Stoneridge Inc (SRI) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 Stoneridge earnings conference call. My name is Gina 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 today's call. (Operator Instructions).

I would now like to turn the presentation over to your host for today, Mr. Ken Kure, Corporate Treasury and Director of Finance. Please go ahead.

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

Joining us 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 such statements are based on 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 by updating on 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. 2010 fourth-quarter sales were $160.5 million, an increase of $26.7 million or 20% over the prior year's fourth-quarter sales, and were nearly identical to our 2010 third-quarter sales. This performance represents an annualized run rate of $642 million.

We reported earnings per share of $0.18, which was $0.19 above the prior year's fourth quarter and $0.15 above the third quarter of 2010. Negatively impacting our fourth-quarter results were expenses associated with the refinancing of our debt in October and an additional expense for environmental remediation at our Sarasota, Florida facility, which is for sale. Combined, these two one-time nonrecurring charges totaled $2.2 million, which reduced our earnings per share by $0.09.

Our fourth-quarter earnings were favorably impacted by a tax benefit of $539,000 or $0.02 per share, which is related to the receipt of our PST cash dividend of $5.5 million in the fourth quarter. George will provide more detail on the dividend in his remarks.

Gross margins in the quarter were 22.2% and slightly below our 23% to 25% target range, but it is the sixth quarter in a row where we were above 22% and it is comparable to the third-quarter margin on similar sales.

Issues of launching component availability experienced in the third quarter improved but we still need continued operating improvement. While component shortages improved from the third quarter, they are still causing us to adjust operations to accommodate supply.

Plant operating costs and premium freight expenses were higher than planned due to higher volumes associated with seasonal customer ordering patterns and inefficiencies in meeting that demand. So while our operations have improved from the third quarter, we still have more work to do.

Commodity increases are another area that have started to impact us in the fourth quarter, especially the rapidly rising price of copper. The impact of copper prices affected us by approximately $1.2 million in the fourth quarter compared to the prior year. Approximately 52% or 600,000 pounds of copper sold in the fourth quarter will be subject to surcharge billings in 2011. Also in 2011, we expect copper recovery pricing to increase throughout the year as more of our products become subject to this contractual agreement.

Operating margins for the fourth quarter were $5.7 million or a margin of 3.6%. Operating margins would have improved by 1% compared to the third quarter excluding the $900,000 charge for the future environmental remediation at our Sarasota, Florida facility. We believe that the amounts we have expensed and accrued this quarter will be sufficient to complete the remediation process and thus do not expect to incur any additional charges in the future.

Net income in the fourth quarter was $4.4 million or an EPS of $0.18 a share, which included $1.3 million expense or $0.05 a share associated with the debt refinancing and $900,000 or $0.03 a share for environmental remediation expense and $539,000 tax benefit worth $0.02 a share. This P&L tax benefit did not impact our cash taxes.

Our quarter end cash position was $72 million after normal business needs and the use of $8 million to retire a portion of the principal balance of our debt as part of our refinancing initiative which we completed on October 4. Our debt has now been reduced from $183 million to $175 million. Cash on hand after the refinancing will support our future growth plans.

Looking at the positive activities accomplished in the fourth quarter, we booked $80.3 million of business wins, of which $53 million was replacement business and $27.3 million was new business. Our year-to-date total bookings are approximately $396 million with $123 million in new business awards and the balance in renewals for existing business.

Replacement business awards of $272 million included our previously announced five-year contract renewal in July with Navistar, our largest customer.

In the quarter, we won a small $1 million award for wiring with a leading North American material handling equipment manufacturer. While small, this award continues our cross-selling efforts, one of our initiatives to grow our business with current customers.

We also landed additional new business with a major European truck manufacturer for our EGT sensor. This is in addition to the EGT award we announced in the second quarter from this customer. These EGT awards demonstrate our technological developments in emissions.

Our JVs performance is returning to a historical performance for sales and profitability as the markets improve in India and Brazil. Our Indian JV sales were approximately $33 million in 2010, an increase of approximately $14.6 million or 77% over 2009. The market continues its robust growth as the Indian GNP grew at about 9% in the most recent quarter. We believe our sales in India can reach $50 million to $75 million during the next two to three years.

PST, our Brazilian joint venture, continued the improvement started in June of 2010 with significant sales and earning increases in the third and fourth quarters compared to the weak first and second quarters of 2010.

Sales improved to BRL 100 million in the fourth quarter from BRL 60 million in the first quarter and BRL 74 million in the second quarter. PST's fourth-quarter operating margins increased to 17% from 8.5% in the second quarter and 4.4% in the first quarter. PST continues to expand its product offerings and its channels of distribution, adding new customers.

As a result, we expect PST sales to grow in the range of 15% to 20% in 2011 from the BRL 320 million level of 2010.

In summary, our fourth quarter, while an improvement over last year and the last three quarters of this year, still has room for improvement as we address our operating performance.

Our major markets for automotive, commercial vehicle and agricultural are all improving in 2011. Our current estimate for 2011 sales is in the range of $720 million to $750 million. Each of our market segments are reflecting industry forecasts above 2010 production levels.

Automotive forecasts continued to improve through 2010 and are now projected to be between 12.5 million to 13 million production units for 2011.

The commercial market is positioned for a continued rebound in 2011 and 2012 as the age of the fleet and general economic improvements bode well for future production levels.

In addition, the construction and agricultural markets have a positive outlook and now represent approximately 18% of our 2011 sales.

As we look at the continuously improving market fundamentals, the challenges for 2011 will be primarily to improve operational and supply-chain issues while managing the potential material price escalations. Looking out over the next five years, our current estimates and projections include net new business sales of approximately $250 million, with those sales occurring fairly evenly over the next five years.

Continuing market improvements and growth with our customers from new programs this year and next will drive our top line. With the cost restructuring done in 2008 and 2009, we can leverage the volume increase. We are addressing our inefficiencies which have lowered our performance. The strategies we have been executing, namely topline organic growth, expanding our customer base, geographic diversification, operating with a lower cost structure, and lean implementation, have positioned Stoneridge to improve financial performance.

With that, I would like to call the call over to George to provide additional details on our performance and outlook.

Thank you, John. Our fourth-quarter sales were up $26.7 million or 20% over last year. Our fourth-quarter sales are positively affected by increased volume on our ag and other segment as well as new business sales for both commercial vehicle and agricultural customers.

Our fourth-quarter sales performance was partially offset by a decrease in sales to our largest vehicle customer due to their loss of market share in both the third and the fourth quarters.

Our earnings performance has improved compared to both last year and the previous quarter and even though our results were negatively impacted by $2.2 million or $0.09 per share for expenses related to refinancing or long-term debt in October, the accrual for our Sarasota facility, we recorded net income of $4.4 million and an EPS of $0.18 per share.

$1 million of the $1.3 million expense related to the refinancing was due to the write-off of deferred financing fees that were non-cash in nature from the $183 million bond issues that was paid off in October of last year.

In addition, our interest expense was favorably impacted in the fourth quarter by lowering borrowing rates and a lower amount borrowed. As a result of our refinancing interest expense has decreased by $600,000 or $0.02 per share in the fourth quarter.

In addition to the refinancing, we completed another major change that positively improves our capital structure. On November 8 of last year, the Company executed a secondary share issuance on behalf of the shareholders affiliated with the Draime family. The Company sold nearly 10.2 million of common shares at $10.75 per common share less underwriting commissions and discounts on behalf of the family.

Though the Company did not receive any proceeds from the offering nor pay any of the costs, we believe it is a positive event for the Company as we added 90 new institutional investors. After completion of the secondary share issuance, our average daily trading volume increased from 120,000 shares to 307,000 shares in the last 13 weeks, an increase of 2.5 times our average daily float.

Our Brazilian joint venture continued its trend of improving financial performance. As a result of their strong financial performance in the second half, PST remitted a $5.5 million dividend in December, which represents our 50% share. PST has now remitted over $28 million in dividends for Stoneridge's 50% ownership over the past six years.

And as a result of the remitted $5.5 million dividend in December, we were able to reverse $1.9 million of our valuation allowance, providing us a tax credit in the fourth quarter on our income statement.

Now I would like to cover with you some of the details regarding the financial performance for the quarter. Revenue of $160.5 million in the fourth quarter of 2010 represents an increase of $26.7 million or 20% over the fourth 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 fourth quarter, light vehicle revenue increased from $43.8 million to $48.2 million, an increase of $4.4 million or 10%. The increase was primarily attributable to the 9.5% increase in traditional domestic production in our control device segment.

Sales in the medium and heavy-duty truck market totaled $81.2 million in the quarter, an increase of $8.4 million or 11.6% over the prior year fourth quarter. The revenue increase was primarily driven by an increase of 29.3% in the North American commercial market production, even though our sales for our largest customer were down $2.1 million compared to the fourth quarter of last year and $3.6 million compared to the third quarter of last year.

European commercial vehicle production is showing an increase of 78.1%. Sales to ag and other market totaled $31.1 million, an increase of $13.9 million or 81%.

North America revenue accounted for 74% share of the fourth-quarter revenue and 82% for the same period last year.

In the fourth quarter, electronics revenues were $101.2 million compared to $82.6 million for the same period last year, an increase of $18.6 million or 22.5%. Favorable factors affecting the fourth-quarter performance was a 29.3% increase in North American commercial vehicle production and a 78.1% increase in European commercial vehicle production.

Revenues for Control Device is a $59.3 million increase from $51.2 million compared to the fourth quarter of last year, which is an increase of $8.1 million or 15.8%. An 8.2% increase in production of North America light vehicles for the traditional domestic manufacturers was the primary reason for the increase.

Our fourth-quarter gross margin was 22.2%. This marks the sixth quarter in a row that our gross margin was greater than 22%. The continued increase is primarily due to our cost structure initiatives compared to the 2007/2008 time period and is positively benefited by higher sales volume.

Our gross margin was also negatively affected by increases in copper pricing. In the fourth quarter gross margin was affected by increasing copper prices of approximately $1.2 million compared to last year. Some of our copper purchases were protected by derivative instruments in the fourth quarter but at the end of last year, we had no future hedging contracts in place. We constantly monitor the market and look for opportunities to lock in to favorable prices.

The current market appears to be highly priced at this point, so we have not taken a position in these current high prices. However, a significant portion of our copper-based sales are covered by pass-through clauses in our contracts and this will help mitigate the longer-term effects of high-priced copper.

Our gross margin was also affected to a lesser degree by lingering launch and component shortage issues, as John indicated.

Selling, general and administrative expenses totaled $30 million, which is lower than the $31 million in the third quarter and $31.4 million in the second quarter of this year. Our design and development expense was $9.3 million, which is consistent with our third-quarter expense of $9.2 million.

Our SG&A expense in the fourth quarter of last year excluding restructuring was down compared to 2007 and 2008 by $5.2 million and $3.2 million respectively as a result of our restructuring initiatives.

Income tax benefit for the fourth quarter was $0.5 million on a pretax income of $3.8 million. As mentioned before, our fourth-quarter tax provision was affected by the cash receipt of a $5.5 million dividend for PST in December. This had the effect of reversing the $1.9 million of our valuation allowance to the tax line in our P&L in fourth quarter, which represents the corporate statutory rate of 35% federal tax on the cash dividend. Income tax expense for the year was $700,000 on pretax income of $11.3 million.

As reported in December of 2009, the Company is in a cumulative loss position and continues to provide a valuation allowance offsetting the federal, state, and certain foreign deferred tax assets and as a result, no tax expense was provided on US income for the year. However, the Company is required to provide deferred tax expense relating to the earnings of our PST joint venture, which is unaffected by our valuation allowance position.

The increase in tax expense for 2010 compared to 2009 was primarily attributable to improving performance of the US and foreign operations as well as the tax we are required to provide related to our PST joint venture. That tax expense was partially offset by a reduction in US valuation allowance due to the US being a book taxable income position as well as the reversal of the deferred tax liability related to our UK operation that was previously included as a component of the $2 million of other comprehensive income.

Due to the valuation allowance, deferred tax related to our investment in PST and the pattern of projected earnings, the quarterly effective rates may fluctuate significantly. Additionally, our annual effective tax rate is unlikely to be in line with the tax rates that we experienced prior to reporting the valuation allowance. We expect the 2011 annual effective tax rate to be between 14% and 18%.

We anticipate that the effective tax rate for quarters one through three will be between 18% and 24% and a fourth-quarter rate of approximately 6% to 12%, resulting in an annual rate of approximately 16% to 20%. We anticipate cash taxes to be between $1.8 million to $2.2 million.

Stoneridge reported a fourth-quarter net income of $4.4 million or $0.18 per share. This compared with prior year net loss of $136,000 (sic - see press release) or $0.01 a share. Depreciation expense for the quarter was $4.8 million and amortization expense was negligible as most of the intangibles have been written off in December of 2008.

Our primary working capital totaled $86.1 million at quarter end, which increased by $15.5 million from the fourth quarter of 2009 levels. As a percentage of sales, our working capital decreased from 14.9% to sales in the prior period to 13.6% to sales in the fourth quarter this year. Our working capital measures were significantly influenced by the drop in sales revenue we experienced in 2009.

Current working capital levels are a function of increasing sales and operational activities we are now experiencing.

Operating cash flow was a source of cash of $10.6 million in the fourth quarter, compared to a source of cash of $16.4 million in the previous year. Our cash flow results in the fourth quarter were affected by the decrease in accounts receivable and receipt of the PST dividend.

Capital investment for the quarter totaled $8.2 million, mainly reflecting investment in new products in European electronics. For the year total, capital spending was $18.6 million. As of December of last year, we have $61.3 million of availability under our $100 million asset-based lending facility, an improvement from the $54.1 million at December of 2009.

Our borrowing base has increased by $7.2 million since the fourth quarter of 2009, as the increased accounts receivable balances are the direct result of higher sales. We had no borrowings drawn against our asset-based lending facility.

As part of the bond refinancing, we extended the maturity of our ABL until November 1 of 2012 and our cash and balance totaled $72 million compared with $91.9 million at the end of last year. Our cash burn rate was mostly driven by increased accounts receivable driven by the increased sales.

We will continue to manage our capital expenditures and working capital, sustain 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 $0.12 of sales.

Our financial results for 2010 started to reflect the benefits from the restructuring and operational improvements even though our sales have not returned to our 2007 or 2008 levels and more normal sales level for the Company. Our sales of $635.2 million in 2010 was still nearly $100 million lower than our sales run rate for 2007 and 2008 but our operating income of $22.8 million and EBITDA of $41.9 million showed our potential to improve our profitability, cash flow, and ROIC as volume returns to more normal levels.

In support of our potential for growth, we have enhanced our capital structure with a refinancing of our long-term bonds by extending our maturity to November 2017. We lowered our interest rate from 11.5% to 9.5%. We have also executed secondary share issuance to create more liquidity and float of the Stoneridge stock in the market. We completed these two transactions in the October through November timeframe of last year.

We have continued to focus on our D&D expenses and capital expenditures to better leverage our technology efforts, drive net new business awards, giving us the ability to cross sell our products and technologies to multiple customers across geographic markets. Our current long-range forecast includes increases from net new business awards of over $250 million over the next five years with the increases split approximately evenly over the five-year period.

We are still working to improve operating efficiencies at our Mexican facilities, but they are making progress. Our operational inefficiencies are still impacting our results. We are not where we would like to be, but we were not impacted as much this quarter to the extent we were impacted in the third quarter.

Our fourth-quarter net income of $4.4 million or $0.18 per share was negatively impacted by the two items that we described before.

As we begin 2011, our volume is still strong for our North America passenger light vehicle market. The market is running at about 12.5 million units and we build our plans based on that level of production. As we start the year, it appears the passenger light vehicle market is being forecast to run closer to 12.5 to 13 million units and our first-quarter production schedules are reflecting the higher production levels.

The North America ag market ran strong the last half of last year and continues to track in the first part of 2011. We expect ag to grow again in 2011 about 15% to 20%.

However, the story is different for the North American commercial market. Our plan for 2011 includes Class 8 production to be around 234,000 units for the year, which is an increase of 52% over 2010 level but is highly skewed to the last half of 2011. The average run rate is forecast to be 185,000 units in the first quarter, 221,000 units in the second quarter, 250,000 units in the third quarter, and 280,000 units in the fourth quarter. In addition, our mix in North America is more heavily weighted to medium truck, which represents nearly 65% of our sales volume in North America but the medium truck is forecast to grow by only 18% compared to the 52% growth from Class 8 vehicles.

In Europe, the medium and heavy-duty truck business is forecast to grow by nearly 30% for both Class 8 and medium truck and our business mix is approximately 55% for heavy and 45% for medium trucks. As a result of these annual production forecasts and the quarterly trends, we are projecting our sales to be in the range of $720 million to $750 million for next year -- for this year, 2011.

Our operating margins will continue to benefit from our cost restructuring. We will experience some negative impact from the increase in copper costs, as copper has increased this quarter from an average of $3.03 per pound last year to the current average range of $3.91 per pound. Current prices are even high -- higher in $4.25 to $4.35. It actually hit $4.55 today -- over the next -- over the last two months.

We do have pricing surcharges that we will recover proper prices when copper levels out at a consistent price. Approximately 52% or 600,000 pounds of copper sold in the fourth quarter are subject to surcharge billings in 2011.

Well, we are encouraged by our progress and still believe that our goals to achieve operating income in the range of 8% to 9% by 2012 and reaching our ROI target of 15% by 2012 are achievable.

Operator, I would now like to open the call to questions.

(Operator Instructions). Matt Mishan, KeyBanc.

Good morning, guys, and a nice quarter. The first question is on your guidance of $720 million to $750 million in sales, is there an incremental margin we can put on those increases that you would feel comfortable with?

You know, Matt, we normally use as an average rate of about $0.30 on the dollar for marginal contribution. I think that would be a good rate for you to use moving forward.

Okay.

It will be a little lower for the wiring business. It tends to run in the 20%, 25%, but I think for electronics and for the Control Device piece, $0.30 on the dollar would be good.

So you would -- I mean directionally, you would think you would be able to kind of offset some of these supply disruptions and some of the commodities and really work at a normalized contribution margin here?

I think the only unknown at this point is we still have more work to do, as we indicated on some of our plants and what we can do with premium freight. I think the wild card in this is copper. As you know, this morning it closed at -- it opened at $4.59 and it continues to escalate. Now, we have surcharge mechanisms in place. That is, you know, they tend to have a six-month lag to them so that it's based off of benchmark price on copper.

And so it will lag over the six-month period as long as copper continues to go up. When it starts to come down then we benefit from that trend. So we are a little uncertain as to where copper is going to end up. It's increased very significantly over the last two months especially, it was trading right around $4 share and now it's sitting at $4.59 this morning.

As I go through the year and you start modeling out quarterly 1Q, 2Q, 3Q, what do you generally get as the cadence of the $720 million to $750 million? Is it starting off a little bit slower in 1Q and ramping pretty evenly throughout the rest of the quarters? Or are we -- is it one-half that's a little slow and you see a bigger acceleration in the back half?

I think because of North American commercial it will -- that will lag and we will see it over the four quarters. When Control Device is running more -- pass car is running around 12.5, 12.6 down and it will be fairly consistent over the year. So that seems to be fairly consistent over the four quarters. Commercial is going to trend up over the four quarters. Europe will see some uptick quarter-to-quarter, but they tend -- they look like they are running at a little stronger pace, so --

I think each one of the three will have little bit of a different cadence to it.

And is there a particular quarter where you -- where the backlog comes in a little bit stronger and you have a little more launch visibility?

Yes, and that's -- if you look at our build, it really -- we get more launch in the fourth quarter this year because we have some major efforts in Europe going on in third quarter, fourth quarter, and there's a question of a platform that may push out of this year into early 2012 and we are working with a customer now on that.

Okay, and is there any particular reason or is the fourth quarter expected to be just significantly stronger profit wise that you have the lower level of tax in 4Q versus one through -- versus the first three quarters?

Matt, what is driving it is that when we pay the cash dividend out of Brazil, then we get to relieve the valuation allowance on that dividend so that the dividend for example this quarter was $5.5 million, 35% on that dividend amount will release valuation allowance. So whatever quarter we pay the dividend, you will see that change in the tax rate.

Okay, that's fair. Last question, Navistar, obviously I listened to their earnings call and their Analyst Day, and it looks as if their market share is going to be down in the first half versus the second half. And your sales to Navistar obviously came in despite the increase in medium and heavy-duty North America.

Where is the trough you are seeing right now in the Navistar business? Is the trough in the fourth quarter? Is it first quarter?

I think that we saw their revenues come down somewhat in our fourth quarter and we expect that to continue into our first quarter. Then we expect to hopefully see that come out of that as they've projected. So they run at a different year-end. They run at the October year-end, so when they talk about their quarters versus our quarters, it is slightly different.

So is the first --? Sorry, John. Go ahead.

But they were clearly down in our third quarter, our fourth quarter. They will be down in the first quarter from what we can see. From their releases, they are saying as it would relate to our quarter, we would start to see some uptick in the second quarter, but more at a better run rate in the third and the fourth quarter for us.

Okay, lastly on their Analyst Day, they made definitely mentioned you as a partner and a global supplier for them as they begin to build out. Where are you currently with Navistar internationally?

Well, we don't have any firm business, Matt, at this point, but we are currently having discussions with them in India with their joint venture there. They have indicated -- can you hear Matt? I --

I can hear you.

There seems to be some indication -- and they have approached us in Brazil. They are starting to do some things down there and we are a ways from that. We're working with them in North America strategy in terms of where they are unfolding there, so those three markets right now we are looking at new business opportunities with them. But there is nothing I would say would be in the foreseeable future other than maybe something within the whole North America operations.

I think it's important as you look at their strategies and they've now announced their operations -- their ventures in China with a partner and in India, and now in Brazil, we have plants and operations in all of those markets. So as they start to ramp up, we are there to support that development and so should experience some of the benefits from their expansion.

Okay, great. Thank you very much and thank you for taking my questions.

Robert Kosowsky, Sidoti & Company.

Good morning, guys. How are you doing? Just a question on PST. What was the driver for the sequential strength in I guess operating profit there? Do you see any potential hiccups with this business, whether it be on the top line or on the cost structure? I imagine copper is a part of their business, or part of their cost structure too.

Copper is not a significant part of their business, more electronic chipsets because they go into alarm systems, so that would be a driver there. Resin and chipsets would be the cost drivers in their business, I would say.

If you looked at the -- their market got hit last year just like other markets, and in the first half, we said that that would be an impact and was starting to improve. They also had some regulatory changes that the government impacted and accelerated -- this is just like our Cash for Clunkers, but they had a program down there which accelerated purchases of vehicles. And then all of a sudden, they cut the program and the pipeline backed up in the fourth quarter of 2009 and the first quarter of 2010 and all the distributors started holding purchases because they had inventory.

That's all flushed through the system now and so we see strong growth coming. In addition, their audio line is getting very favorable reception into the marketplace and not only in the traditional distribution that they have but also in the mass merchandisers. So we see that growth continuing to come back.

The Brazilian economy looks fairly strong with the change of the president down there, we see no change in the economic plan or projections for the economy. Now they will have -- they do have the issue of the strengthening real and that's something they will probably address.

But for PST, I think that it's a robust market. We are looking at that market. We will be down there in the next week as a matter of fact to do our first visit and we don't see anything right now in the future that would disrupt their plans.

Okay, and PST generally has the pricing to be a little offset I guess raw material inflation now?

They do have the capability to on the aftermarket side of the business to price, on the OE side of the business, they are just like any other supplier to OEs, they have to negotiate that over time. So -- but in their aftermarket business, yes, they do have the ability to move prices.

The Brazil real has actually helped them, Rob, because we converted a stronger currency. They were running around 1.85 here about a year ago. The real this week was at BRL 1.66. So it's an all-time high, which helps them. They have a dollar component of the materials that they bring in, so that has a cost advantage to them. So they are positioned pretty well right now from the market and the strength of the currency and the overall economy that John talked about.

Okay, and what was the remediation costs in the P&L?

It's down in SG -- I think it was other expense as a separate line.

It was in other expense?

No, I think it's just in SG&A, Rob. It's just in SG&A.

Yes, it's in the SG&A line for (multiple speakers)

Okay, it's in SG&A?

Yes, it's now roughly $900,000.

All right, thank you very much.

Stefan (inaudible)

A couple questions, I guess. First off, can you quantify, George, what the kind of the impact of the inefficiencies in Mexico and some of the incremental freight and those things?

You know, I think from the premium freight, we are still running high by about 400,000. I think in the terms of the inefficiency costs, we haven't quantified it in terms that way. What we are really trying to drive is efficiency of output, and that's what we are really working on is how we can get the throughput for the plant because we've got a significant demand from a startup, from our new customers, as you know, and also from our launch of the ag products for the spring market, which are on here.

So our real focus has been on driving output and efficiency at the plant, which is really the throughput.

Okay, so when you said the $400,000, that's above and beyond kind of the normal levels of premium freight?

Yes, that's actually what we are running right now compared to fourth quarter of last year. It's still $400,000 high. Now, part of that is being driven by still the shortage of some of the components and some of it, as John talked about, is the demand from our customers and getting product out to them, we've incurred some premium freight on that side too.

I think you look and you saw the announcements where Ford and Chrysler and others had to shut down their plants for supply, component supply availability. That causes us problems too, because they are our customers, so that backs up our production schedules or changes those.

But in addition, we were seeing some erratic one-time disruptions. We had a primary supplier out of Europe that has been very good at delivering product to us for many, many years and they went for the holidays and came back and their product was out of spec. And they started shipping, it took us -- caused us a lot of disruption as we found out the product was out of spec. So we are seeing some kind of what I will call one offs and we are also seeing the continuing flat shortages of the electronic components.

As we said before, we expect that to continue through the second quarter of this year and we are trying to manage that situation, but that does drive inefficiencies into the plant. Now, not all of the plant inefficiencies are driven by that. Some of it is driven by some variability in production schedules and us getting a more efficient production system into our operations.

Okay, it seems like the incremental margins were as I calculate them 28.5 and that seems pretty good on the gross margin, that is, and it seems pretty good considering all the copper you had to eat. So --

Yes, we are pleased with that, but we think we can do better. We know we can do better. We can get the efficiency levels up in two of our operations, and that is what we're working on.

And just to be -- I'm sorry, go ahead.

But I was going to say clearly our marginal contribution, which is a concern we expressed in the third quarter has improved significantly in the fourth quarter.

Okay, just to understand how the copper recovery works, if copper just stayed flat here, you are saying in six months you would start to get back 62 or 52?

Well, right now we have contracts that would cover -- well, we said 52, but our contracts actually take us about 60%. If copper would stabilize at this level, we would recover that increase for 60% of our contracts. We also do have one with Navistar, but it goes over about a 15-month period, so it won't be fully implemented until early 2012. So by that time, we will have about 85% of our contracts covered with a surcharge mechanism.

In a rising market, there's always -- you are always losing your -- recovery is part of it, but you are never recovering it fully. In the down market, when copper starts to reprice, you make your gains there. So I guess in a stable market that once you got up to the price, which would take some time, you'd be (technical difficulty)

Okay, but just to be clear, if copper just stayed flat for the next six months, then in Q3, you would start to recover 60% of that $1.2 million?

That's right.

Okay, all right. Lastly, any update? You said you were going down to Brazil next week. Any progress on trying to increase your ownership in PST and try to clean up the way you report that?

Well, that's one of the reasons for our visit. We are going to go down and we are getting work done on the valuation and then we'll talk to the shareholders and see if we can come to an agreement and talk to them about the percentage ownership, etc. that they might be willing to sell.

So if we get -- that's what really part of next week is all about. So it's still moving forward, but again for every buyer and seller, there's got to be a price that makes sense. So we've got our valuation work done. They are having some of their work done and we will see where it comes out.

Okay, terrific. Thank you and thanks for a very good execution given all the pressures you've got on you.

Thank you.

(Operator Instructions) There are no other questions at this time.

Well, good. I would like to thank everybody for joining us on the call. I think that our markets -- the markets are improving. We continue to benefit from that. We also have some inefficiencies that as we bring those things under control, we will continue to benefit the Company and our performance. So we are very optimistic about the future performance of Stoneridge.

With that, I would like to thank you all for joining us on the call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.