Stoneridge Inc (SRI) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2008 Stoneridge Earnings Conference Call. My name is Carissa and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this call. (Operator instructions) As a reminder, today's call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Ken Kure. Please, proceed.

Good morning, everyone and thank you for joining us on today's call. By now, you should've received our third 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 may be forward-looking statements. Forward-looking statements are those statements that are not historical in nature and include information concerning our future results or plans.

Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties and actual results may differ materially. Additionally, additional information about such factors and uncertainties could cause actual results to differ and may be found in our 10-K filed with the Securities and Exchange Commission under 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 results and his thoughts on the remainder of 2008 outlook and market conditions. George will discuss the financial details of the quarter, along with our guidance for the rest of the year. After John and George have finished their formal remarks, we'll then open up the call to questions.

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

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

Declines in the North American light vehicle segment continued to hit new low projections and now Europe is also slowing signs of decline.

In commercial vehicles, both Europe and North America, markets are being impacted with Europe's forecasting declines in the 10% to 15% range in new truck orders. North American commercial market has dropped nearly 35% in 2007, experienced a slight improvement in 2008 and is forecasted to be flat in 2009.

There are several reasons for these significant changes which you are all aware of. So, I won't recount them here. However, it is fair to say that we are in a period of time where these forces are having a dramatic impact on our industry. Times of crisis are when the challenge to management lead is highest.

So, what are we doing about the change we have seen? Starting in the third quarter of 2007 and continuing into 2008, the team at Stoneridge has taken actions to improve our top line, leverage our global manufacturing footprint, improve our cost structure, secure our assets, generate cash, manage our liquidity, reduce our debt, and take advantage of opportunities in the volatile commodities and foreign exchange markets.

We are continuing on our plan of operational and financial improvements and market and customer diversification that we started in 2007. We continue to modify our plans in response to the market challenges we are facing in 2008. A positive highlight of that plan is our revenue growth compared to 2007 in the first half of this year and now in the third quarter in the face of a significant downturn in the North American market.

In the third quarter, net sales increased by $5.6 million or 3.2%, reaching $178.4 million. Our sales increase occurred despite a 23% decline in production volumes at the traditional domestic light vehicle manufacturers which were driven in part by the dramatic shift away from light truck and SUVs due to fuel prices. Our growth in the third quarter continued to reflect the growth in our military business which was started in the third quarter of 2007, launches of our EGT business in North America, and improvements in our wiring business and sales in Europe.

Our strategy of targeting cornerstone customers has begun to yield results. Gains in the agricultural business segment, primarily at John Deere, combined with additional military sales provided the basis for the increase in our third quarter revenue. Our European commercial vehicle OEM core customers continue to perform well compared to the prior year although our after-market business was relatively flat with a lower margin than planned because of a delayed product launch. We are planning for a downturn of Europe commercial vehicle sales in 2009 as the industry adjusts to the slower economy.

Our new business awards in the third quarter included important strategic wins at our cornerstone customers such as John Deere, Navistar, and Natco, as well as two new Asian OE customers, particularly [Sansada] and [Sangyung] in our emission sensing business. These awards represent important progressions of our customer and geographic diversification initiatives. Our PST joint venture continues to perform well and has launched new alarm systems with the largest motorcycle assembler in Brazil.

Beginning in November 2007, we outlined our restructuring plan for the Sarasota, Florida and Mitcheldean, UK facilities. Early on, we recognized the need to adjust our manufacturing overhead cost centers to enhance profitability, not only in robust economic times, but also to protect profitability when market adversity occurs. We're in the final phases of executing the shut downs of these two facilities and expect these initiatives to be completed before the end of this year.

The gross margins for the third quarter have maintained a similar level to the prior year after excluding the restructuring cost. In the third quarter, our gross margins, excluding restructuring cost were 21% compared to 21.9% in the third quarter of last year. The gross margin benefited from our new business wins, increased volumes in our commercial vehicle segment and a better mix of products in North America, continued efforts to recover commodity cost increases, and the design and redesign of some of our products in North America, and benefits from hedging approximately 20% of our copper.

Our gross margin was negatively effected by approximately $1.6 million in lost overhead recoveries due to lower volumes which were a result of the restructuring bank build of inventories produced in the first half of 2008. We continue to manage our raw material cost and as a percent of sales, has been flat over the year. Our Asian sourcing of many of our electric parts, connectors, board assemblies, and electronic components continues to lower our acquisition costs. Due the current financial turmoil and the strengthening of the US dollar, we have started to see significant reductions in some of our commodities such as copper and zinc, which can provide opportunities to lock into favorable prices compared to those experienced over the last few years.

Operationally, we continued to show improvement in our cost of poor quality. In the third quarter of 2008, our cost of poor quality improved by $1.3 million on a similar sales level compared to last year. We have improved by $2.3 million through the first nine months of the year compared to last year. While we are making progress in those areas, there is more that we can achieve in the future. We are also working through our Lean initiatives to make our improvement permanent and ongoing.

Our operating income for the third quarter of 2009 was $900,000 compared with $5.2 million in 2007. Our third quarter 2008 results were negatively impacted by $4.8 million in restructuring charges and approximately $1.6 million in lost overhead recoveries due to lower volumes which were the result of bank builds for inventories required under our restructuring plans that were produced in the first half of 2008.

We continue to pursue the sale of the Sarasota facility. Buyer earnings guidance included a gain on the Sarasota facility of between $4 million and $5 million or nearly $0.10 a share. We have eliminated the gain on the sale of the Sarasota facility from our current guidance. We believe the sale of the facility will be delayed until 2009 because of the difficult commercial real estate market and the more stringent financing requirements.

Our joint venture in Brazil continues to perform well with another strong quarter. Local currency revenues increased 15% in the quarter and our share of equity earnings increased from $3.4 million in 2007 to $4.2 million in the third quarter of this year, an increase of $800,000 or approximately 24%.

PST continues to report strong results in its after-market business, particularly in the security products area and new business with OEMs in Brazil. Given PST's pipeline of new products, we continue to expect growth from this venture although we are cautious about the potential impact of an economic slowdown as much of Brazil's growth and success has been built on strong exports, growing agricultural markets, and higher prices related to the global commodity markets.

One changing factor is the Brazilian Real compared to the US dollar. In the third quarter this year, the Brazilian Real has appreciated approximately 14.6% against the US dollar compared to the third quarter of 2007; however, the Real devalued in the last two months from 1.85 to 2.05 Real to the dollar which will impact reported earnings going forward if the rate stays in this range.

Our diluted earnings per share was a loss of $0.02 in the third quarter. Excluding restructuring expenses, our earnings per share would've been $0.15 per share which compares favorably to last year's $0.11 per share. Earnings per share for the nine months ended September 30, 2008 were $0.46 per diluted share which included $0.37 per share in restructuring charges. Earnings per share, excluding restructuring charges for the nine most ended September 30, 2008, were $0.83 compared to $0.43 for the nine months ended September 30, 2007, an increase of $0.40 or 93%.

Going forward, we face a challenging environment, particularly in the North American commercial and light vehicle business. Given the almost weekly adjustment to build plans from our OE customers, forecasting for material and production planning has become more difficult. For the fourth quarter of 2008, the traditional domestic light vehicle OEMs are forecasted to be down 20% to 22% compared with the fourth quarter of 2007. The North American commercial vehicle market appears to be tracking towards a modest recovery, although at the lower end of our previous expectations. Given the market's volatility, we remain extremely cautious.

We are facing these challenges with the same fundamental focus that has resulted in our progress to date, working on the aspects of our business which are under our control in the short-term and adjusting our market strategies longer-term to reflect the new realities. Short-term, we are managing our cost structures by adjusting our direct labor and variable overhead cost to match reduced production levels and control discretionary spending, pursuing world class operating metrics and driving cash flow through forecasted working capital management and improved profitability.

In addition to the two restructuring initiatives we have discussed, we are implementing additional restructuring initiatives in our Canton, Massachusetts location. We have announced the closing of our second facility in Canton, Massachusetts, plus additional layoffs to match the production schedule reductions. This initiative is expected to cost about $900,000 of which $300,000 was expensed in the third quarter and the remainder will be recognized in the fourth quarter. These additional measures are also expected to be substantially completed by the end of 2008 with the 2009 benefits estimated to be approximately $2.1 million.

The environment for the remainder of 2008 will be challenging. We are providing our new expectations for the full year earnings to be in the range of $0.40 to $0.46 per diluted share which includes restructuring expenses in the range of $13 million to $15 million or $0.48 to $0.52 per share.

I'm pleased with the results for the quarter, even though they have been impacted by the negative market declines, mix shifts, and charges associated with our restructuring efforts. We are taking the appropriate actions to improve Stoneridge on a long-term basis. We are growing our top line even in the face of significant drops in the market.

During 2008, we have established a global manufacturing footprint that provides us with the opportunity to provide the lowest landed cost from any one of our facilities that serves our customer requirements. Our restructuring plans are well on track to be completed by the end of the year. We enhanced our restructuring plans to adjust for the downturn we are experiencing in the North America light vehicle market and we continue to monitor our cost structures with market forecasts. Restructuring, once complete this year, will benefit the future performance of our Company. While we are faced with a difficult environment and vehicle mix has an impact on us, we will continue to work on our plan of improving operations, improving financials, and increasing market penetration, leading to improved shareholder value.

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

Thank you, John. Before we review the third quarter, I'd like to share a few financial highlights in the quarter that applies to the original plan we shared with you previously and to which we are executing or will execute once the equity and capital markets are more stable. Our restructuring programs, announced in November 2007 continue to track to plan. As John mentioned, we have announced additional measures in the third quarter adjust for market downturns in North America.

We are focused on cash flow, maintaining our liquidity and improving our return on invested capital. Compared to the third quarter of 2007, we have improved our gross debt to debt plus equity from 57% to 44.8% and net debt to equity from 45% to 24.9%. We have strengthened our balance sheet to manage in the difficult conditions.

With the uncertainty in the financial markets, we have repositioned our North America, European cash investments to protect our assets. Our liquidity remains very strong. We have nearly $90 million in cash at September 30, 2008 after repurchasing nearly $17 million of our 11.5% long-term bonds through the end of May of this year. Our asset backed revolving credit facility of $100 million remains undrawn and has no restrictive performance covenants. Our 11.5% long-term bonds have long-term maturities through May 1 of 2012. We have established hedging programs to reduce our exposure to commodity and foreign exchange rate volatility.

With the continued volatility and drop in the commodity market, we are executing hedge contracts to minimize the volatility and improve your results for 2009. The cost of our manufacturing inefficiency, though still too high, has continued to improve. The cost of poor quality in the third quarter of this year improved by $1.3 million compared to similar sales level in 2007 and $2.3 million for the year. We are targeting continued improvement in 2009 to $5 million.

We continue to monitor the capital markets and will pursue recapitalization opportunities when the capital markets recover and continue to have an equity transaction with our PST Brazilian joint venture. That transaction is on hold until the equity markets are more receptive. During the third quarter, we needed to enhance our restructuring plans based on the changes that were being forecast and those we are experiencing in the vehicle market in America. The third quarter and that was projected to the fourth quarter.

We continue to evaluate the impact of the announced production decreases for light truck and SUV market announced by our traditional North America customers. We will continue to manage our cost structures as way to offset lower production levels in North America and to improve our financial results. We're adjusting our directly re-staffing levels and variable costs to match the reduced production levels.

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

Revenue of $178.4 million in the second quarter and the third quarter represents an increase in $5.6 million or 3.2%. Our year over year improvement in revenue was primarily attributable to new program sales, strong production in our European vehicle businesses, wiring business for the agricultural market, and favorable foreign currency exchange. These factors more than offset substantial declines in our North America light vehicle revenues due to production declines.

For the third quarter, light vehicle revenue declined from $70.5 million to $49.6 million, a decrease of $20.9 million or 29.6%. The decline was primarily attributable to a 23% decline in traditional domestic production, the previously announced business losses of pressure sensors and fluid level sensors at our Sarasota, Florida facility.

Medium and heavy duty truck sales totaled $102 million in the quarter, an increase of $19.2 million or 23.1% over the prior year. The significant revenue increase was driven by new government business, strong European commercial vehicle production and favorable foreign currency exchange rates which more than offsets the decline in North America light vehicle production.

Sales to agricultural and other markets totaled $26.8 million, an increase of $7.3 million or 37.4% above last year. The increase in our agricultural sales was predominantly due to strong build rates at John Deere.

North America revenue accounted for a 74% share of third quarter revenue compared to 73.4% for the same period last year. The percentage increase for our North America revenue reflects the growth of new business in our North America commercial markets.

In the third quarter, electronics revenues were $126.6 million compared to $103 million last year, an increase of $26.3 million or 22.9%. The positive factors in the quarter were strong revenue from our North America commercial vehicle operations, due in part to new government business, strength in our European markets and currency exchange rates.

Another favorable factor affecting the third quarter performance was the 2% increase in North American commercial vehicle production. Revenues for control devices of $51.8 million declined from $69.8 million last year, a decrease of $18 million or 25.8%. A 16.4% decline in production in North America light vehicles with a traditional domestic manufacturing and loss of revenue with a pressure sensor and a fluid level sensor at our Sarasota facility were the main drivers behind the decrease.

Our third quarter gross profit was $35.3 million resulting in a gross margin of 19.8% which included $2.1 million of restructuring charges and yielded a gross margin of 21% excluding the restructuring charges. Cost of goods sold were also negatively impacted by loss and overhead recovery of $1.6 million for investor bank builds produced in the first half of this year as a result of our restructuring efforts.

Including this two factors, our gross margin was consistent with the third quarter of last year. Our gross margin was positively impacted by new business sales and favorable sales mix relative to the prior year. Our commodity hedging programs resulted in a slightly favorable offset to the third quarter comparable price variances.

We've been developing a low landed cost manufacturing footprint. Our target is to develop low landed cost facilities that could service our custom requirements, sourcing from locations such as China, Estonia, Mexico. Sales from low-cost manufacturing locations accounted for 40% of total sales for the third quarter compared to 39% in the prior year.

With our China operation ramping up and our announced production line moves from our Mitcheldean, UK operation to China and Estonia, our corporate wide initiatives, we expect our sales from low-cost locations to grow as we relocate labor intensive manufacturing over time.

We will continue to expand our presence into three low cost manufacturing locations in Mexico, Estonia, and China. Our new facility in Estonia has opened in October of this year and will be fully operational by year end.

Selling, General, and Administrative expenses totaled $31.9 million in the third quarter, compared to $32.4 million in the previous year. The decrease in SG&A is primarily due to increased design and development, customer related reimbursement activities related to new product launches in our European commercial vehicle unit.

Third quarter income tax expense totaled $900,000, resulting in effective tax rate of 174%. The higher effective tax rate is primarily attributable to restructuring costs associated with our UK operations, but provided no tax benefit and unfavorable impact due to the expiration of the Federal Research and Development Tax Credit.

The Federal Research and Development Tax Credit was approved as part of the $700 billion Congressional bill in October of this year. We expect our 2008 effective tax rate to be in the range of 40% to 42% which is significantly higher than the last two years due to restructuring charges in Mitcheldean, UK where we received no tax deduction. We expect our 2009 effective tax rate will return to a more normal level between 30% to 32%.

Stoneridge recognized a third quarter net loss of $400,000 or $0.02 per share, which included approximately $0.17 per share of restructuring charges. Our net income per share. excluding restructuring, compares favorably to last year's net income of $0.11 per share.

Depreciation expense for the third quarter was $7 million and amortization expense totaled $100,000. For the full year, we expect depreciation and amortization to approximate $29 million. Earnings before interest, other income, taxes, depreciation, and amortization, $17.8 million in the third quarter compared to $14.3 million in the previous year, an increase of $3.5 million or 24.5%.

The primary working capital totaled $116.4 million at quarter end, which increased $600,000 from the end of the year. As a percentage of sales, our working capital decreased from 16% to sales in the prior year to 14.7% to sales in the third quarter this year. The primary reason for the decrease was a reduction in accounts receivable balances, largely offset by inventory increases. Part of inventory increase was $7 million of bank bills to support our restructuring efforts.

While we have made some progress towards improving our working capital levels, the working capital balances remain above our targeted range of 12% to 13% of sales. We see significant opportunity to reduce our inventory balances in 2008 and made this a focus area for operations. Our new director of Lean operations is working with our businesses to enhance manufacturing efficiencies, supply chain management that supports our global operations.

Operating cash flow was a source of $18.1 million in the third quarter, compared to a source of $3.9 million in the previous year. Our cash flow in the third quarter was positively driven by a reduction of our accounts receivable balances, was partially offset by increased inventory to support bank builds for our restructuring initiatives. Cash flow, particularly in the area of working capital management will remain a focus for the remainder of the year. We continue to target primary working capital balance in the range of $0.12 to $0.13 per dollar of sales.

Capital investment totaled $6.3 million in the third quarter, mainly reflecting investment in new products. In significant areas of our investment were in our emissions, sensor products, and instrumentation business. For the full year, we expect our capital spending to approximate $27 million. We currently have $67.8 million of availability under a $100 million asset based lending facility. We have no borrowings drawn against our revolving credit facility. Our credit facility has no restrictive performance covenants. Our quarter end cash balance totaled $90 million compared with $68 million at the end of the third quarter of 2007 and going forward, we expect we will continue to fund our operational growth initiatives through our pre-cash flow generation and available cash balances.

Now, I would like to take a moment to discuss our outlook for the remainder of 2008. It was mentioned by John through the full year based upon the current industry outlook, we adjusted our previous annual guidance from $0.75 to $0.85 per share, $0.40 to $0.46 per share. The annual guidance includes restructuring expenses of $13 million to $15 million or $0.48 to $0.52 per share. Due to the difficult commercial real estate market and stringent financing requirements, the sale of the Sarasota facility will not be completed until 2009 and it's been eliminated from our current guidance for 2008.

This year has not played out as we originally expected. We could not forecast the significant drops we now experience in the light vehicle market in North America. We were expecting the medium and heavy duty truck market to come back stronger by the end of the third or fourth quarter; however, our original plans to which we are executing anticipated that we needed to grow the top line with new business wins, needed to lower our cost and improve our margins. We needed to restructure our manufacturing overhead centers and streamline our organization to reduce our SG&A expense. We wanted to refinance our long-term debt and we wanted to pursue an IPO for our Brazilian joint venture.

Some of these efforts our contributing to our improvement performance in 2008, but just as importantly, these initiatives will benefit us significantly in 2009 and beyond. Earnings per share, excluding restructuring expenses in 2008, are forecast to be higher than last year as we are absorbing approximately $13 million to $15 million in restructuring expenses. We continue to monitor the capital markets and we are positioned to refinance our long-term bonds when the capital markets are more receptive. We're planning to continue the IPO process with our Brazilian joint venture once we determine the global equity markets have stabilized.

As our markets have become more difficult, we continue to readjust our plans to address the changes by growing our top line, managing our cost structures, and driving our cash flow to adjust to market challenges that we are experiencing. We have taken steps to ensure that Stoneridge is well positioned to manage through the market downturns that we are experiencing, dealing with the financial uncertainity that we have to operate under, while positioning the Company to take advantage of the future upturn in economic and financial markets. We have worked to improve our operating performance by reducing waste, scrap, warranty charges, and premium trade. Our third quarter 2008 cost of poor quality improved by $1.3 million, compared to last year and our nine month year to date COPQ improved by $2.3 million over last year. We are targeting to improve our cost of poor quality by $5 million in 2009.

We initiated a restructuring program last year to reduce our manufacturing overhead centers and flatten SG&A structures. Sarasota, Florida and Mitcheldean, UK facilities will be closed by the end of this year. We've flattened our SG&A structures into two business groups to lower SG&A excluding design of development to be under 10% by 2010. We have set a target to grow the top line by 6% on an annual basis. As you remember, top line sales have not grown in Stoneridge from the period of 2000, 2005. Our top line growth has grown by 4.1% compounded from 2005 to 2007.

Our sales were up 12% in the first half of 2008 and 3.2% in the third quarter even with the significant drop in vehicle production. North America commercial vehicles were down 35% in 2006. North America light vehicle was down 15% in 2008 and forecast to be off 9% in 2009.

We have continued to generate positive cash flow since 2006 after the Company experienced its first negative cash flow in 2005, the first time in the history of the Company. We have refocused our management on return of invested capital and cash flow as primary targets. Since 2006, we have sold $14.6 million in non-strategic assets. We have built our cash position from $40.8 million in 2005 to $90 million in September of this year. We have extended our $100 million asset based lending facility to 2011 which has no restrictive performance covenants. We maintained our 11.5% long-term bonds that mature in May 1, 2012 even though we refinanced the lower rates when the capital markets reopened.

In the face of a difficult global market and economic conditions, we still believe our plans are correct to weather the problems as we position Stoneridge to prosper when the global economy improves.

Operator, we'd now like to open up the call for questions.

(Operator Instructions) Your first question comes from the line of Brett Hoselton from KeyBanc. Please, proceed.

Hi, Guys. It's Matt in for Brett.

Matt, how are you?

Doing good. How are you guys doing?

Good.

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

I think when we finish with this footprint that we'll have then three plants in -- we'll have a one plant facility up in Canton. We'll have one in Lexington which has consolidated the Sarasota and then we'll have our Portland facility which doesn't -- and that's kind of the footprint that we envision going forward. Certainly if market conditions change dramatically, we might look at something different. But right now I don't see that.

And then the rest of our facilities in North America of course are all in our Mexican operations except for a cross border warehouse facility in El Paso. In Europe, the opening of the Estonian facility will allow us to transfer more product into that facility and we continue to look to expand in China. So, I think pretty much in terms of physical relocation of products for right now, I think we're finished once we get through this.

Great On your business backlog, I believe it's -- what? $200 million over the next three or four years? I think that's what we've said in the past. Has that changed due to this environment or is that still growing?

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

Okay. Great. And last, did you guys say that you expect North America commercial vehicle to be moderately up next year?

I think that number changes all the time. But I think looking at the forecast that we've seen, we expect there to be a slight improvement, yes.

That's great. Thank you very much.

I have one more comment. Our internal projection, that's what we're looking at, but we're not structuring our business for that. We want to make sure our business stays lean and looks at -- till we actually do see the improvement. Because, as you'll recall, in 2008, this year we thought there would be an improvement over 2007 and that hasn't happened. Our businesses were smart enough to stay lean and stay focused. So, we didn't have a significant impact on that lack of volume coming through.

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

You know, I will tell, the only problem with that is that the customers, the forecast changed rather quickly. If you looked at what was for instance, if you looked at Europe three months ago, in Europe, I mean in the commercial vehicle market, I don't think anybody was really saying it would be as dramatic as they've seen it now. Now we've seen the last three months rapid shifts. If you look at the North America market, I think the same thing can happen here or has happened, particularly on the automotive side. Look at October sales results. They're well down. I think a 25 year low. And commercial vehicle, also, if we don't get some kind of economic stimulus passed and this country moving forward, we're going to have issues in that segment too.

Right. Thank you, guys.

You're welcome, Matt.

(Operator Instructions) Your next question comes from the line of David Leiker from Robert Baird. Please, proceed.

Hi. This is Keith on the line for David.

Keith, how are you?

I'm doing well. Couple of quick questions here. If we look at revenue, it's probably going to fall over the next several quarters. What are some of the actions that you've been taking? What's your downside contribution margin at right now? What's some guidance there?

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

If we look at SG&A/ going forward, after some of things restructuring actions, we were at about a 18% run rate in the quarter. That's including the design and development. What kind of changes can we expect on that level going forward after we've implemented a lot of the restructuring actions?

I think what we've said before is that our SG&A/ to get under 10% by 2010, about half of that was going to come from sales increases, the other half is going to come through reductions. We intend to spend at the same level of D&D or reduce, but we would have an improvement in percent to sales based on the volume and then the cost side on the non -- I would call the discretionary SG&A. Half of that would be sales growth. The other half would be the actual reductions of cost.

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

It would depend on -- I would say that if you wanted to be prudent, that's what we're looking at to say that that business will slow because I don't think anything's not linked in this global economy. However, the market's down and we continue to be fairly strong. That business would get immediately outlook because they sell right into the after markets. So, they can monitor almost on a daily basis their sales and start to spot the decline and adjust appropriately to it. But I think it's prudent for our forecasting that we look at some impact from a slower economy.

Okay. I think I missed the earlier caller when he was talking about the new business backlog. What were the numbers there?

I think they were more talking about we had announced previously that we had a $200 million order booking which was the largest in the Company's history and the question, that spreads out over the next three to four years. The question was how is that going to be impacted? Are you seeing any cancelations of that? We're not seeing any cancelations of those orders yet, but what we will see is that depending on what the volume forecast are, that amount could be less that $200 million because it was based on projections from last year or the current projection from earlier this year. However, as the cycle improves again, it'll go back up. So, the important thing is that you run the business and if the business still, that we continue to make sure that the business is profitable, profitable contribution to our overall Company.

Okay. And can you quantify what sort of volume a business might be launching next year?

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

Okay. And then the last question, clearly your electronics program with the military has been a pretty strong driver of results here in 2008. Is this something that completely goes away in 2009 or do we expect to be able to offset that with new business that's launching?

I think that we look at some impact from the military business in 2009. We continue to see some. We've won some awards as international and others could win some awards though we will continue to have some benefit of that in 2008 and actually in talking in international, they believe that their military business contributed to about $3.5 billion to their Company this year. They expect that they -- and that's a major initiative for them. They expect that next year, if the wind down in Iraq happens, though, we'll still be in Afghanistan. They still see continued needs for some of the vehicles that they're producing and so we would expect to be supporting them in that.

Excellent. Are you guys on a number of different military products with Navistar?

I wouldn't say a number. That's always subject to debate. We're on the most significant ones. Let's put it that way.

Okay. Thank you very much.

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

Again, I want to thank everybody. These are very, very difficult times. I think the turmoil that everybody's seeing is just spreading out. What turned out to be an initial start with high fuel prices and then the credit markets, et cetera, has really expanded from a North America issue to a global issue. The encouraging news here and the things that I want to impart, we have adapted our organization and the key now is to be fast and flexible and to be prudent. And we're sitting on $90 million of cash.

We're engaged our organization in a variety of dialogues of how we look for opportunities and how we continue to generate cash and we continue to reposition our business. I'm not sure anybody today can tell you where our markets will end up, what will happen in the transportation sectors. What they should be telling you is how they're attempting to respond to this stuff. I think that's what we've tried to demonstrate throughout this year and going into the next. That we've got a mindset that allows us to quickly go after opportunities and then hopefully quickly resolve problems we have. So, I think the Company's fairly positioned in this difficult market environment and as the upturn comes, we should continuing improvement. And I think a tribute to the team and the employees of Stoneridge. With that, I'd like to thank you all for joining us on the call and we'll look forward to improvements in our market.

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