Stoneridge Inc (SRI) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2007 Stoneridge Earnings Conference Call. My name is Chantilay, and I will be your facilitator for today's call. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Ken Kure, Corporate Treasurer and Director of Finance. 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 to our website at www.stoneridge.com.

Joining today's call are John Corey, our President and Chief Executive Officer; and George Strickler, our Executive Vice President and 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'll also be referring to certain non-GAAP financial measures. Please see our Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

With that, I'll turn this call over to John.

Good morning, and thank you for joining us today. I would like to review our accomplishments in 2007 and discuss our expectations for 2008.

This call marks the second anniversary of our new management team's tenure. Previously, we discussed a plan for operational improvement, leading to financial improvement, and finally showing us to be well-positioned for market execution. I would like to review our progress on our plans.

In 2007, the Stoneridge team responded in a difficult North American market to accomplish the results that continue to improve the top-line growth, address our cost structure, improve our operating margins, generate significant cash flow, and drive return on invested capital in the range of 10 to 15%.

For the full year, we reported earnings per share of $0.71, compared to $0.63 per share in the prior year, an increase of 12.7%. These results are indicative of the continuation of the turnaround at Stoneridge over the last two years.

In the fourth quarter, our sales totaled $185.5 million, an increase of $14.3 million or 8.3%. For the year, our sales totaled $727.1 million, an increase of 2.6%, despite difficult and challenging commercial and automotive markets in North America.

A few highlights are -- we secured future sales bookings that exceeded $200 million in 2007. We had some significant wins during the year, especially in the third and fourth quarters, that help offset the downturn in the light truck and commercial vehicle volumes in the U.S. market.

Our sensing businesses launched over $26 million in new business during 2007, and our emissions sensing secured bookings of over $38 million in new business that further supports our enthusiasm for our growth strategy in emissions.

In our sensor and switch business, we won a new business award in Asia for actuators that will broaden our customer and market diversification. Our aftermarket business in Europe grew by nearly $10 million or 30% in 2007, as we continue to penetrate and expand our market presence there.

We won an award supply and product to the MRAPs, the Mine Resistant Ambush Protection vehicle, potentially opening [up a] new market segment for us. Our two joint ventures in Brazil and India continue to grow the top line, with new products entering new markets and broadening their customer base. Geographic and customer growth continues to be an important element of our top-line sales focus, and we made progress in diversifying our business.

Another important area we are addressing is our overall cost structures. In 2007, raw material costs continued to impact our performance with escalating commodity prices, especially for copper and zinc. We were able to offset some of the increases through hedging transactions for copper and supplier agreements for zinc. In addition, we continued to build a global network for our purchasing activities to leverage our buys across all of Stoneridge, including our joint ventures.

We are addressing our manufacturing overhead structures, with the announcement in November of 2007 of the cessation of manufacturing at our [Mitchell Dean], UK and our Sarasota, Florida operations. This will be accomplished and will be substantially completed during 2008.

These actions were taken to remain competitive across our global manufacturing footprint, based on a fully landed cost, not just low labor cost. Our global manufacturing footprint now includes low-landed cost manufacturing sites in China, Estonia and Mexico, and our joint ventures in Brazil and India.

We're presently building a new facility in Estonia which will significantly increase our manufacturing capacity from 22,000 square feet to 86,000 square feet. Presently, we have about 36.4% of our manufacturing capacity in low-cost plants defined by sales source. Sales source from low-cost countries has increased 9.5% since 2004, and we will continue to have more of our products produced in low-cost facilities.

With significant product launches occurring in 2007, we incurred operation inefficiencies higher than our expectations, so we have room for improvement. We have not completed our operational plan. But as we do, we can expect to demonstrate efficiency and cost improvements, improving our performance. We've also begun to address our SG&A structures to streamline our support services and reduce our SG&A at cost excluding design and development expense.

Last year, we combined six business units to create two distinct business units -- Control Devices and Electronics. From that initial effort, we have begun integrating our two high-stat locations into one, and combined our two North American Electronics businesses into one, announced the restructuring of our UK operation and are addressing our corporate overhead cost.

Our target is to reduce our SG&A excluding design and development to less than 10% of our net sales over the next two years by growing the top line and reducing costs. By addressing our top-line growth and combining that with our actions to reduce our key cost components for raw materials, manufacturing overheads, and SG&A excluding design and development, we are targeting operating margins in the 7 to 8% range in the next two years.

We expect 2008 will be impacted for the restructuring program we announced in November 2007 in the range of $9 million to $13 million, net of expected benefits of a facility sale.

The Company incurred approximately $1 million for restructuring expense in the fourth quarter of 2007. We are expecting projected benefits to be in the range of $8 million to $12 million in 2009 and beyond.

Cash flow has been a focus for us. During the last two years, we have generated $80 million in operating cash flow -- $35.5 million in 2007 and $46.5 million in 2006. In 2007, we had generated approximately $46 million in cash flow -- $33.5 million from operations in $12.3 million from the divestiture of nonstrategic assets, which included two idle facilities and the Company airplane. Cash flow in the future will be generated from operational profitability and working capital management, as we have completed the sale of our nonstrategic assets except for the Sarasota facility, which we are working on to complete this year.

From the actions we have taken to improve profitability, our focus on cash-flow generation, the divesting of nonstrategic assets, and more effective managing of our working capital, our goal is to drive our return on invested capital to the range of 10 to 15%.

Some other highlights from our operations have been encouraging and have benefitted our progress. Our China operations are becoming more focused on developing our market presence in the Far East. We're pleased that sales have ramped up to a level that the China operation is slightly profitable, and as of the fourth quarter generated their first positive cash flow. This is a small but not insignificant step.

Our India and Brazil joint ventures continue to perform well. In 2007, Stoneridge's equity earnings reached an all-time high of $10.9 million from the contributions of our joint ventures -- an improvement of $3.8 million or 52.9% over 2006. Minda, our Indian joint venture, posted double-digit sales growth in 2007. Minda manufactures electronics and instrumentation for the motorcycle and commercial vehicle markets.

PST, our Brazilian joint venture, designs and manufactures security and customer-convenience products. PST continues to experience double-digit sales and earnings growth. This reflects the growth in the market for security and related products but also is the result of PST's penetration with its three channels of distribution -- aftermarket dealers and distributors and OE manufacturers. As we disclosed on October 23rd, 2007, PST filed for an initial public offering. With the volatility in the equity and capital markets, this process continues to be addressed, but the timing cannot be fully determined until the capital and equity markets become more stable.

For this reason, we are not providing forward guidance at this time for 2008. However, we can share with you what we see in the first quarter.

For 2008, our forecast for the North American light truck and pass car production levels are being forecasted in the range of 14.3 million to 14.6 million vehicles for the year. Medium and heavy-duty truck production in North America is forecasted to be comparable to the last year. European commercial business continues to be strong, at least through the first half. Our joint ventures continue to run well and experience significant growth potential.

For the first quarter of 2008, based on our market and operational outlook, our operating income should improve by $2 million to $3 million compared to the first quarter last year, but our results will be negatively impacted by the approximately $3 million to $4 million from the previously announced restructuring program.

As I have stated before, we expect 2008 will be impacted in the range of $9 million to $13 million for expenses for the restructuring program we announced in November of 2007, which includes the expected benefit of the Sarasota facility sale. We are expecting projected benefits to be in the range of $8 million to $12 million in 2009 and beyond.

In summary, we continue to make progress on our plan. Our top line grew at 2.6% through increased vehicle content, new products, geographic expansion and customer diversification; offsetting the 35% decline in medium and heavy-duty vehicle production in the North American markets for the full year 2007.

We continue to address our cost structures, especially manufacturing overhead and SG&A expense excluding the design and development expense. We continue to focus on cash flow as a way to strengthen our balance sheet, and we still have some work to do in managing our working capital to the range of 12 to 13% dollar of sales.

We need to continue to improve our operational excellence and reduce our operating inefficiencies. Costs such as premium freight and wastes and scrap were high this year. These were adversely impacted with two significant launches in 2007.

2008 will be an equally challenging year due to market conditions and the restructuring we are undertaking. However, we have improved our operational position and can continue to drive improvements. We have strengthened our balance sheet, so we are not subject to the uncertainties of the credit market and can fund all our operational needs.

We exited the year with the highest new order intake in Stoneridge history, positioning us well for the future. During the last two years, we have focused on improving our operations and financial excellence. We will continue to work on operations and financial excellence and increase our emphasis on marketing excellence to drive top-line growth.

Our team has demonstrated we can manage the challenges that faced us in 2007. We are confident that we can continue with the improvement plans we outlined to you two years ago.

With that, I'd like to turn the call over to George.

Thank you, John.

Before we review the fourth quarter in detail, I'd like to share a few financial highlights.

During 2007, the Companies executed on significant strategic initiatives that we have discussed throughout the year. We have divested certain nonstrategic assets which have generated approximately $12.3 million in positive cash flow.

The divestitures, coupled with cash flow from operations, contributed $46 million in positive cash flow. Cash and cash equivalents at year end were $95.9 million, compared to $65.9 million at the end of 2006.

As a result of our improved cash position, our net debt decreased to $104.1 million, which resulted in improved net debt-to-equity ratio. Our debt-to-debt plus equity ratio improved from 52.8% to 49.2%. And on a net debt basis, we improved from 35.4% to 25.6%.

We still have not achieved our working capital target of $0.12 to $0.13 per dollar sale on a consistent run rate. We're putting additional resources and efforts into achieving our goal of the $0.12 to $0.13 during 2008.

We expect 2008 will be impacted in the range of $9 million to $13 million for expenses for the restructuring program we announced in November 2007, netted expected benefit of the Sarasota facility sale. We anticipate that we'll incur these expenses approximately evenly over the four quarters of 2008.

The Company incurred approximately $1 million for restructuring expense in the fourth quarter of 2007, and we're expecting projected benefits to be in the range of $8 million to $12 million in 2009 and beyond.

This program, along with the steps we have taken to address our SG&A expense, as explained by John earlier, will allow us to reduce our cost base and move the Company toward our long-term operating profit margin goal, in the range of 7 to 8%.

We'd now like to cover the fourth quarter results in more detail and provide some input for 2008.. We will then open the call for questions.

Revenue in the fourth quarter was $185.5 million, an increase of $14.3 million or 8.3% over the fourth quarter of last year. Favorable foreign currency translation contributed $4.6 million to our top line compared to the previous year. Our revenues continue to be unfavorably impacted by the substantial decline in North America commercial vehicle production.

During the quarter, North America commercial vehicle production fell 42%, in part to the change in emissions regulations. Offsetting these declines were the impact of the new program launches and new business in both North America and Europe.

Light vehicle revenue increased 4.3% to $68.2 million in the fourth quarter. The increase was primarily attributable to new program launches in the areas of emissions sensing and speed sensors. Medium and heavy-duty truck sales totaled $93.9 million in the quarter, up 6.1% from the prior year. Strong European commercial vehicle production, new product sales and favorable foreign currency exchange rates more than offset a 42% decline in North America commercial vehicle production, due in part to the change in emissions regulations.

Sales to agricultural and other markets totaled $23.3 million and were $6 million or 35% above the prior year. The increase in sales is predominantly due to strong build rates of John Deere.

North American revenue accounted for a 69.9% share of the fourth quarter revenue, compared with 72.3% for the same period in 2006. The percentage reflects the strong growth of our European operations and the production declines in North America commercial vehicle market.

In the fourth quarter, Electronics revenues increased approximately 12% to $120.2 million. The increase was mostly attributable to new program sales in both North America and European commercial vehicle segments.

Revenues for the Control Devices increased 2% in the fourth quarter. Both new business revenue and favorable exchange impacted the sales compared to last year.

Fourth quarter gross profit totaled $48.1 million, yielding a gross margin of 26%. Our gross margin was significantly higher than last year's level of 21.1%. The increase in gross margin was due primarily to new business volume in our European Electronics business and new business and more favorable mix in our North America Electronics business. This is the highest gross margin we have achieved in the last eight quarters.

Our commodity and foreign currency hedging programs resulted in a slightly favorable offset to the unfavorable variances and the volatility we experienced with some of our commodities, especially copper. As a reminder, we locked in approximately one third of our total copper purchases in 2007 at favorable rates compared to the market prices experienced throughout 2007.

Sales from low-cost manufacturing locations accounted for 32% of total sales in the fourth quarter, compared to 37% in the prior year. Reduction as a percent of sales in the fourth quarter of 2007 was due to new business in North America and reduced electronics sales in the heavy-duty truck market from our Mexican operation.

With our China operation ramping up and our restructuring initiatives, we expect our sales from low-cost locations to grow. As we relocate labor-intensive manufacturing over time, we will expand our presence in the three key low-cost manufacturing locations of Mexico, Estonia and China, and build on our growth potential in Brazil and India through our joint ventures.

We are continuing construction of our new facility in Estonia, which will be completed in the second half of 2008. We will relocate existing Western European production from our current facilities, plus production being transferred from our other facilities, which will benefit our Estonia facility.

Selling, general and administrative expenses totaled $34.6 million in the fourth quarter, compared to $33 million in the previous year. The prior-year SG&A figure benefitted from the non-recurrence of a $1.6 million one-time gain related to the sale of a real estate investment realized in the fourth quarter of 2006.

The increase in SG&A during the quarter was related to additional design and development of marketing expenses, primarily in our European Electronics operation that applies to future platforms.

And finally, our operating income totaled $12.9 million in the quarter, compared with $2.8 million in the prior year, an improvement of $10.1 million. Fourth quarter income tax expense totaled $4.3 million, resulting in an effective tax rate of 40%. The rate is higher than in the first nine months, primarily due to the level for the fourth quarter and the year of higher-tax domestic earnings. We expect an average effective tax rate to be in the range of approximately 45 to 48% for 2008 due to restructuring charges of approximately $8 million to $10 million in the UK, which will accrue no tax benefit.

Stoneridge recognized fourth quarter net income of $6.5 million or $0.28 per share, compared with net income of $1.5 million or $0.06 per share in the prior year.

Depreciation expense for the fourth quarter was $6.2 million, and amortization expense totaled $326,000. For the full year, we expect depreciation and amortization to approximate $28.5 million.

Earnings before interest, other income, taxes, depreciation and amortization were $19.5 million in fourth quarter, compared to $9.6 million in the previous year. Our EBITDA measure does not include the significant improvement in our equity earnings contributed by our PST and Minda joint ventures, which contributed $3 million before tax in the fourth quarter of 2007, versus $2.3 million before tax last year.

Equity earnings for the year were $10.9 million before tax in 2007, compared to $7.1 million last year, an increase of 52.9%.

Our primary working capital totaled $110.3 million at quarter end, which decreased $5.4 million from the previous quarter. As a percentage of sales, our primary working capital was 15.2%, which was higher than the prior-year level of 13.1%. The increase was partially due to increased sales in the Electronics segment to customers with contractually longer payment terms.

While we have made good progress towards improving our working capital levels and improving our process flow, our working capital balances remain above our targeted range of $0.12 to $0.13 of sales. We see significant opportunity to reduce our inventory balances in 2008 and have made this a focus area for operations.

Operating cash flow net of fixed-asset additions was a source of $22.5 million in the fourth quarter, compared to a source of $18.7 million in the previous year. We have generated $80 million in operating cash flow in the last two years -- $33.5 million in 2007 and $46.5 million in 2006.

In 2007, we generated approximately $46 million in cash flow -- $33.5 million from operations and $12.3 million from the divestiture of nonstrategic assets, which included two idle facilities and the Company airplane. We continue to target primary working capital balance in the range of $0.12 to $0.13 per dollar sale.

Capital investment totaled $3.9 million in the fourth quarter, mainly reflecting investment in new products and testing equipment. Some significant components of our investment were in the areas of electronics and instrumentation. For the full year, our capital expenditures were approximately $18 million.

Turning to liquidity -- in the fourth quarter, we completed our new revolving credit facility. This facility will provide us with significant flexibility going forward and eliminates our financial maintenance covenants. We've also structured this facility to allow us for the flexibility to refinance our long-term debt when the capital markets improve.

Our cash balance totaled $95.9 million compared to $65.9 million at the end of the fourth quarter of 2006. Going forward, we expect to fund our operational growth initiatives through our free cash flow generation, available cash balances and the available credit line. We have not drawn against our revolving credit facility during any period in the last two years.

As John mentioned before, because of the previously announced IPO transaction filing of our PST joint venture in Brazil, we are not providing earnings guidance for the year at this time, due to the volatility uncertainty of the capital and equity markets.

However, what we can say is what we see for the first quarter. North America light truck and pass car production levels are forecast to be in the range of 14.3 million to 14.6 million vehicles for the year. Commercial vehicle, medium and heavy-duty trucks production in North America is forecast to be comparable to last year.

European commercial business continues to run strong, at least through the first half, and our joint ventures continue to run well. For the first quarter of 2008, based on our market and operational outlook, our operating income should improve by $2 million to $3 million compared to the first quarter of last year. But our results will be negatively impacted by approximately $3 million to $4 million from the previous announced restructuring programs.

As we stated before, our projected restructuring expense, after the expected benefit of the facility sale in Sarasota, will be in the range of $9 million to $13 million. The annual expense will be incurred evenly over the four quarters. Once completed, our restructuring should generate savings in the range of $8 million to $12 million in 2009 and beyond.

In summary, we have made significant progress during the last two years. We continue to address our top-line growth through new products, geographic expansion and customer diversification. We continue to address our cost structures, especially our raw material costs, manufacturing overheads and SG&A excluding development and design expense.

We continue to focus on cash flow as a way to strengthen our balance sheet. We still have work to do to manage our working capital in the range of $0.12 to $0.13 per dollar sale.

We need to continue to improve our operational excellence. We need to complete our restructuring plans well, which will permit us to create an efficient and effective manufacturing footprint on a worldwide basis.

And operator, I would now like to open the call for questions.

(OPERATOR INSTRUCTIONS) David Leiker of Robert W. Baird.

Hello? Can you hear me?

Yes, Dave.

Morning, David.

First of all, George, I missed the depreciation number.

You missed it?

Yes.

It's $28.5 million for the year.

Okay, great.

The gross profit margin you put up here in the quarter -- clearly well beyond anything you've done in the last three years. How much of that is sustainable on a go-forward basis? Was there anything really unusual in there, or is this a -- have you finally gotten back to what your old level of profitability has been?

Well, I think that we're looking at two things. I mean, we did make some operational improvements. We shut down factory; we consolidated that. We believe that will be sustainable. We also had -- on some things that we were closing out with certain customers, some disputes and discrepancies, and so that benefitted us. We don't expect those to go forward in the future.

But I think that what we're trying to do is build in the floor on a gross margin level. I think you've seen that we've been able to build in that floor and operate from that level and improve it, as we continue with these operation improvements, particularly when we finish with this restructuring.

What do you think that normal level of gross margin would have been in the quarter?

David, I think we've always said that we'd run at a rate between that 23 to 25%. We were clearly benefitted with the new mix of business we picked up. I think as you mentioned -- John mentioned -- the government business we have, that's predominantly in the second half of this year, and then we have some of that business flowing through the first half of next year -- that had a nice mix of margin to it.

And we had, with the down market -- especially in the wiring business was impacted by heavy-duty truck -- that has a lower-margin business. So when you see that mix of a better run rate of commercial heavy-duty truck, I think you're going to see some of the margins come down because of the volume there. And then the continuation of the government business will not run at the same level we experienced in the second half of this year in what we're expecting the first half of next year.

Okay.

So that will tend to reduce the margins from what you're seeing right now in the fourth quarter, but I think will get us back in that range that we've always said that we're striving for, in that 23 to 25% range.

And if we -- okay. And is there anything unusual about this quarter seasonally, that makes it bigger then the other quarters that play here, or not really?

Nothing seasonal. I think what we're seeing is the benefitting in the global business. Our European business continues to run very strong. Our joint ventures ran well in the fourth quarter. And then naturally, we had the big drop in the heavy-duty and medium truck business, which we all forecast that that would come back sooner. But right now, it continues to run at lower levels than I think we all expected.

Okay. Great. Thank you.

You're welcome.

Brandon Ferrell of KeyBanc Capital Markets.

Good morning, guys.

Morning, Brandon.

-- Brandon.

I want to start with your first quarter outlook -- either one of you guys. You had talked about a $2 million to $3 million improvement versus 1Q '07. Can you just kind of call out what that comparable number is from the first quarter of last year, that you're comping that $2 million to $3 million increase against?

Well, I think, Brandon, last year that the --

I think you said operating income?

Yes, we talked about operating income.

Is it --

Last year, the operating income was roughly about -- little under $10 million; it was $9.7 million.

Okay, so $2 million to $3 million on top of that?

That's right.

Okay.

John, when you think about what's going on in China and what you've already done there -- you talked about cash flow-positive -- do you have any goals that are set in stone for a run rate in sales as we move forward? What's taking place there -- what kind of capacity utilization, et cetera?

Well, we've got about five product lines that are over there now. And we started this year with a program of -- a more aggressive business-development program. We've aligned our organization -- we've put the responsibility for Asian growth back into the various business units, so they have to develop their products and programs working in conjunction with our folks over at China. So we'll put resources on the ground in China to support that development growth.

In terms of setting a growth target there -- we're going to do that later on this year, as they've gone through all their plans, to assess where we can make an impact on how the markets develop. For instance, on emissions, we know emissions are the high-growth market. But in the Asian market, unless it's legislated, it won't grow the way it will in the European and North American markets.

So it's still -- China's still very small footprint for us. And we're now starting to wrap our arms around -- first we had to get the plant to where it could produce, and get it to a breakeven point; we've done that. Now we're ready to start the accelerated growth. We're putting resources on the ground to do that, but I don't have a targeted growth rate for that.

Okay.

While were on the subject of China, John, just strategically from a competitive standpoint -- I mean, we listened to Lear this morning talk about increased competition in their electronics business. What allows you guys to keep your margins? And how is that changing? Can you kind of just explain the competitive landscape?

Well, you mean, Lear was talking about impacts from China on their business in North America and Europe?

Yes, just generally increased competition in their electronics and their distribution business.

Okay.

Well, we haven't really seen much of that in our business segments. And if you look at our commercial vehicle market, for instance -- if you look at instrumentation, you look at the big instrument panels that we ship and send to people, it's pretty bulky to move that product around. If you look at the tachograph, for instance, that's a mandated product; has to be produced in a secure facility. So that protects us -- has a little built-in protection to it also.

If you look at the North American market -- I think really, so far, it's been our technology, although we will source product back here if necessary. But I don't think we're seeing that the cost structure -- we continue to drive our cost structure down.

I think -- when you look at China, the rate -- really, the big issue is their labor rate, and then second, their overhead rate. And so, when we're working to consolidate and take costs out of our operations, if you compare that favorably to our Mexican operations, I don't think we have any -- we're not seeing any significant inroads on that.

Okay.

That doesn't mean -- as I said before, though, China operation for us is both an offense and defensive play -- offensive meaning we want to start growing into that Asian market; defensive -- if we start to see product coming from Asia that impacts our business, we'll move those products into that area and ship them back into the home market.

Okay.

With respect to the $200 million in new business, can you kind of give us a cadence and a time period over which that flows in? Maybe, is it three years -- '08, '09, '10 -- and how much per year?

Well, at this time, Brandon, we haven't really wanted to -- and we don't want to disclose that level. I mean, this is a gross number. But we'll continue to talk about this in the future moving forward, but we don't want to put a split out there like that at this point.

Can you give us a sense of the number of years that it entails, rather than saying it's 25% '08, '09, whatever?

Well, most of our program awards are -- there will not be any significant impact next year; those are the awards we won last year. So we look at these awards as kind of four years from this year, spreading out over that horizon, to really look at it over the next -- not next year, but over the next three years after that.

So maybe 2010 and beyond?

Yes, I would say probably that -- where the bulk of it will show up. We'll get some benefit in 2009. But most of our awards in 2009 were booked in prior years.

So that roughly $50 million in gross organic growth per year, through probably '09, is a fair representation of what's taking place still?

Well, I -- we've talked about the growth, and I think our target has been -- is 5% for organic growth over the next three to five years. And that's the target that we're striving for. And it's your projection. I mean, it fits within that range.

Yes.

Okay.

And again, I guess, just to lay the platform to remind everybody -- we felt that -- our first objective is really to secure and sustain our operational base. And I think with this restructuring program we've announced -- when that's completed, we'll have done that. And then to improve that performance, and then to start moving into more aggressive marketing plays. And that's where we're turning our attention now.

With respect to the mix in the fourth quarter, I think you guys kind of explained there were some things in there that might not persist going forward. But John, just longer term, it appears as if most of the business that you guys are booking and bringing on is electronics-based, which I would assume carries better margin than some of the controls-related stuff.

Is there some benefit, some longer-term benefit, that's taking place? Is there a broader mix shift that we should expect going forward, that might benefit margins?

I wouldn't characterize it that way, because I think it really is product-specific as to what the margins are. And also, if you -- our actuation business was part of the business we picked up in the Far East. So we're trying to expand our product offering across the board, where we see attractive profiles of the product line, and business profiles and financial profiles, that will allow us to grow in there and sustain that growth.

Okay.

And I think part of the conclusion you're seeing, Brandon, is that growth in the markets where it's coming. And right now, Europe continues to grow and expand, whereas North America is down just because of its overall volume.

Let's see here -- I kind of wanted to talk about PST. I know you can't talk about much. What's your ownership base? What's the potential tax liability going to be based on? Is it below $20 million range?

We can't really -- I mean, as you know, it's a 50-50 joint venture. And beyond that, Brandon, we can't really -- we can't really say much more about the operation at this point.

Okay.

Is there any way for you guys to kind of disclose what the full-year '07 EBITDA was in PST this year?

Well, as you know, we disclose in the 10-Q full financials, so that when that comes out, you'll have full access to the financials of PST.

Okay.

We will tell you that substantially -- most of the equity earnings in 2007 is attributable to PST.

Okay.

With respect to restructuring -- full year -- sounds like you're going to hit a run rate on the roughly, I think, $9 million to $12 million as we exit 2008 going into 2009? Is it fair to assume, though, that those savings start to flow through, as we sit here today, actually, in the beginning of 2008?

We don't really see much. Because there's a lot -- it's very -- I mean, we've got to get testing with our customers in that. So you won't see a lot of the benefit in 2008.

The way we've pulled this together is we've looked at this and said -- I mean, there are a lot of uncertainties in our time horizon, primarily as George alluded to. You have to go back, and we've got to re-qualify at the new locations. What we're in the process right now is building inventories to allow for the transfer. We're starting with going to the customers and getting them validation. Then we'll do the [P-pats] at the new location and do the product testing of samples that come back from that.

If we can accelerate that, yes, we'll be able to move faster than our plan. But we've given ourselves hopefully sufficient time to make sure we get customer approval to proceed. But if we do accelerate it, there should be some benefit maybe later on in the year. We're not planning for that right now.

Okay, so most of it will take place in '09, then?

Yes.

Okay.

Cash use -- almost $100 million on the balance sheet at the end of the year; it's half of your market cap. I know you've talked about priorities of that cash. Is it still first and foremost debt? And can we actually start to see some de-leveraging take place during the year?

I think what we wanted to do, as we talked about before, is we want to prepare the Company for any kind of crisis that might hit, not in the Company, but in the marketplace. I think we've done that, and I think we are looking at options with our Board for de-leveraging the Company. So we will continue to look at that and examine that.

We've got an objective here to lower our financial cost of the business, and de-leverage is one way to do that, along with potentially refinancing.

And I think we said that's a high priority for the Company, so clearly that is an objective we have.

Okay.

I think the thing that we want to do, though, Brandon, is do it at our terms as opposed to come into sort of volatile markets and pay a premium when we think we have the balance sheet --

Right.

-- to support something better than that.

Okay.

Is there anyway, George, that you can kind of just give me some housecleaning items -- 2007 revenue breakdown, commercial truck; and what the split between North America and Europe is? And then maybe agricultural and aftermarket?

Well, that's -- I mean, we will provide some of that in our disclosure, and I think that's the best place to get it, rather than use a lot of time here to do that.

Yes, because it really -- aftermarket -- if you look at what our aftermarket in Europe was, the number I quoted, the 30-some million -- that's all aftermarket. If you look at in the North -- and that all goes primarily into the commercial vehicle segment. But in the U.S., our product flows in -- it's a much smaller market, but it flows into various market segments, including automotive.

Okay, guys. That's all I have. Thank you.

Thanks, Brandon.

David Leiker, Robert W. Baird.

David?

Mr. Leiker --

Can you hear me all right?

What?

Can you hear me all right?

Now we can.

Sorry about that.

What's the reason that you're not providing guidance?

Well, as we said, with the PST IPO, that could have -- we believe there's significant value in PST. And with the IPO, we hope to unlock some of that value. But I mean, right now, with the markets being where they are, it becomes difficult to say, if we go forward with that IPO, what the implications would be on our performance.

But couldn't you provide guidance assuming nothing changes from where you are today?

I think the problem is there's many different facets a potential deal could do. And to try to qualify and quantify all the different alternatives, I think it becomes very difficult. So rather than getting into those discussions, I think we felt it was better not to provide guidance. But I think what we will do is -- just as we've done here -- is we'll give you some insight into what we see for the current quarter. And if the situation changes, then we'll come out. And I think we're very clear that we'll provide guidance for the year, or give you an update for the quarter, to at least keep you up to speed where we think we're going as a company.

Okay. I understand that. I guess -- (inaudible) the next one in the context of assuming nothing changes from where we are regarding PST, consistent with what you're giving for the first quarter. If you take your fourth quarter you just reported, and what -- this is implying a first quarter number that's not a whole lot different than Q4, you got $0.55 or $0.60 in earnings in two quarters. What would be wrong -- where would we be wrong if we just doubled that and said that's a full-year run rate?

Well, I think we can't get into each one of those different variances. But clearly, we were -- I think we tried to say that we were benefitted by some new business in the fourth quarter that came in very strong. And that business is out there for 2008. But it's mostly in the first quarter, second quarter, so it doesn't continue through the second half. So there's some nuances like that that do not carry quarter-to-quarter and for the full year.

Is that business that goes away in the second half of the year?

Well, it's extremely high-volume compared to what you would expect to see. I mean, it's a unique business that we got -- clearly started in the third quarter; in the fourth quarter, nice run rate. And then right now, it's forecast to run only through the first half.

Yes. And in addition, as I said before, in the fourth quarter, we closed out on some customer issues that were favorably impacted for us. So we don't expect to have those customer issues again. We don't expect to see that favorability repeat.

But what we're trying to emphasize here is, even taking those out to look at the fundamental operating performance of the business, and in the range that George mentioned on the margins, on the gross margins, that's where we're tracking to push this business to achieve that and sustain that.

Okay.

Which -- if we remember, our margins are -- we've got fairly good gross margins. So what we've got to focus now is continuing that operational improvement, and then start a more aggressive plan around our marketing growth. Because as we drive our top line, then the other things, like SG&A and our percentage targets there, start to come into reality.

How much of your SG&A expense would fall into product development R&D as opposed to sales and marketing?

We spend a little over 6% on design and development R&D.

Right. Our typical SG&A is a little over 12% excluding D&D, and then design and development's about 6%. So when we talk about SG&A that we're addressing is we'd like to maintain dollar spend with our design and development. But when we say we're going to reduce the target less than 10%, it's really coming off that base of about 12 to 12.2%.

Okay. And where would you like to get that number? I mean, some companies in this space are down at 5 or 6 or 7% of revenue. Is that something you can achieve?

Well, I think part of it is our sales level. And our dollar spend will continue to go up as we -- for new products. But our percent of sales will stay the same or decrease as our sales top line continues to grow. So I think what you'll find is that we'll inflate in dollar terms over the period, but not at the same rate that sales will grow.

Where do you --

Well --

Do you have a target of where you'd like SG&A to be as a percent of revenue?

We said 10% is where we'd like to target it.

Okay.

And then -- I've been jumping on and off the call, so I apologize if you've hit these before.

One thing on the D&D -- just let me comment -- one further comment on that. We have a balance of growth opportunities, but some of these would require a lot higher D&D spending in the longer-term timeframe. So we're balancing out several activities. But I would probably not say we would see reductions as a percentage of sales -- significant reduction of percentage of sales at our D&D. As we said before, we won't see any significant increases in that line, either.

It sounds like your plan is to lower that through growing the revenue base as opposed to addressing any cost issues that might be there.

A lot of our D&D is tied to --

Not the D&D, but the SG&A.

Oh SG&A -- there are, as we talked about -- we've consolidated some business units. The high-stat units are consolidating now, and we'll -- part of the restructuring in 2008 -- that will benefit it. In 2007, we consolidated the North American Electronics business. That's taken out some SG&A overhead. We're doing some other things that will continue to push that line down. So it is a combination of cost-reduction, cost takeout and sales growth.

Okay.

All right, great. Thank you.

You're welcome.

Brandon Ferrell with KeyBanc Markets.

George, just to make sure I've got this right -- the 40% tax rate in the fourth quarter is basically what you're expecting quarter-to-quarter through 2008?

Well, I think we actually said it's a little higher than that for 2008. And it really has to do with the restructuring expense in the UK. Our rate's running -- I think it's right around in that range of 45 to 47 -- or 48, I think we said. So it'll be right around 46. But a lot of that is because of the restructuring expense in the UK operation, which we get no tax benefit for.

Okay.

And then thereafter, 2009 -- I think you were targeting lower 20% range? Is that right?

Well, I think it'll go back historically. This year, we ran in that range, around that 30%. And so I think we can get it back in that level for 2009 and beyond.

Okay.

Can you guys just kind of quantify if you've got this available -- what occurred during 2007 in terms of expenses that won't reoccur in 2008? Worse than expected -- let me put it this way -- you had some facility issues in the second and third quarter. Those were about $0.20 a share, right?

Yes, we had some product launch issues that caused us some difficulties and impacted us. And we're working on those and making progress on that. Most of the launch issues were resolved. We've still got one that's improving rapidly and is actually in a very good growth line for us.

So those things should go away. And we're focusing on -- we're having our -- each one of our business unit managers or leaders have now -- as one of their personal objectives for 2008, we're going to focus on the cost of poor quality inside their business units. So that will be tracked and monitored and measured as it was this year. But now we're going to start -- we're going to expect to make some significant improvements in certain areas where we feel we are not operating efficiently.

Okay. Perfect, thank you.

Catherine O'Connor of Deutsche Bank.

-- could help us out with the dollar amount of the one-times you got back from your customers?

We don't disclose that.

Mean just sort of the general range, so we could figure out what the normalized margins would have been?

It was roughly less than $1 million, so it was not significant.

Okay.

And then in terms of the working capital -- I guess you said you had some changes in payment terms. Where exactly, I guess, on the Electronics side -- is that from a certain geographic area?

It's not a change in payment terms; it's just where the volume of additional business -- our sales have gone up in Europe, which traditionally have longer terms than other markets.

Right, okay.

And then I guess the last question -- in terms of where you see the business going over time, once you get the operational side worked out, and you're in the more aggressive marketing side, do you have a goal for where you want to grow and how big you envision the Company at that -- what your goal for the size and scope of the Company will be going forward?

Well, I think as George said, we're trying to target growth in the mid-single-digit range. We're looking at certain area -- we think the emissions area is an area that we've talked about which has good opportunities for us. We look at the commercial vehicle market, particularly instrumentation and tachographs, as good opportunities for us, continued opportunities for us; we have good positions there.

We like the aftermarket business in Europe. We continue to grow on that and will expand that geographically, and maybe with more product additions.

And then we have some new sensing capabilities that we think will apply well to the off-road markets, construction and ag markets. And we're developing those, and those should come on later on. And then finally, going back -- chemical sensing business in the 2011, 2012 timeframe, driven by the growth of those markets.

So in terms of the opportunities you just listed, how many of those are outside of North America? So how many of those are in Europe, and how many of those are in Asia?

If you look at emissions, that can be global, again, depending on the market. There's opportunities in Asia, opportunities in Europe and in North America. If you look at -- well, the actuation product that we awarded -- that was in Asia. If you look at instrumentation and commercial vehicles, I mean, our market's split between Europe and North America, and we're looking at how we participate in the Asian market.

Now, our Indian joint venture is one of our plays to go into commercial vehicle instrumentation. So we can do that -- we can leverage that facility to do that.

And then finally, if you look at -- if you look at tachograph, that's primarily all European-based. But as legislation changes, that product might expand further.

Do you know approximately what your market share for the tachograph in Europe is versus your competitors?

We normally don't disclose that. They're two key competitors, and it makes it sensitive as to what our market shares really are.

And then I guess, maybe more generally then -- in terms of where your market shares are now in your products, do you feel like you need to increase those shares in order to get better scale? Is that something you're thinking about?

And I guess in terms of the more aggressive marketing, are you willing to -- what are you willing to do in order to possibly increase your share and improve your scale versus your larger competitors?

I don't necessarily think increasing our scale is the key that we want to follow. What we're looking -- in our case, we're looking at being a fast, flexible and responsive organization that brings technology to the table for our customers. So if our customers are going to look at us, that's what we want them to do. We want them to know that they can come to us, and we can turn around something very quickly.

And if you looked at the example of the program that we won this year, the military program, that is a good example of the team all of a sudden turning on a dime and pulling together a design and development efforts, and then actually going into manufacturing and producing the products. That's really our play.

That, and then combining it with technologies that we think are sustainable, in areas that primarily -- with legislative emphasis. So if you look at the emissions play, if you look at the safety play, if you look at the tachograph -- that's another one -- you look at instrumentation -- that's not legislated, but it's needed -- those are the kind of things that we're looking at to continue with.

It sounds like you're more comfortable sort of in a -- looking at things on an opportunistic basis and sort of staying a niche player, rather than looking at it in something in terms of (inaudible).

I wouldn't call it opportunistic. I mean, each one of our business units has a plan for those products; that's where we are today. The opportunistic side might come if we see something that would fill out our product portfolio. Then we might go after that and try to develop it. But all of these are plans that the current business units are working on.

Right. So I guess, I mean, I'm saying "niche' in the sense that you feel like you have the right market share now. You don't think it's necessarily vital to try and increase that market share, or --

Well, I think you can increase market share. I don't want to increase market share through the traditional way of trying to go out and price cut in the marketplace, and destroy our margins. I want to increase market share because I'm offering the customer something that's more attractive to them versus the competitor on a non-price basis.

I mean, price is always going to be a part of it, and so is quality. But those are kind of givens at certain levels. But then I want to offer the other things, which is either a technology -- something that solves a problem for them, and the fact that we can bring it to market to them in a fast, efficient manner.

So I guess this sort of brings me back to the marketing phase, then. Because if you're solving problems with solutions, then -- it sounded more like you were going to be going after a more aggressive marketing scheme. So I was just trying to differentiate that between what you're doing right now.

Well, I think -- yes, if you wanted to find a more aggressive marketing scheme, it really is starting -- I think in the past, we would develop things for a customer. I think one of our challenges and changes is, look, we want to let the market determine how fast they want to integrate something. And we want to offer it to the market, not specifically to a customer. Now we will certainly work with any customer. But we want to try to have the customers drive the market and us participate with them. And I think that's probably one of the ways that we think we can add value to our business.

So I guess it sounds like what you're saying is that before, when you developed maybe a solution for someone, for a customer, you weren't able to take that solution and deliver it to other customers?

I think our mind set was that we didn't focus on that. We didn't think about that. We spent too -- we spent a lot of time with that customer. I think as we've talked about here in our plans -- when we talked two years ago -- we want to see more diversity in our customer base, and we want to take our products across multiple customers or multiple regions. And that's one of the areas we're working on.

So our business units are now thinking about this technology. For instance, we have a technology that we're developing on magnetic sensing that could be used in various markets. How do we take that to the European market, to customers over there; to the North American market? Which customers, and how do we penetrate with those customers -- instead of before, maybe just developing it with one customer.

Okay, I think that answers my questions.

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

Okay, well, thank you.

We're very encouraged by the performance in 2007. I mean, we tried to give you a flavor of it. But if you look it, the real test of the management and the team that we've got here at Stoneridge is our ability to take the pluses and the minuses and still turn those into an overall plus, which means improvement in operations.

I would say 2007, because of the impact of the commercial vehicle market in North America being down as much as it was, offered a significant challenge to our business. And I'm pleased that our performance has improved the way it has. And that's through the work and efforts of a lot of people.

So I think as you look at this, and you look -- this is the second year we've met our commitments. We've gone forward, we've laid out what we were going to do; we've done and done it. And that's how we expect to proceed in the future. And I think the message coming out of here is improved performance, but based on a strong alignment of the management and the organizations to driving those results.

So if there are no other things, I'd like to thank you all very much, and look forward to talking to you on our next call.

Thank you for your participation in today's Conference. This concludes the presentation. You may now disconnect. Good day.