

On the commodity front, we have seen some moderation in copper prices. We are able to take advantage of this weakness and took forward contracts on copper to better protect our position in 2007. These contracts reflect approximately one-third of our annual buy and result in some relief from the prior year average. We have not seen this type of decline in other commodities and continue to monitor these for opportunities to reduce our risk exposure.

Given the 2007 market backdrop discussed previously, we remain focused on building our operational excellence progress and cost controls and I am sure we are driving towards our earnings in generating operating cash flow that will allow us to successfully meet difficult market conditions. Specifically, we will review all components of our cost structure to drive towards greater efficiencies. We recognize that our selling general and administrative expenses are not at levels we consider acceptable and we will address this.

We have several key product launches underway in 2007 and the primary focus of our operational initiatives will be on launch excellence. I feel Stoneridge has a bright future ahead and I am excited about the possibilities for the Company. As I close, I would like to recognize the work of our employees.

Stoneridge employees responded to the challenges in 2006 and the results produced are the results of their hard work and effort. In 2007 we have many challenges and opportunities. We will meet our commitments because of this same support and accomplishment of our employees. With that I would like to turn the call over to George.

Thank you John.

Before we review the fourth quarter and full year results, I would like to highlight a few notable areas of accomplishment during 2006. For the full year our cash flow from operations net of fixed asset additions totaled $20.6 million. The improvement was due to increased net income and lower working capital levels.

Our year-end cash balance was $66 million and provide us with strong and improving liquidity positions. Improving our working capital net earnings were key goals during 2006 and continuing to improve these metrics will be a key focus point going forward. These results are good steps to drive return on invested capital.

Our challenge last year was to improve our profitability in asset management. We have sold assets that were deemed nonproductive and did not support our strategic needs. Excess land in Sarasota was sold in the first quarter and our IDA partnership interest in the fourth quarter. We also continue to redeploy our existing assets to enhance our competitiveness and better meet our customer needs.

Specifically we expanded our global manufacturing capabilities in Estonia, China, India and Brazil. We are pursuing initiatives to leverage our entire organization to improve our cost structure in the areas of global sourcing, enhancing our information technology capabilities and efficiencies. We will continue to pursue ways to improve our asset utilization, lower our costs and generate cash flow to reinvest back into our business.

I would now like to cover the fourth quarter and full year results in more detail and then we will open up the call for questions.

2006 marked a record sales year for Stoneridge as revenue increased 5.5% to $708 million. Our full year results were driven by strong North America commercial vehicle production levels and new business awards in Europe. The fourth quarter, revenue increased 12.8% to $171 million. Our year over year improvement in revenue was primarily attributable to strong North American commercial vehicle production for wire and harness products.

For the fourth quarter light vehicle revenue declined 7%, 65.4 million. The decline was attributable to a 13% decline in North American traditional domestic production and ongoing product price reductions. These factors were partially offset by new product launches. Medium and heavy-duty truck sales totals $88.6 million in the quarter, 40% above the prior quarter. North American commercial vehicle demand was particularly strong, ahead of the 2007 change in emissions regulations. In addition our European operations generated additional revenue from new programs for our digital tachograph and instrument clusters.

Sales to agricultural and other markets totaled $17.3 million and were $2.3 million below the prior year. North America revenue accounted for 72.2% share of the fourth quarter revenue compared with 78.5% for the same period in 2005. For the full year, North America sales accounted for 75.5% of our total versus 78.6% in the prior year. The percentage reflects the strong growth of our European operations. In the fourth quarter, power distribution revenues increased 27% to $98.8 million, bringing the full year increase of 13.7% to $407.8 million.

The primary driver behind the increase in stronger demand in the medium and heavy-duty truck segment in both North America and new product launches in Europe.

Revenues for the controlled devices declined 2% in the fourth quarter and 4% for the full year, as new product revenues were offset by lower North America light vehicle builds, and our traditional domestic customers and product price reductions. Our fourth quarter gross profit totaled $38.2 million and our corresponding gross margin was 21%. Our fourth quarter margin increased 130 basis points from the prior year level. This increase was due to higher sales volumes relative to prior year and operational efficiency improvements at both UK and Mexico operations. These factors were offset by unfavorable variances in material price and product price reductions.

For the quarter our unfavorable raw material ferrets was approximately $2.5 million and as John previously noted, our full year gross margin expanded 30 basis points to 22.4%. This increase was despite the substantial increase in raw material prices during the year, which reduced our gross margin by approximately $7 million.

While we are pleased our gross margin has improved significantly from the prior year, our organization continues to pursue material savings in all aspects of our business to mitigate the commodity price pressures we have seen, particularly in the area of copper.

The recent declines in copper have allowed us to lock into approximately one-third of our total purchase for 2007 at favorable rates compared with the prior year. Sales from low-cost manufacturing locations accounted for 38% of total sales in the fourth quarter compared to 37% in the prior year.

With our Chinese operation ramping up and other corporatewide initiatives, we expect ourselves from low-cost locations to grow as we relocate labor intensive manufacturing over time.

Selling, general, and administrative expenses totaled $33 million in the fourth quarter compared to $27.9 million in the previous year. Approximately half the increase in SG&A is related to increased design and development activity related to new business development in our European commercial vehicle units.

In addition, SG&A increase due to systems implementation expenses related to a new ERP system in Europe. The system will go live on April 1 of this year.

Looking forward, SG&A cost control will be a key focus in 2007. As John mentioned our SG&A is not at levels we feel are appropriate for our industry. With our organizational alignment in 2006, we feel we have the ability to gain efficiency and scale through more streamlined management structure. We are evaluating opportunities to leverage our organization and implement cost reduction programs accordingly.

Stoneridge generated a quarter charge of $450,000 related to the final costs associated with a North America plant closure. Fourth quarter income tax expense totaled $269,000, bringing our effective tax rate to 16%. For the full year our effective tax rate was 26% compared to 79% in the previous year. The lower effective tax rate is primarily attributable to improved income in our UK operation and we expect our 2007 tax rate to fall between 30 to 35%.

Stoneridge recognized fourth quarter net income of $1.4 million or $0.06 per share compared with a loss of $0.13 prior year.

For the full year, we reported earnings per share of $0.63 compared with $0.04 in the prior year. Depreciation expense for the fourth quarter was $6.8 million and amortization expense totaled $400,000. For the full year we recorded depreciation of $25.9 million in amortization expense of $1.6 million.

Earnings before interest, other income, taxes, depreciation and amortization were $9.6 million for the fourth quarter and $8.5 million the previous year. This brings our full year EBITDA to $61.2 million compared to $49.5 million in 2005, an increase of 23.6% for the year. Our primary working capital totaled $93 million at year-end, which declined $18.1 million from the end of the third quarter.

For the full year we reduced working capital by $5.8 million. As a percentage of sales our working capital declined to 13.1% from 14.7% in 2004 -- or 2005. While we have made good progress toward improving our working capital levels our working capital balances remain above our target range of $0.12 to $0.13 of sales.

We see significant opportunity to reduce our inventory balances in 2007 and have made this a focus area for all our operations.

Operating cash flow, net of fixed asset additions was a source of $17.8 million in the fourth quarter compared to a use of $4.5 million in previous year. For the full year our operating cash flow totaled $20.6 million compared with the use of $9.9 million in the prior year. We are pleased with our cash flow performance in 2006, as it marks our return to the types of cash flow generation Stoneridge has historically generated. We are focusing on continuing to drive this trend in 2007 and beyond.

Capital investments totaled $6.1 million in the fourth quarter, mainly reflecting investment in new products and equipment. Some significant components or our investment were in areas of equipment for the commercial vehicle instrument front panel award we announced in July and the start up of our operations in China.

For the full year, our capital expenditures totaled $25.9 million, down from $28.9 million in the prior year.

Currently we have full availability under the $100 million revolving credit facility. Our year-end cash balance totaled $66 million compared to $41 million at the beginning of the year. Our capital structure is currently comprised of $200 million of Senior Notes due in 2012 and an undrawn revolving credit facility of $100 million. We are comfortable with our strong liquidity metrics and will work to reduce our cost of capital going forward.

Now I'd like to take a moment to discuss our outlook for 2007. As mentioned by John, for the full year based on our current industry outlook, our expectations are for our full year earnings of $0.45 to $0.55 per share. During the second half of 2006 our North American light vehicle customers announced significant production cuts as they address their inventory situation.

In addition, we have also begun to see some softness in our North American commercial builds. We expect these trends to continue for the first half of 2007. The macroeconomic assumptions we have utilized, including North America commercial bills declined 25 to 35% and North America light vehicle production is down approximately 3% compared with 2006.

We currently expect our earnings to be more balanced toward the second half of the year than usual. The volume reductions are expected to be more acute in North America light and commercial vehicle markets in the first half.

John mentioned we were able to take advantage of the drop in copper prices and reduce our risk exposure in 2007. We will continue to monitor the commodity [markets] in other areas when these types of opportunities come available. We will continue to drive positive cash flow this year through working capital management and profitability.

Cost control and cost reduction will have high management priority this year. We've not made the progress we would like to see on ROIC but we will continue to make this a high priority and move our ROIC toward objective of 10 to 15%.

Operator we would now like to open the call to questions.

(OPERATOR INSTRUCTIONS) Jonathan Steinmetz with Morgan Stanley.

Just a few questions here. First on PST can you explicitly give an assumption on what you are thinking equity income is going to be within this $0.45 to $0.55 guidance? And do you have full year revenue numbers and EBIT for PST from '06 that you can share with us?

That is a disclosable item and you will see that in our official release in the Q, Jonathan.

Do you have an expectation for '07 though from what you like -- if you got 7 million of equity income I believe it was this year, what do you think that ramps to in '07?

I think at this point we will not disclose that but I think, Jonathan, with the release you are going to see on PST and with the sales growth that we have forecasted I think you can project and see what kind of improvement it would have.

I guess I can do the math. Maybe another way to get at it would be I mean, do you have -- do you expect margin expansion there or flat? I just want to try to understand how much of the delta in earnings is going to come from growth here?

I think you'll see some margin improvement but I think it is going to come more in the topline, and margins we should be able to hold.

You commented in the second half that you would expect the earnings to be tilted to the second half. Is there a lot of cost cutting that ramps up sequentially because I would think on a unit basis, North America commercial vehicle builds would actually be lower the second half of the year than they would in the first. Given that we are starting out the first quarter at least the first part of the first quarter should be okay.

I think what we're seeing from our customers is that their first half is lower and they expect to see a rebound coming in the second half. So that is what they're telling us. So that is kind of the trend that we see and we believe in that, based on what we have seen for the first quarter production [fall offs].

Last question is, is there a free cash flow number that you would care to share that's sort of associated with let's say the $0.50 midpoint of the guidance?

No. Because I think we are working with our organizations to make sure we are not satisfied with any of our tasks right now. We have to work more diligently to get the numbers to where we want them to be in terms of our cash flow.

We are running this, Jonathan, on our historical levels and I think you saw some of that in 2006 and we will continue to drive in those same kind of levels in '07.

So is working capital sort of the big swing item potentially within that? Is that what you're saying here?

Well, clearly, inventory we have a ways to go. It is running 39 days and we think we can do significantly better than that.

And any reason from a cash flow perspective versus the earnings and dividends out of PST start to ramp up or is the payout ratio get constant effectively there?

I think it will be fairly constant from what you've seen the last two years.

Brett Hoselton with KeyBanc Markets.

This is [Brandon Farrell]. I have another question with respect to the Brazilian JV. I think you had alluded to '07 growth rates there being on par with '06. Is that with respect to the topline or equity income because I think equity income was up about 75% in '06 versus '05?

I was referring to our topline growth that we indicated would be in -- has been running at about 30%. It will be slightly less than that for '07 and then you can trend your earnings off of that growth.

If you look at the cadence of equity income progression throughout '06 down there in that JV, I think it was up substantially in the fourth quarter, relative to the three previous ones. Is there -- what happened in the fourth quarter relative to the rest of the year? What changed?

We had a promotional program in the fourth quarter and we have been very successful landing new OE accounts. So they have been building over the course of the year and those two events have really had a significant impact, a positive impact on our fourth quarter.

You also talked about improving the cost of capital going forward. I know -- I think those 200 million Senior Notes are able to be refinanced here in '07, I think in May. If you look out into the financial markets how do you look at that opportunity? And what are your thoughts there with regards to taking action?

We will do what we normally do is we'll look at all different alternatives and the cost of that and then we will make an assessment as to what we can or will be able to do. And so that will be a decision we will continually explore here in the first quarter and determine what is our best use as we move forward in cash in our overall debt position. And that's what is really consistent with what we've been saying is that we will continually evaluate that.

Also had a question about copper. Is the -- I think it was the $7 million hit in '06, is that net of recoveries and if copper prices kind of prevail at current levels in '07, is there any type of benefit to that that's not reflected in the current guidance? I'm guessing you get some benefit on the two-thirds of the buy that isn't locked in?

Yes that position is still open. It depends on which way copper goes. It could go north to where it is. It could go south and we will evaluate that risk as we move forward. But we will take positions to mitigate or reduce the volatility we had in 2006.

Is that $7 million no recoveries or --?

That number is net of any recoveries. We got very little in recovery in terms of what you're referring to as customers. We have only had one customer that has had some limited recovery that we have had, most of that has been absorbed by the organization. So that is a net number.

So that's very close to the gross number, I'm guessing?

Yes.

Do you have a sense with respect to SG&A? I think this is the first time in four quarters we saw SG&A as a percentage of sales increase. Do you have a sense of increased D&D going forward is going to play out that way in '07 as it did in 4Q?

No. We will maintain our level of D&B spinning because you need a break between the two segments. We have had an increase and it is really had to do with the product launches in Europe and the ramp up of the ERP system to complete in our Swedish operation. So we do not see that continuing forward and we will have very much of a focus on SG&A in 2007.

Good. Thanks, George.

David [Laker] with Robert W. Baird.

That was interesting.

They changed your name.

Name and firm. I guess I changed jobs.

SG&A line there a little and I know you've talked about it, but is there a way that you can break out how much of that SG&A in the quarter is related to implementation costs as opposed to business-related costs?

Yes, we can do that for you. We'll give some insights into the SG&A. At least you are referring to the ERP in the (MULTIPLE SPEAKERS)

In the fourth quarter. It sounds like there were some extraordinary costs there.

Well two things happened. One is, that with some of our engineering in Europe we have we get recovery from the customers. We had more of that recovery in the first half compared to the second half. So the expenses didn't change dramatically but the recovery piece that went against that had an impact. And then we are ramping up for the launch of 2007. So we had some increased expenses on that side.

Then the acceleration in the ERP to get that completed for April certainly had an impact in the fourth quarter.

How big was that last number?

For the ERP?

Yes.

It's probably running in the range of about $1 million.

And is that a cost that goes away or is that a step -- that's not a step up in your cost structure.

No it will --it won't go away completely. It will step down as we get closer to ramp up and comes online in April.

So that run rate in SG&A going forward is probably somewhere between what we saw in the first half and what we're seeing here in the fourth quarter?

Yes, I think you could use that as a rough assumption.

On the working capital, you certainly have made some nice progress here in '06. Do you have a target of where you want to get that?

Yes. We have consistently said that we would like to get it to $0.12 or $0.13 and that is on primary working capital. If you look at where we're at is our receivables are running around 56 days. We made nice strides in that and our past dues, there are some things we think we can do there. Accounts Payable, we have done a nice job of really increasing that.

I think the area that we are really focusing on, our five key businesses or inventories. They are running around 39 days. We think we to get that much lower than where it is today. So the improvement in working capital, get down to that $0.12 to $0.13 will be coming out of the inventory side.

Could that number be as much as $15 or $20 million?

Yes. I think $20 million is probably a little on the high side but I think clearly in that range is doable.

I don't think I heard a D&A or capital spending number for '07. What would you be looking at?

We don't see anything that is going to change dramatically. I would use a little bit more than what is coming in in '06 by probably a couple of million dollars. For CapEx.

And depreciation is probably not a whole lot different?

No. Depreciation won't change that much.

Two last ones. As you have improved the operations and you are generating cash here -- obviously with the term debt out there -- the balance of that means that it is going into cash and equivalents. What is your thought on that? Is the idea to accumulate that at a point that you end that doing something in terms of redeeming the term loan or you have some other plans for that?

Well I guess how we would say it is we don't have any immediate plans to say this is what we are going to infinitively do but it certainly provides us the flexibility to do what it does to enhance the value for this firm. And we will look at a number of different alternatives. Debt is certainly one. And other things we can do and reinvest back in the business would be another.

So we will continually explore for that. We'll continue to build cash. I think it's the strength that we have in the cycles and that gives us the ability to move and react quickly.

How important is it at the point that you refinance that $200 million and it ends up being a smaller number?

Well, clearly, that cost of debt is expensive and I think we can find a way to do it to where it lowers our over cost capital. We have -- very much have an interest in that.

I'm not talking about the rate. Would you be -- do you have a target or a goal that that $200 million gets replaced with $150 million and you use 50 million of cash? And then just the absolute level of debt just to (MULTIPLE SPEAKERS) priority is of reducing at?

I think those are just different alternatives that we would look at.

Lastly where are we on a timetable or anything of an update you can give as you focus on new product development and booking new orders (indiscernible) to accelerate growth? Where are you in that process and what should we be expecting over the next few years, as we go forward?

As I said most of the Design and Development costs are being spent on the new product launches currently underway and supporting those programs. Part of our analysis here is we're paring back some of the portfolios. So we will allow certain product lines to gradually phase out because we don't see an attractive position in those product lines. And we will invest more heavily in other product lines.

I think one of our growth stories in 2007 will be the new business awards we have had in [initiatives]. We continue to see that as an attractive area for us going forward. We've got the new business awards we said in the commercial vehicle that start late in 2007. We'll continue to push that.

I think our initiative is that what we are doing is focusing around some critical areas where we think we can have some clout in the design -- I mean in our design development spending. And I think also I would say do that we had very good order input this year and so one of our challenges is to keep the business we have and add-on with new orders.

We have had some turnover of business due to past historical operating problems. And so we are -- that is why we want to fix our operations. We are getting good order input. We are just not, maybe we are not getting that focused in the areas we want and then also maintaining our existing business and not just turning it over.

It sounds like, correct me if I'm wrong here. But it sounds like the new business that you are launching the revenue from that is essentially going to replace revenue from programs that you are letting run off? Is that fair for the moment?

Well we'll have growth -- no. We will have growth but we are managing that process. We'll have growth going into these new programs. I think the biggest downturn in our impact in 2007 of course is the decline of the commercial vehicle markets and some of the automotive productions. But when you cut through that you'll see that we're going to have in 2008 we will show growth again.

What's the timing for that runoff of business? Is that something that -- ?

No, that just goes -- as we look at a program we decide that that program is not an attractive -- we will phase it out with a customer. We're not going to do anything dramatic or drastic. Some of those areas, investment could run for three years. I mean the program could run for another three years before we are finally out of it.

If you look at the scale of that is the runoff of that something that drops off then '08 or '09 where it becomes less meaningful?

Yes. I think it probably -- '08, '99. That would be about right. I mean, looking at it again. Some of this is that what we're doing is forcing the organization to examine its product portfolio and how to enhance the position in that product portfolio. So as they are looking at this and we're driving it, they're looking at ways they can maybe make a product more attractive versus to meet some targets that we have set for products.

And if they can do that, then we will continue to invest in the product. If they can't the product will just -- gradually will stop supporting it and it'll gradually die off.

Another one for George and I don't -- this may not be a fair question so you can skip it if you want. But if you look at where you are at Stoneridge right now and the need to bring the market new products and let some not so good pieces of business run off, how would you compare that to [Ford Warner] when you walked which obviously wasn't in the same position, but somewhat similar? You know, a need to revitalize the new product development and bring new technologies to market and fill that book of business?

Is there any comparison you can draw there?

The only comparison I would do is a process and we have talked about it and that is where John and I are moving. We are changing the process at Stoneridge where we really start to dissect our D&D spending between what is replenishment and maintenance of existing business to new product development. Even to the point we are creating a corporate fund that we can incentivate our businesses for new technologies. I think from a business standpoint we are different.

But I think there are segments John alluded to, like emissions is one that we have some new growth coming in this year. It lends itself to some good growth over the next two, three, four years and further. It puts us in another aspect in the engine platform.

So those are the kind of things we're trying to really focus on now. Get our organization redirected and build that portfolio just like happened at Ford Warner. And then along the way if you do that well you cross-sell to different organizations. You have the ability to hit a couple of homeruns in that process and most importantly of all of it is, you create a feeder system for your new product innovation and development that you constantly are making alternative choices of where you want to invest.

I think that is the biggest thing is we've got to have a more robust pipeline that we have choices of where you want to invest your technology dollars.

Do you think there is a similar opportunity here at Stoneridge as there was at Ford Warner 10 years ago?

You know my gut tells me one of the reasons John and I both believe that. I think we are in some areas, both the electronic side and we have seen building the engine, yes. I think we have the potential to grow in this coming does have a bright future on the technology side, if we manage it well.

Thank you for your time.

(OPERATOR INSTRUCTIONS) At this time, there are no more questions in queue. I would now like to turn the call over to Mr. John Corey for closing remarks. Go ahead, Sir.

I would like to thank you all for participating on the call and I would only reiterate, we are pleased with our progress in 2006. And at the same time we recognize that we still have a lot to do to create an enhanced shareholder value.

But I think if you look at the things that we set off to do at the beginning of the year we made progress on every one of those things and we started to put this Company back into a different trajectory as far as its performance and where we want to go with the company.

So I'm happy for that and I think that 2007 will offer us, again, unique challenges that we will have to face. And we are looking at a lot of areas in our Company for improvement and it will be the team that you stop reduce the results in 2006 do the same thing in 2007.

So thank you all very much.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect. Good day.