Stoneridge Inc (SRI) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 Stoneridge, Inc. earnings conference call. My name is Crystal and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session .

(Operator Instructions)

As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr. Ken Kure, corporate Treasurer and Director of Finance. Please

Good morning, everyone, and thank you for joining us on today's call. By now you should have received our first quarter earnings release. The release has been filed with the SEC and has been poster 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 a reasonable assumption, 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 with the Securities and Exchange Commission under the following -- under the heading forward-looking statements. During today's call we may 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 today's call with an update on the current market conditions, operating performance in the first quarter, our growth strategies, business development and his thoughts on future initiatives. George will discuss the financial and operational details of the quarter and forward outlook. After John and George have finished their formal remarks, we will open up the call for questions.

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

Good morning . We have strong revenue growth in the first quarter as all of our market segments experienced good growth, especially in the agricultural and commercial vehicle markets. The rapid growth in agricultural and commercial vehicles, however, did reduce the operational performance in our operations, along with rising commodity costs and a weaker US dollar. I will first review the trends we are seeing in the marketplace and then address certain items affecting our operating performance and explain what we are doing to address these issues. Finally I will conclude with an update on our outlook.

2011 first quarter sales were $193 million an increase of $44.9 million, or 30.3%, over prior year's first quarter sales and $32.5 million, or 20.3%, above our 2010 fourth quarter sales. Our first quarter sales represent an annualized run rate of $772 million, which is better than our previous annual guidance of $720 million to $750 million and higher than our peak revenue year a $752 million in 2008.

We reported earnings per share of $0.12 which was $0.04 above the prior year's first quarter but short of the marginal contribution of the gross margin line that we produced last year. George will provide more details on this when he reviews the financial

Sales in our agricultural and equipment category serves approximately 45% to $41.3 million. Sales to our commercial vehicle customers increased by 33%, to $96.5 million, as a result of increased medium and heavy-duty truck production of 40% in North America and 66% in Europe compared to the prior year. Sales in our passenger car and light truck segment grew by 14%, to $55.2 million on improving North American production. We continue to see positive market growth market trends for the remainder of the year and next -- and into next based on the industry forecast.

In the first quarter performance from our European/North American electronics and controlled devices business, and our joint ventures and India and Brazil have met or exceeded our financial expectations. Our North American wiring business's financial performance was hindered by the operational issues, higher commodity prices and peso denominated costs. The first quarter surge in orders taxed our wiring operation's abilities to produce -- to build product to match our customers' demand. As we could not meet demand with overtime alone, we added weekend shifts and increased headcount as well as overtime to meet current demand and catch up on orders. We also incurred excessive premium freight to prevent our backlog from building.

The manpower increases reduced efficiency, as new employees do not have the experience level to build complex harnesses at the same efficiency level of experienced employees. As a result, we incurred labor cost increases and inefficiencies of approximately $1.9 million when compared to our planned efficiency levels. In addition, first quarter 2011 premium freight at our wiring operation was approximately $2.4 million above the first quarter of 2010 and $2.8 million above the fourth quarter 2010. Currently, production schedules are slowly being stabilized as we are getting ahead of customer demand. As our efficiency rates improve we expect to see improvement in the second and third quarters as we increase our production to match customer orders while reducing headcount, overtime and premium freight.

The other negative cost impacts were a result of copper prices increasing and the strengthening of the Mexican peso to the US dollar. Copper prices averaged about $4.30 a pound in the first quarter, which is 33% above the first quarter of last year and 11.5% above the fourth quarter of 2010. This increase in copper impacted our first quarter results by approximately $1.7 million compared to the first quarter of 2010. In addition, the Mexican peso to the US dollar exchange rate reduce profitability by $1.6 million. As a result of these factors, our gross margin in the quarter was 20.4% and below our 23% to 25% target range. George will go into more detail on these factors and what we are going to address these issues in the financial section of the call.

On the new business front, we continue to quote and win business. In the first quarter we booked $40.6 million in business wins, of which $4.4 million was replacement business and $36.1 million was new business. We won a $14 million award for instrument panels and wiring with a new customer for a severe service truck application. We booked additional new business in China with Euromar -- for our EGT sensor and air temperature sensors. Euromar is a leading Asian agricultural and construction equipment manufacturer. We've also won three awards totaling over $8 million for a shift-by-wire application in the North American automotive market with production starting in 2013 and 2014.

Finally, as we've been discussing on past calls, China is becoming a more significant part of our growth strategy. Last year we signed a $17 million in new business awards and are targeting an additional $16 million to $20 million this year. Currently our China operation has 12 products in varying stages of launch. These products consist of temperature and wheel speed sensors as well as switches and wiring. Of these 12 products and launch, we expect to begin production of six of these products in 2011. With the awards we've won last year, and are expected to win this year, we have agreed to lease additional space next to our current facility to be ready for increased production volume in 2012 in China.

As previously announced, we are opening a new facility in Mexico to support our customers. We expect profitability to be negatively affected in the second quarter through the fourth quarter of 2011 by approximately $4.5 million to $5 million as a result of the costs associated with the initial startup of this facility. Our current forecast is for approximately $1.1 million in the second quarter and the remainder to be evenly split through the third and fourth quarters. We will also increase our capital expenditure forecast to $25 million to $30 million as we add machinery and equipment of $5 million to $6 million for the new facility. This new plant will handle the transition of existing business but also provide us with increased capabilities to accommodate the growing requirements of our North American electronic business.

Our JVs continued to perform well. In India first quarter JV sales were $11.5 million compared to $7.2 million in 2010, an increase of 58%. Our 49% share of net income from the Indian JV nearly doubled to $400,000 in the first quarter of 2011. In addition, two weeks ago we announced that we enhanced our current joint venture agreement to add Stoneridge sensor technology and products in India. Minda Stoneridge will now be able to expand its products offering beyond instrumentation and gauges and into the sensor markets and sell these products into India, southern Asia and Indonesian markets. Minda's annual sales are expected to increase to $50 million to $75 million in the next two to three years, compared to $33 million in 2010.

PST, our Brazilian joint venture, recorded first quarter 2011 sales of 89.2 million [reals], an increase of 48% from the $60.1 million [reals] in first quarter of 2010. PST's first quarter operating margins increased to 12.1% from 4.3% in the first quarter of 2010. PST continues to expand its product offerings and is channel of distribution, adding new customers, especially audio and infotainment sales in the OES and mass merchandiser channels. As result, we expect PST sales to grow nearly 30% in 2011 from the 320 million [real] level last year.

Finally, let me comment on the tragedy in Japan. Though we have very little in direct sales and mainland Japan, many of our electronic components are sourced from Japanese suppliers. Microprocessors, capacitors, motors and LCD displays are among the components we sourced either directly or indirectly from Japanese suppliers. Immediately after the crisis occurred we formed a team of purchasing and operations personnel to assess the impact of part shortages against production schedules and customer forecast. Our sales team maintained constant communication with our customers, making them aware of any potential shortages, possible component substitutions and design alternatives.

Our proactive efforts of finding alternative suppliers, redesigning projects to accept different components and pre-buying certain parts are underway. We are working closely with our customers as certain components flagged may not be available to meet their demands, necessitating alternative approaches and close cooperation. We do not believe there'll be a significant negative profit impact of the second or third quarter and I'm grateful for the hard work and diligence of our team as we working through the situation.

In summary, our first quarter operating performance should have been better. Our major served markets improved more than anticipated. Our European and North American electronics businesses, control devices and joint ventures continue to perform better than projections. We are addressing the structural and operating deficiencies to improve performance and our North American wiring business to fully capture the benefits of the improving markets.

Based on revised market projections, our current estimate for 2011 sales are in the range of $750 million to $775 million which is higher than the $720 million to $750 million range we were discussing in our last call. North American automotive production forecast now are projected to be between $12.8 and $13.1 million units for 2011. The commercial vehicle market continues its recovery as the age of the fleet and the general economic improvement bode well for future production levels. We expect continued growth in the construction and agricultural market, as this segment represents approximately 18% of our sales in 2010.

We have to monitor and manage the impact of a possible component shortage from Japan. These shortages may affect production and sales of certain vehicles and our ability to supply product though we believe the impact to be temporary.

Looking out over the next five years our net new business awards are approximate $250 million with sales between $25 million and $30 million in 2011 and the balance occurring fairly evenly over the remaining four years. Continuing market improvements and growth with our customers from new programs this year and next will drive top line sales. The task in front of us is to restore our operations performance and we are addressing that with specific plans.

With that I'd like to turn over the call to George to provide additional details on our performance and

Thank you, John. Before we discuss our first-quarter operational financial results it should be noted that as of January 1 we adopted the FIFO inventory evaluation methodology for financial reporting purposes. We've adopted FIFO over LIFO as we believe FIFO will provide better transparency to our financial reporting. We've made the change for a few key reasons. First, it makes inventory valuation reporting of our US operations consistent with our operations in the rest of the world. Second, it better reflects the value of the inventory in an environment of rising commodity costs, And finally, our businesses manage their professional inventories in a FIFO basis and is the basis upon which we quote new business.

All the financial comparisons in our press release and discussed in this call for 2011 and 2010 reflect this change. The change from our previously published results have the effect of reducing direct materials from the first quarter of 2010 by approximately $400,000. We will be restating 2008, 2009 and 2010 financial statements for this change but they are minor changes in all three years.

Our first quarter sales increased by $45 million, or 30.4% over last year. Our first quarter sales were positively affected by increased volume in all three of our segments as well as new business sales to both commercial vehicle and ag customers. Our first-quarter sales performance reflects increased production demand in our passenger car-like vehicle and medium duty and heavy-duty segments.

Our earnings performance is improved compared to last year but we did not convert it to marginal contribution rate of $0.30 per dollar or sale, as we did last year. Assuming we achieved our target of marginal contribution of $0.30, we would have improved our reported gross margin of $39.3 million by $7.5 million to $8 million or $0.32 per share. The $7.5 million $8 million shortfall though our targeted marginal contribution was generated from operating inefficiencies due to excess headcount, overtime and premium freight, all which are controllable by us. And negative impacts from copper prices and the result of a stronger Mexico peso, for our peso-denominated labor conversion and overhead costs at our Mexican facilities.

The negative impact to gross margin and operating income from additional labor, overtime, operating efficiencies and premium freight totaled $4.3 million, which would represent nearly $0.18 per share, or 55% of the marginal contribution miss in the first quarter. To meet the demand forecast in the first quarter we needed to ramp up our headcount, which resulted in overtime, excess people and training to manage our customer backlog which was our first priority. These actions cost nearly $1.9 million in the first quarter or 44% of the $4.3 million controllable marginal contribution miss. We will incur excessive costs of $1 million compared to our plan in the next two quarters but we have plans reduce our headcount by 27% in our two largest Mexican facilities between the first quarter and the end of the third quarter as efficiency levels improve.

Premium freight was up by $2.4 million as we were impacted by significant backlog from customer orders. For the most part the premium freight was incurred to managing and guarantee customer deliveries to address the significant increase in production to both the commercial and the ag markets in North America. We have caught up with our backwards in early April so we should only incur approximately $500,000 for premium freight in the second quarter, which is an improvement of $1.9 million in the second quarter. This improvement should continue into the third and fourth quarters.

The negative impact caused by market changes for commodities, specifically copper, and currencies we can control the medium and the long-term though are very difficult to control in the short-term horizon. We were impacted by copper increases and currency impacts from the Mexico peso which totaled $3.3 million or nearly $0.14 per share. Our cost increase for the rising copper prices, excluding the effect of any surcharge billings, was $1.7 million compared to last year and our labor conversion costs and overhead costs from the increase in the peso to the US dollar was $1.6 million.

As we have shared with you in the past, we have copper pricing surcharge mechanisms in place for 55% of our customer contracts. And we recovered 50% of the increase in the first six months the remaining 50% in the next six months. With these contracts in place and assuming a current copper price of $4.38 per pound compared to our average price last year of $3.79 per pound, we will recover $1.7 million for the year through surcharge billing as long as copper stays in the range of $4.38 per pound. But by the fourth quarter the annualized recovery rate will be up to $2.8 million.

We are projecting based on current production forecast we will consume about nine million pounds this year compared to approximately six million pounds last year. At the end of March we put the copper hedge position with monthly contracts to lock in 10% of our remaining consumption at $4.26 per pound and 10% at $4.20 per pound with monthly contracts through December of this year. And just yesterday we executed another copper hedge for 20% of our consumption for June through December at a rate of $4.07 per pound as commodities dropped significantly. We now have the third and fourth quarter hedge at an average rate of $4.16 per pound for 40% of our copper consumption. We will continue to monitor the market to execute hedge contracts to minimize the volatility of copper during the current year. As we just have seen this morning, copper is now down to $3.99 to $4.00 a pound.

On the longer-term we are addressing ways to shorten the recovery period of our copper surcharge billings and negotiate one-time pricing adjustments to catch up from the rapid rise of copper prices. As in the past, we will continue to reprice for copper adjustments for new contracts and for redesigns of existing programs. As a reminder, we negotiated the same copper surcharge pricing adjustments with one of our largest customers that we have with all of our other customers. The copper surcharge is included in our latest agreement signed in August of last year. With the surcharge mechanism fully in place by mid-2012 we will have approximately 84% of our customer contracts under the copper surcharge pricing mechanism outlined above.

The other area that negatively affected us in the first quarter was the continued strengthening of the Mexico peso with the US dollar. We have for facilities located in Mexico with an expected annual spend in Mexico of approximately $71 million for peso equivalent for labor, conversion and overhead costs and that's of the current spot rate of 11.6 Mexican pesos to the US dollar. Last year, the Mexico peso traded on a spot as high as 13.2 pesos to one US dollar and we hedge most of our peso obligations at an advantageous average rate of 13.85 pesos to one US dollar using forward purchase derivatives executed in late 2009.

This year the Mexican peso strengthened very quickly since late last year and early into this year against the US dollar to an average rate of 12.04 which represents a revaluation of nearly 12% against our first quarter 2010 hedged rate of 13.62. This rapid change in the Mexico peso cost us $1.6 million in the first quarter when comparing the prices we've paid for pesos last year and this year. At the current exchange rate we will experience similar level of dollar impact next quarter and through the year. As long as the US dollar continues to weaken , we will be addressing increases in our pricing to recover cost increases for labor, conversion and overhead costs incurred in pesos and paid for in US dollars.

In regards the cost increases that are external to us for commodities in currencies, we are pursuing price relief to recover the cost increases. We are evaluating a number of alternatives on the best way to recover the cost increases, such as shortening the period of time to recover our copper surcharges, negotiating one-time price changes to adjust for significant cost increases, negotiating new long-term agreements, eliminate price downs for older products and increase prices for service parts.

We have developed actions to address our operational issues and will improve controllable costs over the next two quarters. As I outlined, we are addressing our copper prices and currency impacts in our Mexico peso to nominate cost through pricing initiatives, surcharge mechanisms and reducing our operating costs. And as John noted earlier, our new Mexican facility will impact our operating income by $4.5 million to $5 million for the remainder of the year. Our current forecast is incur start up expenses of approximately $1.1 million in the second quarter and the remainder be spent evenly over the third and fourth quarters.

Now I'd like to cover with you some of the details regarding the financial performance from the quarter. Revenue of $193 million in the first quarter of 2011 represents an increase of $45 million, or 30.4%, over the first quarter of last year. Our sales increase is a result of increasing production volumes in our served market and business sales programs and continued economic improvement carried over from last quarter.

For the first quarter light vehicle revenue increased from $48.4 million to $55.2 million, an increase of $6.8 million, or 14%. The increase was primarily attributable to the 11% increase in traditional domestic production at our control devices segments. Sales in the medium and heavy-duty truck market totaled $96.5 million in the quarter, an increase of $25.3 million, or 35.5% over the prior-year first quarter. The revenue increase was primarily driven by an increase of 39.7% in the North American commercial vehicle production.

Our sales with our three largest customers were up by $17.3 million, or 24.4%, compared to the first quarter of last year. European commercial vehicle production is showing an increase of 66%. Sales to ag and other markets totaled $41.3 million, an increase of $12.9 million, or 45%. North America revenue accounted for 74% share of the first quarter revenue, and 78% for the same period last year. In the first quarter electronics revenues were $124.8 million compared to $91.6 million for the same period last year, an increase of $33.2 million, or 36.2%.

Favorable factors affecting our first quarter performance was a 39.7% increase in North America commercial vehicle production, and a 66% increase in European commercial vehicle production. Revenues for control devices of $68.2 million increased from $56.4 million compared to the first quarter of last year, which is an increase of $11.8 million, or 20.9%. The 15.6% increase in production of North America light vehicles for the traditional domestic manufacturers was the primary reason for the increase.

Our first quarter gross margin was 20.4% which fell short of our capabilities. The controllable costs were premium freight, additional headcount, overtime and operating efficiencies represented nearly $4.3 million, which reduced our gross margin by 2.2 percentage points, an impact that our marginal contribution by $0.10 per dollar of sale.

The commodity in peso exchange rate exchange cost us approximately $3.3 million, which also reduce our gross margin by 1.7 percentage points. We are very focused to address the issues to improve our second quarter performance and the rest of the year.

SG&A expenses totaled $32.6 million which is higher than the 30 point -- $30 million in the fourth quarter. SG&A as a percentage of sales was 16.9%, the lowest it has since the third quarter of 2006.

Our design and development expense was $9.7 million, which is higher by $0.5 million, in comparison to the fourth quarter expense of $9.3 million. The increases are part of our product launch and product lifecycle management initiatives. Our SG&A expense for the first quarter 2011 is down compared to 2008 by $5.1 million as result of our restructuring initiatives.

Income tax expense for the first quarter was $700,000 on pre-tax income of $3.4 million. As reported for December of last year, the Company's in an accumulative loss position continues to provide evaluation allowance, offsetting its federal, state and certain foreign deferred tax assets. As a result, no tax expense was provided on US income for the year. However, the Company's required to provide deferred tax expense related to the earnings of our PST joined venture, which is unaffected by our valuation allowance position.

The increase in tax expense for the three months ended March 31 of this year compared to that same period for last year is attributable to the improved financial performance of the European operations, as well as the improved financial performance of PST joint venture. Additionally, the first quarter of last year included a one-time tax benefit of $1.2 million due to the reversal of a deferred tax liability which was previously included as a component of accumulated other comprehensive income within shareholders equity. Due to the valuation allowance, deferred taxes related to our investment in PST and the pattern of projected earnings per quarterly effective tax rates can fluctuate significantly.

As previously discussed, we continue to anticipate that the effective tax rate for the second and third quarter will be between 18 % and 24%, and a fourth quarter tax rate of approximately 6% to 12%, which will result in an annual tax rate of approximately 16% to 22%. We anticipate cash taxes to be approximately $1.8 million to $2.2 million for the year.

Stoneridge reported first quarter net income of $2.9 million, or $0.12 per share. This compared with prior year net income of $1.9 million, or $0.08 per share. Depreciation expense for the first quarter was $4.9 million and amortization expense was negligible as most of the intangible have been written off in December, 2008.

The primary working capital totaled $111.8 million at quarter-end, which increased by $21.6 million from the fourth quarter of last year with trade receivables accounting for $27.3 million of the increase. As a percentage of sales our primary working capital increased from 14% to sales in the prior year to 16.3% in the first quarter this year. Though our primary working capital base increased by 2% compared to the fourth quarter of last year. Current working capital levels are a function of increasing sales and operational activities we are now experiencing.

Operating cash flow with a use of $15.5 million in the first quarter compared to use of cash of $7.3 million in the previous year. Our cash flow results in the first quarter were primarily driven by the increase in accounts receivable, while the inventory increase is more than offset by accounts payable.

Capital investment for the quarter totaled $4.3 million, mainly reflecting investment in new products and old European electronics. We are forecasted to finished the year with total capital spending in the range of $25 million to $30 million, which includes $5 million $6 million for the new Mexican facility.

As of March 31 of this year, we have $78.8 million of availability under our $100 million asset-based lending facility, a significant improvement from the $61.3 million level at December 31 of last year. Our borrowing base is increased by $10.8 million since the first quarter of last year as increased accounts receivable balances are the primary result of higher sales. And at this point we have no borrowings drawn against our asset-based lending facility.

As part of the bond refinancing October of last year, we extend the maturity of our ABL to November 1 of 2012. And our first quarter ending cash balance totaled $53 million compared to $72 million at the end of last year. Our cash burn is mostly driven by increased accounts receivable as a result of increased sales. We will continue to manage our capital expenditures and working capital to sustain and 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.

All of our businesses are showing significant growth as the markets return. Our first quarter was disappointing as we did not convert at our $0.30 per dollar sale targeted marginal contribution on our 30.3% sales increase. We have outlined our plans and how we intend to respond to operating issues that generated the shortfall. We are confident that our responses to these issues will yield improved results in the second quarter and indeed the second half of this year as our volume continues to ramp.

Despite the headwinds we faced in the first quarter we are encouraged by our top-line growth as quarter as our plan continues to unfold. Our current long-range forecast is not changed and includes increases from net new business awards of over $250 million over the next five years. As we experienced in the first quarter of 2011, our volume is strengthening for all of our businesses. Every business is performing well except for our North America wiring business. We are very focused to fix our operational issues in that area.

Even though our facilities were impacted by the strong customer demand, we have developed plans to improve our manufacturing efficiencies by reducing headcount and over time that were required to reduce the customer backlog. We've caught up with our customer backlog and expect to reduce premium freight in the second quarter compared by the negative impact of $2.4 million in the first quarter. We're starting to work with our customers to recover cost increases that were driven by rapidly escalating commodity costs and the result of currency fluctuation.

The last subject would we like to update with you is PST. Over the last several months we have been in active negotiations and discussions with our Brazilian partners to purchase an additional shareholders stake in PST. We have been engaged in discussions related to valuation of the Company, the management structure of the Company and how the Company will be managed if the ownership percentage changes. We remain optimistic that a transaction to purchase an additional stake will be completed this year.

However, regardless of the timing and completion of a transaction, one thing remains important, PST has significant growth opportunities, as we indicated earlier, and that the top line growth will be in the range of nearly 30% this year. And PST's gross margins and operating income percentages continue to remain consistent. As a result , we remain very positive about the financial and operating results forecasted by the PST business.

In summary, we are encouraged by our progress and still believe that our goals to reach operating income in the range of 8% to 9% by 2012, and reaching or exceeding our ROIC target of 12% to 15% by 2012 are achievable. Operator, I would like to open up the call for questions at

(Operator Instructions)

Today's first question comes from line of Robert Kosowsky of Sidoti & Company.

Hello. How are you doing?

Hello, Rob.

Good. I had a question about the premium freight. At what point in the quarter did you realize that you needed to really ratchet up headcount? And the reduction in headcount and the lower premium freight, is this a function of your throughput increasing or demand starting to soften a little bit?

No. Early on in the quarter demand remains -- was very strong, particularly in agricultural markets. So we started looking at alternative plans besides overtime. And so I would say the premium freight is started at the beginning of the quarter. As we look at different ways to get product to our customer while we were ramping up the internal operations with additional shifts.

Okay. And so -- but did you catch up with brisk demand with your own throughput?

Well, right now we are ahead of customer demand. And as we look at the cycles, we are in -- the agricultural cycle is a temporary lull right now, will come back up strong in the beginning to mid-summer, so we're preparing for that. And so then I think we're looking at strong commercial truck throughout the remainder of the year. But we are working -- we are ahead of customer demand right now. We still do have some spot shortages where we are. Working overtime to meet those things. But gradually as we see this condition improve, we will see reductions in both premium freight, overtime, as well as some of the backorders to our customers.

And, Rob, the demand has remained very strong for both the first quarter, continues in the second quarter. So we have caught up with demand going into the second quarter. So the premium freight is pretty well behind us starting here in April.

We've seen that -- we are continuing to work on the efficiency level because that's the key point because we need to ramp the efficiency and our two key facilities. That will permit us to begin to reduce the headcount and the overtime.

Okay.

That is our current forecast we see will take us primarily in the second quarter and we'll still have some of that in the third order. But over the next two quarters we can have that back in balance.

Okay. And then, as far as PST, the sequential decrease in equity income, is this more a function of seasonality than anything else?

It is. The first quarter in Brazil is always the lowest quarter and then it will start to build in the second quarter. So they are a little bit reverse from where were at -- their fourth is generally the strongest. And then it builds over the sequential quarters of the year.

Okay. And then, finally, the new facility that you are building down in Mexico. Is that going to generate net new business with Navistar, or is this shifting production from Ohio down to -- or somewhere in the US down to Mexico?

It will shift production into that facility. It will come from both some of our Mexican operations and some of our US operations. Ultimately, in this year I don't think it will generate any net new business from Navistar but ultimately we expect that we will have capabilities to expand our business down there. And hopefully it will be with them.

All right thank you very much.

Thanks Rob.

(Operator Instructions)

Our next question comes from the line of Stefan Mykytiuk from Pike Place Capital.

Hello, good morning. It's Stefan Mykytiuk. Just a couple questions. Going from Q1 to Q2, I think, George, you said the premium freight's going to go down by $1.9 million, is that right?

That's right.

Okay. And is it Q3 when we start to get some copper recovery then?

Yes, well we're actually starting to get copper recovery in the second quarter. And it builds because as you know we have a timing difference for that.

Yes.

So it starts to build some in the second quarter, it gets bigger in the third quarter, substantially higher in the fourth quarter. We are trying to shorten that cycle time in terms of how the surcharge billing mechanism works. But I think what I alluded to is we'll get recovery of $1.7 million over the year. If you take the fourth quarter billing rate, you'll have an annualized benefit of about $2.6 million to $2.8 million.

Now, we've seen a dramatic change, as you have seen, is copper was trading -- when we put this together here a few days ago it was up and around the $4.30 range. As of yesterday, with what's going on with China and reserve requirements, it dropped dramatically down to $4.03. Yesterday's spot was $4.08. This morning it's trading at $3.99 to $4.00. We're clearly going through another volatility period and it's changed dramatically here just in this past week.

Okay. But, so, if I take the Q4 number that implies $700,000 or something in Q4 recovery, and so the other $1 million is Q2 and Q3. And I'm assuming Q3 is bigger than Q2?

Yes, and to help you, Q2 is -- the annualized rate there is about $2.4 million, so you're down around $600,000.

Okay. And then what's the -- is there anything else I guess going from Q1 to Q2 that were going to pick up? What was the labor?

We'll see an improvement in labor of about $900,000. It's costing us about $1.9 million in the first quarter, it will continue at about $1 million in the second and third quarters. So, we'll pick up about $900,000 in the second quarter and third quarter on the labor side.

Okay terrific. I think that's all my questions for now thanks.

Okay. You're welcome.

And we have a follow-up question from the line of Robert Kosowsky with Sidoti & Company. Please proceed.

Hello. Just a follow-up question on the revenue outlook. If you take your -- just the past quarter multiply it times four, you get to $772 million, so I'm wondering why you're a little bit more cautious on the lower end of that? Is it basically just due to seasonality in ag for those?

Well, that would be one. And I think there's still some uncertainty wrapped around a few of our key customers. But it could continue to improve beyond that, more towards the upper end of the range. So, I think we're comfortable in -- the low end is $750 million, but I think it's going to be more approaching the higher end, Robert.

Okay.

The other issue with that would be if there are component shortages from Japan. That we may not have component shortages, but there could be another supplier of one of our customers who might temporarily idle their facility, so there may be some bumpiness in demand over the short-term, over the next two to three quarters as that supply situation sorts itself out.

All right. And do you see any other further meaningful increases in SG&A as the year progresses according to your budget right now?

No, our SG&A is pretty set. And we've frozen -- our merit increases are 2% this year. So, we have no other plans for SG&A this year.

Okay. So you think low to mid 30s is pretty fair, if you get good revenue ramp?

Yes, I think it's going to stay fairly consistent.

All right, thank you very much.

You're welcome Rob.

That concludes our question-and-answer session. I would like to turn the call back over to Mr. John Corey for closing remarks.

Well, again, I'd like to thank you for joining us on today's call. I think, as you can see, our revenue is ramping up rather nicely. We're seeing strong performance in all our markets globally. We expect that performance to continue, and we're going to put -- we have intense focus on fixing our issues in our wiring business. And we expect to see improvement in that business over the next two to three quarters, and overall we believe we're still very encouraged by how we see the Company's ability to perform in the future.

So I'd like to thank you very much and with that I will end the call.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect. And have a great day.