Stoneridge Inc (SRI) 2010 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second-quarter 2010 Stoneridge earnings conference call. My name is Francine and I am your operator for today.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (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. Sir, you may proceed.

Good morning, everyone, and thank you for joining us on today's call. By now you should have received our second-quarter earnings release. The release has been filed with the SEC, and has been posted on our website at www.Stoneridge.com.

Joining me on today's call are John Corey, our President and Chief Executive Officer; and George Strickler, our Chief Financial Officer.

Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature, and include information concerning our future results or plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties, and actual results may differ materially.

Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-K filed with the Securities and Exchange Commission under the heading "forward-looking statements.

During today's call we will also be referring to certain non-GAAP financial measures. Please see the investor relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

John will begin [the] call with an update from our growth strategies and business development, and his thoughts on market conditions. George will discuss the financial and operational details of the quarter and future outlook. After John and George have finished their formal remarks, we will then open up the call to questions.

With that, I will turn the call over to John.

Good morning. Last year's economic disruption temporarily slowed the implementation of our business plan, which we have reviewed with you on many of our calls. The key elements of that plan were and are -- topline organic growth with customer and geographic diversification; improved operational performance, and a lower cost structure, to yield improved financial performance.

These plans and the restructuring done are being reflected in our financial results. We are focused on driving topline growth through market demand, coupled with internal organic growth. We have reduced our cost structure that has raised our marginal contribution dollars as our volume returns. We are managing our working capital and capital projects to grow cash flow. Our financial results in the second quarter reflect our progress in those key areas which were started in the third quarter of 2009.

As you have seen in our earnings release, our second-quarter sales of $166.2 million are $64 million above the prior-year quarter, which is an increase of 62.6%, and is driven by stronger-than-anticipated improvement in the North American automotive production, and higher North American and European commercial vehicle production volumes.

Based on these market conditions, we are raising our 2010 sales guidance to the range of $605 million to $625 million, from our previous guidance of $590 million to $610 million.

Our second-quarter gross margin was 23.8%, which is within our range of 23.10 to 25%, the target range we have previously discussed, and an improvement over the first quarter. We achieved operating income of $8.2 million, and our marginal contribution was nearly $0.41 for every $1.00 of sales at the gross margin line. We recorded net income of $4.2 million and an EPS of $0.17 a share.

We maintained significant liquidity with a cash position of $74.6 million which will fund our working capital needs and capital expenditure requirements to support our business plans. In the second quarter, we booked $31.1 million in new business wins and continued to further diversify our customer base and address the growth in emerging markets. Our year-to-date total bookings are approximately $63 million and are in line with our planned projections. Included in the second quarter awards is an EGT sensor win from Daimler trucks in Europe with an annual sales of approximately $12 million starting in 2013. Dongfeng Motors also selected our EGT products for a program in China beginning in 2011. We continue to make progress in the global EGT business, and the Daimler and Dongfeng wins are examples of that progress.

Another significant milestone is our obtaining a new five-year comprehensive supplier agreement with Navistar, our largest customer. With this agreement, we continue our long partnership with Navistar and are proud to continue to be a significant supplier to Navistar. Though the specific terms of the agreement cannot be disclosed, it was executed in line with our plans.

In addition to executing the new CSA, last week, we received the prestigious Diamond Supplier Award from Navistar. This award is based on performance expectations for quality, delivery, and cost, and represents the best of the best in terms of the Navistar supplier collaboration.

I'm proud of the team's accomplishment and the recognition of our Company's performance as evidenced by this award and the new supplier agreement.

For the second quarter of 2010, our percentage of sales were 52% for commercial vehicle -- medium and heavy-duty truck, which includes military; 33% for pass car and light vehicle; and 15% for agricultural and other, which includes material handling.

We continue to focus on growth in all regions and customer cross-selling opportunities, and expect to announce a significant award of this type in the third quarter.

Our business development and sales efforts in China are beginning to show results. In June, we were awarded our first order of wiring and PCB assembly for the Chinese market. We are particularly proud of this award -- [it is] the riding mower and garden-tracker application, [with the] number one company serving the lawn and garden market -- world plant protection and machinery. This is a direct result of installing wire manufacturing capabilities and locating engineering resources in China, and adding sales engineering resources to develop the market.

We have also won a significant award in EGT at Dongfeng, as previously discussed. Although China is a relatively small part of our current portfolio, we are building our presence to increase its importance to our business.

Our JV results continue to improve as the market fundamentals are improving in India and Brazil. In India, our JV sales are forecasted to be approximately $26 million in 2010, an increase of approximately $5.6 million or 20% over 2009. The market has continued robust growth and the Indian economy is improving as GNP growth was 8.3% in the most recent quarter.

As we've mentioned on our last call, we believe our sales in India will reach $50 million to $75 million during the next 3 to 5 years, as we are negotiating to add sensor product lines to our existing instrumentation and gauge product lines.

Our PST joint-venture performance improved in the second quarter of 2010 compared to the first quarter of 2010. Sales improved to BRL74.1 million in the second quarter from BRL60.1 million in the first quarter, an increase of BRL14 million or 23.3%. Operating margins improved to 8.5% from 4.4% of sales in the first quarter, while June operating income reached a more normal historical levels of 19% of sales.

PST is making progress to return to their previous performance level. As discussed in our Q1 call, their sales in the first quarter reflected the impact of the elimination of government incentives on March 31, 2010. These government incentives prompted OEMs to produce more vehicles with more accessories, which had a detrimental impact on PST's aftermarket and dealer sales in the first quarter.

During the same period, dealers also started to reduce their inventories, which had a negative impact on PST's aftermarket sales in the January through the April timeframe.

PST also took actions to improve its manufacturing efficiencies by balancing customer demand with its month-end production schedules. PST typically sells between 43% and 48% of its products to dealers and aftermarket distributors in the last five business days of every month.

PST initiated a change in the first quarter to balance production schedules with the sales demand, which impacted PST's sales during the March through the May time period.

PST sales and operating income have progressed over the second quarter, with June being the highest level for this year in sales and operating margins. We believe that in spite of the first-quarter performance, PST will still achieve their planned sales and profit margins for the year.

Operationally at Stoneridge, we are leveraging the increased volume. We have, however, experienced some difficulties in the second quarter, primarily with suppliers of electronic components. In both control devices and the electronic business units, these problems resulted in lower efficiencies in selected operations, as we had to schedule overtime and premium freight to meet commitments.

We continue to see difficulties in electronic components as leadtimes have continued to lengthen at the same time as market demand continues to improve. This creates a difficult situation to manage, customer requirements and forecast component delivery schedules which may in some cases be beyond the normal customer forecast schedule.

In addition, we are having some launch difficulties with a new program award that has impacted both the first and second quarter of this year, but expect an improvement late in the third quarter.

Our inventory days for the second quarter were 33.4 days, which is a 10.9-day or 25% improvement over the second quarter of 2009, as we continue to implement our lean programs.

In summary, 2010 continues to show signs of recovery. Passenger car and light truck production increased by nearly 73%, and is expected to reach 11.6 million units this year in the North American market, which will benefit our control device business as we have built our 2010 plans for slightly less than 10 million units.

In the commercial vehicle market, there was an improvement over last year as higher North American and European commercial vehicle production volumes increased by 28.3% and 58.1%, respectively. We expect to see further benefit from this topline growth in the commercial vehicle segment.

In summary, we believe the second-quarter results are further affirmation that the plans we developed and executed over the past three years to position Stoneridge to be a profitable global competitor are paying off. Though there are still improvements to be made, we have demonstrated our ability to adjust and, indeed, thrive under the worst industry conditions, and will continue to deliver results indicative of our abilities as the market returns.

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

Thanks, John.

As the market has transitioned from the significant downturn toward a recovery, our plans reflected those shifts. We were diligent to reduce our cost levels to drive marginal contribution and improve profitability. As sales are improving, we continue to manage our working capital tightly as receivable dollars are increasing, so we need to be more efficient with our inventory and payables as a way to minimize the cash burn rate.

By the end of 2009 we reduced our manufacturing overhead, direct labor, design and development, and other SG&A costs, excluding restructuring, by $99.3 million compared to 2008, and $85.8 million compared to 2007.

Our second-quarter 2010 results for the same four cost line items, excluding the impact of restructuring costs, are down by $22.2 million compared to the second quarter of 2008 and $13.7 million compared to the second quarter of 2007. We have permanently changed our cost structure and reduced our fixed costs, which combined with our sales increases has resulted in improving our gross margins. Our gross margin was 23% in the third quarter of 2009, 21% in the fourth quarter of 2009, 22.6% in the first quarter of this year, and 23.8% in the second quarter.

Our marginal contribution compared to prior-year was 40.6% in the second quarter. Our second-quarter margin performance was achieved despite headwinds of electronic module shortages, higher-than-expected launch costs for a new program with a new customer, and the unfavorable impact of the euro weakening against other European currencies in April and May. As the euro dropped, the US dollar is $1.19 per euro. We estimate that the second quarter was unfavorably impacted by approximately $3 million for these three factors.

With our sales reaching $166.3 million in the second quarter of 2010, this would represent an annualized sales level of nearly $645 million, a 35.7% increase over the 2009 sales levels of $475 million, and only 11.3% short of 2000 (sic - see press release) sales level of $727 million.

We have accomplished this growth with minimal increase in our cost structure. Our challenge will be to aggressively manage our cost structure as tightly as we did when the market was declining as when the market is rebounding.

Another area of importance we are monitoring are the capital markets. We have an interest in extending the term of our long-term maturities and reducing the 11.5% coupon rate on our long-term bonds that mature May 1, 2012. As of May 1, 2010, our bonds can be repurchased at par. As the capital markets improve, we will pursue opportunities to extend our maturities and reduce our interest rates.

Now I would like to cover with you some of the details regarding the financial performance from the quarter. Revenue of $166.3 million in the second quarter of 2010 represents an increase of $64 million or 62.5% over the second quarter of last year. Our sales increase is the result of increasing production volumes in our served markets, new business program sales, and improving economic conditions.

For the second quarter, light vehicle revenue increased from $30.5 million to $54.9 million, an increase of $24.3 million or 79.7%. The increase was primarily attributable to the 72.7% increase in traditional domestic production in our control devices segment.

Sales in the medium and heavy duty truck market totaled $85.2 million in the quarter, an increase of $29.4 million or 52.8% over the prior year's second quarter. The revenue increase was primarily driven by an increase of 28.3% in North America commercial vehicle production.

European commercial vehicle production is showing an increase of 58.1%, and sales to agriculture and other markets totaled $26.2 billion, an increase of $10.2 million or 63.7%.

North America revenue accounted for 78% share of the second-quarter revenue, compared to 79% for the same period last year. The percentage decrease of our North American revenue as a percentage of total reflects a more rapid increase this quarter in European sales and production relative to the North American market.

In the second quarter electronics revenues were $104.9 million compared to $65.9 million from the same period last year, an increase of $39 million or 59.2%. Favorable factors affecting the second quarter performance was a 28.3% increase in North American commercial vehicle production, and a 58.1% increase in European commercial vehicle production.

Revenues for control devices of $61.3 million increased from $36.4 million compared to the second quarter of last year, which is an increase of $24.9 million or 68.5%. The 72.7% increase in production in North America light vehicles for the traditional and domestic manufacturers was the primary reason for the increase.

Our second-quarter gross profit was $39.6 million, resulting in a gross margin of 23.8%. Our gross margin increased 105 basis points from the prior-year level. This marks the fourth quarter in a row that our gross margin was greater than 20%. The continued increase is primarily due to our cost-structure initiatives and is positively benefited by higher sales volume.

Sales from low-cost manufacturing locations accounted for 51.6% of total sales for the second quarter, compared to 45.1% in the prior-year. The increase is due to volume increases at our Mexican facilities. Our production line moves from our Mitcheldean, UK operation to China and Estonia have contributed to the increase in our low-cost manufacturing locations as well.

Selling, general and administrative expenses totaled $31.4 million in the second quarter compared to $27.9 million in the previous year. The increase in SG&A is primarily due to the reinstatement of certain compensation-related benefits that were curtailed last year. We've increased our design and development expense from $9.5 million to $10 million, as several of our customers have made the decision to proceed with some of their future projects and platforms that had been delayed or deferred.

Our SG&A expense for the second quarter of 2010, excluding restructuring, is down compared to 2007 and 2008 by $0.5 million and $5.8 million, respectively.

The second-quarter income tax expense was $700,000 on a pretax income of $4.9 million. As reported for last year, the Company is in a cumulative loss position, and continues to provide a valuation allowance, offsetting its federal, state and certain foreign deferred tax assets. As a result, no tax expense was provided for the second quarter of this year for US federal tax purposes.

The increase in tax expense for the three months ended June 30, 2010 compared to the three months ended June 30 of last year was primarily attributable to the improving performance of the foreign operations and the resulting decrease in tax benefits related to losses in those foreign jurisdictions.

Due to the valuation allowance and a pattern of projected earnings the quarterly effective tax rates may fluctuate significantly. We expect the 2010 annual effective tax rate to be between 27% and 32%.

Stoneridge reported second-quarter net income of $4.2 million or $0.17 per share. This compared with prior-year net loss of $19.8 million or $0.84 per share.

Depreciation expense for the second quarter was $4.9 million, and amortization expense was negligible, as most of the intangibles had been written off in December of 2008.

Our primary working capital totaled $90.4 million at quarter end, which increased by $17.1 million from the second quarter of last year. As a percentage of sales, our working capital increased to 13.1% to sales in the prior year, to 16% to sales in the second quarter of this year. Our working capital measures have been significantly influenced by the drop in sales revenue in the last 12 months, and the current working capital levels are a function of increasing sales and operational activities.

As markets return, our long-term goal remains to reduce primary working capital to 12% of sales, and we are projecting we can reach 13.4% by the end of this year.

Operating cash flow was a cash use of $158,000 in the second quarter, compared to a cash use of $3.8 million in the previous year. Our cash flow results in the second quarter were affected by the increase in accounts receivable and inventory offset partially by accounts payable, which are a function of increased sales and operational activities.

Capital investment for the quarter totaled $3.4 million, mainly reflecting the investment in new products in sensors and wiring, as well as IT spending for our ERP implementation in North America electronics. We are forecast to finish the year with total capital spending in the range of $23 million to $25 million.

We will continue to focus on cash flow and liquidity as a high priority. As of June 30 of this year, we have $71 million of availability under a $100 million asset-based lending facility, a significant improvement from the $57 million level at December 31 of last year.

Our borrowing base has increased by $11.7 million since the first quarter of last year, as increased accounts receivable balances are the direct result of higher sales. We have no borrowings drawn against our asset-based lending facility, which has a maturity of November of 2011.

Our quarter-end cash balance totaled $74.6 million compared with $85.5 million at the end of the second quarter from the previous year, and our cash burn rate was mostly driven by increased accounts receivable, driven by increased sales.

We will continue to manage our capital expenditures and working capital to sustain and/or improve our cash flow.

Going forward, we expect we will continue to fund our operational growth initiatives through our free-cash flow generation and available cash balances. As the market recovers, our working capital will begin to grow in dollar terms, but we will continue to improve our days to achieve our primary working capital target of 12% of sales.

Through the first half of 2010 the market has improved for all segments of our business. The North American passenger market continues to show strength and is estimated to reach 11.6 million vehicle units, which significantly exceeds our annual business plan level of approximately 10 million units.

Our commercial sales have improved significantly in the second quarter, which was driven by both the market and product launches in new business wins. John Deere improved significantly in the second quarter and we expect they will continue in the second half. We have recently been receiving favorable input from our commercial customers to plan on higher sales in the second half of 2010 and extending into next year.

In Europe we are operating our manufacturing facilities with no summer downtime. Our first- and second-quarter financial results reflect the market rebound and the cost reductions we put in place in 2008 and 2009. These achievements were accomplished in spite of negative impacts in the second quarter from supply shortages from electrical components, weakening of the euro, and the [seek] -- compared to US dollar in the April-May time frame; startup of a new product launch which should improve by the third quarter; and the impact on PST's sales and income due to market legislative changes in the first four months of this year.

In spite of these negative impacts which we estimated to be $3 million in the quarter, we have delivered significant sales and operating and net income improvements in the second quarter, and we will continue to drive growth, manage our costs to improve our profitability, and generate positive cash flow.

Operator, I would like to open up the call for questions at this time.

Brett Hoselton, KeyBanc Capital Markets.

It is [Matt LaShawn] in for Brett. Let's start off with your upwardly revised sales guidance. I think the midpoint of the guidance implies a back-half decline in sales. And it seems to me as if commercial vehicle production in both Europe and North America are accelerating -- light vehicle production may be down a little bit in North America. But it seems as if your sales should be up in the second half versus the first half.

Yes, I would think as we're looking at it, we are going back and we are getting more favorable -- George indicated we are getting more favorable indications from the commercial vehicle sector, both in North America and in Europe, that they will see a strengthening second half, which should, as I said, should have some improvement in our future forecast.

And the automotive forecast looks to be relatively stable and strong out there at 11.5 (technical difficulty) million units.

So I would expect as we go back through and look at this after we get an indication of what everybody is going to do in the fourth quarter, a stronger indication -- because we are not sure what the operating plans are for all the commercial vehicle plants in the fourth quarter. We do know the summer shutdown in Europe hasn't happened, so that will be a benefit. And I think when we get to the fourth quarter we may see additional benefit.

And Matt, I think to piggyback on that, it is clear the signals are out there that the market is improving in the second half. We've been getting those indications from our customers, both in Europe and in North America.

We've been somewhat cautious because as you know, the supply lines are rather long, and it has taken us a lot to rebalance those positions and we've had some shortages of electrical components. So we have not planned on building for those sales but we are very close with our customers and we'll monitor that as we'll proceed. But it certainly is starting to indicate that the second half will continue stronger than the first half.

Okay, so what I'm hearing is it's a conservative sales guidance, and if things continue to progress as they are looking in June and July and heading into August, you are likely above that?

Yes, I think that's true. And one thing that we have always said is, when we did our restructuring, we did not take capacity out. We relocated capacity globally so that we have the ability to ramp up with whatever the market forecast would be. And so we have been cautious from the operating side, but we will follow the market very closely and we can react to it very quickly.

I mean, I think the issue you guys -- the one issue we can't factor in is electronics component supply capability. And not only us, but others in the electronics sector are fighting that daily to make sure we're getting -- as they ramp up their plans, that they can ramp up to support increased industry demand. Every month goes by, we get increased confidence that the supply base is improving, but it still is an uncertainty out there for us.

Is that more of a European issue or is that a North American issue as well?

Well, a lot of the chips and components come out of Asia, so it affects both sides -- both Europe and North America.

Okay. And then just following up -- and number one, congratulations on the agreement with Navistar -- did you lose anything? I know you don't want (multiple speakers) -- did you lose anything or did you gain anything?

Well, you know, when you sign a long-term agreement with your largest customer, you've always gained something. And we didn't give up -- I mean, we didn't give up -- we worked it in conjunction with what our plans were.

We expect that they -- based on the feedback that we have gotten, that we should continue to grow with them, and we will be able to continue to grow with them. So we are very pleased with the contract. And also, as I said, the Diamond Supplier Award -- we are pleased with that, because that's another indication of how our relationship is with that customer.

Okay. I see. As far as -- can you give an update? I mean, you did give some new numbers on some bookings in the quarter -- what your updated net new business backlog is?

We haven't updated that math. We will do that as the planning session -- we actually do that in August, and so we will update that probably late -- early fourth quarter -- late fourth quarter as we approve our budget. So we will give you an update on that probably over the next few months.

(multiple speakers) But I think it's, based on what John reported today, we continue to win new business. And more importantly, we are winning it globally with diversified customers and some of our new technologies we shared with you -- some of the wins in EGT. So those products are really pushing well, and they're pushing globally. And we are utilizing our facilities worldwide to really address global customers and global product lines.

As far as -- go ahead?

I was finished.

Okay. As far as the euro goes, what was the impact on sales and operating income for the quarter -- of the euro?

Well, we estimate that the impact in operating income was a little less than $2 million in the quarter. And it was sort of a phenomenon, because if you look at our operations in Europe, we are about 71% on the receivables side [or] sales in euros, 29% in [seek] because of our relationship with our customers.

And then on the direct materials, we bring in about 50% or a little over that in dollar-denominated, and the rest are in euros. So they are created imbalance. Roughly, our breakeven level with our currencies are at about 1.26 euro. And so when it dipped around 1.18 and 1.19 in April and May, it did have an impact on our costs that we were bringing in and then some of the revenues.

So I think a combination of that and with the euro presently at 1.30, that will not have a negative impact on us in the second half.

Okay. And lastly, and then I will jump out -- you had mentioned utilizing the deferred tax assets in 2Q '10. If you are utilizing them in the second quarter, and it is affecting obviously both book and cash taxes, because you are bringing the valuation allowance back, why should we be forecasting a 28% to 30% tax rate for 2010?

Well, I think it will trend based on our where our earnings are. And I would assume -- Matt, with your question -- and if the earnings stay in the level we see them today, we will trend in the same relation to earnings and taxes.

So I think it was really based on our forecast of our annual plan. But certainly, the switch in the earnings will continue in that light, at least as we see it today. So I think we will see some benefits from that in the third and the fourth quarter.

Yes, the automotive market strength, which is primarily our North American content, benefits us greatly in that regard. So as we continue to see strength in that market, we should continue to be able to lower the tax rate.

All right, thank you very much, and a great quarter.

(Operator Instructions) David Leiker, Robert W. Baird.

It is [Keith Schicker] on the line for David.

Matt took care of most of what I had here. But I just wanted to circle back. I think in the past, we had sort of talked about the first quarter being the weakest quarter for revenue, and then the back half being a little stronger. Is that still the case, or has there been a change with the guidance?

Well, you know -- and I know maybe the guidance is a little weak. And I have seen your forecast, too, Keith, where you're looking at increase of about 7% in the second half.

Yes.

And as we put our annual business plan together and still looked at it later on, we still view the second half being stronger. Clearly the first quarter was the weakest, the second has been strong. The third quarter will be a little flatter, but fourth should be an improvement also.

So I think if the commercial market continues to improve -- and I know that you and David believe that it's going to increase around 7% -- we will benefit from that. So if there is an increase in the commercial side, 7% as you are alluding now, we will see stronger sales and resulting earnings from that.

Okay. And then I guess if we look from a cost perspective, is there any additional cost that maybe you took out during the downturn that's going to flow back into the models sequentially, or should I look at your cost structure for the balance of the year and pretty much assume that it's going to stay at kind of the Q2 level?

I mean, I think you have to assume that we're going to hold the cost model. I mean, we went to a lot of work to get it down. We're not going to let it come back up.

There will be additions of individual people, but largely in our operations, if you want one in, you get one out, so -- with a few exceptions; we will be adding some people on the overhead side. But we're going to hold that cost -- we have to hold that cost structure. That's what we've got to do to hit our targets.

(multiple speakers) I mean, we'll flex direct labor. We're getting efficiency gains in that line. So, you know, I think we will control the cost. I mean, it took a lot of pain to get it down, and we will manage through the process of the volume growth.

Okay, and then on the contribution margin side, you've got 41% during the quarter, which is a really good number. Is that elevated beyond what you would normally expect? If so, how long is that sustainable up at this level? And would we expect that to normalize at some point? What are the drivers there, and how can I think about that going forward?

Well, as I think we've said in the past, I think we are gaining from the benefit from of some of the weakness of last year in both the first and the second quarter. And our normalized rate is more in the range of 30% to 35% on an incremental margin.

So I think that's how you should think about this moving forward in the more normal periods like third or fourth quarter and into 2011. I think the second quarter is very high in relation to what our normal rates would normally be.

Okay, and then one final one, how much did the Bolton acquisition add to the top line this quarter on a year-over-year basis?

It was actually minimal. It wasn't all that substantial, because they are only at a run rate of about $10 million to $12 million annually right now. So within the quarter, you are only looking at a couple million dollars. So --.

They're probably about six months behind a plan we had for them. And they still have a lot of opportunities out in front of them. They're quoting a lot of business. They're actually winning business now as we start to see their awards start to pick up.

So I think as we look at that, we think they are about six months behind where we thought they would be -- so probably more in the 2011 timeframe when we see a more positive benefit from them.

Okay. And then if I want to look at them for the rest of the year, that $10 million to $12 million run rate probably ramps up a little bit in 2010, but not much?

Right, it will ramp up, because we have won some smaller business. There are about five contracts we've picked up. So their run rate starts to increase in the third and the fourth quarter above that annual rate I just referred to. So I think you'll start to see -- and I think John said it well; we are probably six months, maybe even 12 months behind where we originally thought. So we will start to see that build probably more in the fourth quarter and then into 2011 from what our original plans were.

Okay, and then with the notes that are out there, George, I mean what is the plan for that? [I mean, obviously, we] want to get it refinanced. Is that something you are working actively really hard on today, or do you think the capital market conditions still need to come around?

Well, (inaudible) -- I think where we were at is we had been very active in the capital markets, understanding where they are. And as you know, they got very volatile over the last probably five, six weeks.

And I think it was clear to John and myself is that we needed to hang on some performance of quarters to really support what we're trying to get done in the refinancing. I think this is a nice step forward in the second quarter, and I think strengthens the ability for us to do what we're trying to accomplish in the capital.

So we will actively pursue this. I think it's clearly -- we want to get this done long before we get into '11 and '12 when they mature. So I think with this performance, it starts to help us sort of complete that kind of transaction.

Yes, I think the way to look at it -- now we will have, with this quarter, four quarters where we're profitable again. You know, we went -- if you looked at our business from the second quarter of 2008 was great, then the market fell apart and we went through a 12-month period where we worked like hell to get the business back together again.

We started to show the benefits of that in the third quarter of 2009, continued in the fourth quarter of 2009, now the first quarter of 2010 and the second quarter of 2010.

More importantly, when we look at our forward forecast and we go to talk to lenders, they should have some confidence that we have the ability to deliver on what we are saying and what we're doing, because we've demonstrated that.

So I think that bodes well for us as we look at this, and we are out there looking at -- for us, it's really trying to get the lowest rate possible and watching how the markets respond. And so I think we've got a very good story to go to the market with now.

Okay, that's all I had, guys. Thank you.

John Riley, ACK Asset Partners.

Good afternoon, John, George; great quarter.

I just want to get into the drag on the quarter. You talked about a $3 million drag. Was that to revenue or costs? And you talked about the impact of several items -- some of the launch difficulties and others (multiple speakers) and currency --?

It was all to costs and to -- there was some sales. But when I talked about the $3 million, it really was the impact on operating income, because of the delay in the startup of the launch of the new program. That cost us some in the revenue line. But the $3 million was really the impact of the operating income of the Company. And it was really wrapped around the electronic shortages which get driven by overtime and premium freight to deal with that.

And then on the currency -- the euro really started to move fairly significantly in April and May. In fact, it got down to around $1.18. And as I shared with you, the percentage of our sales revenue within the market, plus our direct material buys -- that had an influence on our cost structure in those two months specifically, and then it righted itself in June.

And then the startup of the product launch was the other key factor to that. And that is improving. And we have been improving every quarter, and I think with a launch that -- really going on the third quarter, that will start to diminish itself.

So I think that of the $3 million, it's probably that we should recognize close to $2 million of that moving forward as some of those will be behind us then in the third and fourth quarter.

$2 million being behind you; $2 million won't be recurring?

Yes. I think another $1 million will still continue to cost us. I think the electronic shortages is still an issue out there, and it is forcing premium freight. And in some cases, we have got to run overtime to catch up with production schedules, and especially it could get a little more dramatic than that if volume really starts to pick up.

That's great, really would have been some really powerful numbers even without that.

Then focusing in, you talked about another new business win in Q3. Could you just expand a little bit about that? And is that something we've talked about before, or is this something else new?

It will be a new one that's going to -- one of our goals that we have always said is to improve our cross-selling capabilities amongst our business units and to leverage the whole portfolio of Stoneridge. And we're working on doing that. Within the past, we showed some examples such as John Deere where we are able to take a rotary precision sensor from our control device business unit and have that sold into John Deere because we've got a very good relationship with them on the electronics side. And so we cross-sold that opportunity.

I think in the third quarter we will report another example of that where we are trying to demonstrate that we are executing to our plan, and diversified growth, cross-selling was one of those things that we had identified in our plan.

That's great. Then just switch gears right to PST. Did I hear you right in saying that the month of June was back to historical pretax margins of 19%?

Yes.

But the sales actually trended all quarter. It got a little better every quarter, because -- what really did it was when they tried to balance their production schedules with their customer demands. And so every month the sales are going up, and then we were finally back to more historical level in the month of June.

That's great. And then you said you've got them now -- that means that within PST also, it's trained, so it's not happening at the end of month anymore, but it's becoming more linear throughout the quarter?

Right, and what they've done is now, instead of going out a month clean they've got a backorder that they can start to ship into the next month. So it improved their operational efficiencies, and lowered their costs.

And that was part of the reason why in the second quarter they got hammered by some cost takeouts as they had to reduce staff and other things. So that's gone, done. But the cost structure is now aligned with a business structure that is aligned with doing the right thing for the customer and for the business.

That's great. And then, just -- if they still reiterate that they can hit their plan, that is just some very significant numbers in the back half of the year. (multiple speakers) may be a stretch, but anywhere even close to it.

They are clearly trending in that direction. We [wouldn't here] say that they're going to see it. But I think the trend where they're at, John, clearly says that they've addressed it, they have improved it, the changes -- because of the legislative and the market have worked themselves through. So yes, I think they are going to have some very good results in the third and the fourth quarter.

That's great. Congratulations, guys; great numbers and look forward to a successful refinancing here, too.

Ladies and gentlemen, we have no further questions in the queue. I would like to turn the call over to Mr. John Corey for closing remarks.

Well, thank you. I would just summarize this -- we like what we see. And the reason why I say that is because we've talked to you about our plan. We've talked to you about our execution of the plan. We think we have demonstrated that. We think we've got our cost structure aligned. We are having some minor -- well, "minor" -- we are having some problems with -- supply-based problems; those are positive because the market is growing.

So we like what we see because our cost structure is aligned. As volume continues to come on stream, we should continue to see the benefits of that. And so where we are positioned right now, we are very happy. Our new order book is growing as we planned. So things are moving generally in the right direction, with the caveat of the supply base.

So we are very encouraged, and we look forward to closing out this year and entering into the next year, because it looks like the volumes are improving.

So with that, I would like to thank you all for attending.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation; you may now disconnect. Have a great day.