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Stoneridge Inc. (NYSE:SRI)

Q2 2009 Earnings Call

July 31, 2009; 9:00 am ET

Executives

John Corey - President & Chief Executive Officer

George Strickler - Executive Vice President, Chief Financial Officer & Treasurer

Ken Kure - Corporate Treasurer & Director of Finance

Analysts

Brian Sponheimer - Gabelli & Co.

Brett Hoselton - KeyBanc Capital Markets

Matt Summerville - KeyBanc Capital Markets

Operator

Good day ladies and gentlemen, and welcome to the second quarter 2009 stoneridge earnings conference call. My name is Jasmine and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Ken Kure, Corporate Treasurer. Please proceed, sir.

Ken Kure

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 at 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 maybe 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 on our results and his thoughts on the market conditions. George will discuss the financial 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’d turn the call over to John.

John Corey

Good morning. Thank you for joining us on today’s call. As you have seen, we have reported sales of $32.2 million in the second quarter, which is a decline of a $110 million or 52% from the prior year. This sales decline was the primary reason for the net loss of $19.8 million, which excludes any benefit for taxes due to the valuation allowance taken in the fourth quarter of last year and is compared to last year’s profit of $4.7 million.

To give some perspective on our results, let me briefly review the market’s performance. In March of 2009, based on industry forecast, our expectations were for the North American automotive productions to be approximately 8.2 million units, North American commercial vehicle production to be around 293,000 units and European commercial production to be around 270,000 units.

As the second quarter developed, it became apparent that volume declines accelerated over the first quarter. Several factors contributed to this, including continued weak demand based end customer uncertainties, continued credit financing availability issues and the bankruptcies of Chrysler and GM.

In Europe our end customer responding to continued economic weaknesses conducted rolling shutdowns of operations and generally operated at 50% of the prior year volume or less throughout the quarter.

The combination of these issues resulted in actual production rate for the second quarter, 15% below our North American light vehicle production estimate, 17% below our North American commercial vehicle production estimate and 11% below our European commercial vehicle production estimate.

These production variances were compared to our estimates of March of 2009. Compared to 2008, North American automotive production in the second quarter of 2009 of 2.9 million units was a decline of 49.6%. In the North American commercial vehicle sector second quarter production was 55,000 units a drop of 54.7% from the prior year.

In Europe where we sell predominantly in the commercial vehicle market, second quarter production was 62,600 units a decline of 70% from the prior year. Clearly our markets and our customers were in a distressed state globally.

While the results are lower than we expected, we have been execute on our plan, discussed and reviewed all this and several times on past calls. Our plan, which started in 2007, called for a restructuring of our operations, improving our financial and operating performance and pursuing top line growth. So how are we performing against our long-term plan?

First, while no one could forecast the severity of the market decline with did modify our plan slightly last year to emphasize cash management in order to get through this troubled period. Our liquidity remains strong. Our cash balance was $85.8 million as of June 30, compared to $92.7 million at the end of 2008 and $81.3 million at the end of the second quarter of 2008.

Our borrowing capacity on our asset based lending facility remains undrawn with $45.2 million availability. Our team has managed multiple customer bankruptcies including those of GM and Chrysler with minimum losses in accounts receivables.

We have also strengthened the balance sheet by improving the quality of our receivables, lowering our working capital and buying back $17 million of our long-term debt last year. As part of our cash management plan we have lowered capital expenditures but are not jeopardizing customer programs or launches for this year or for 2010.

Our operational restructuring has improved our financial performance, although it has been masked by the volume declines currently. Our operating improvements are coming lean initiatives and restructuring of our overhead cost centers at our manufacturing facilities.

Besides the closing of our Sarasota, Florida and Mitcheldean, UK facilities completed last year, which will provide an expected benefit of approximately$2o million this year, we initiated additional actions to improve our cost position.

In late 2008, we consolidated dated our Canton, Massachusetts facility from two plants to one facility. This initiative should save about $4 million in 2009 compared to our 2008 cost structure. We have also completed restructuring initiatives at Orebro, Sweden and Juarez, Mexico facilities earlier this year, which are expected to save about $2 million this year.

The length and severity of the current market downturn has necessitated further reductions in the second quarter. We have announced and implemented restructured staffing at our [Bromo] facility outside of Stockholm and reduced employees in our North American wiring and instrumentation business. This resulted in a $1.5 million expense recognized in the second quarter. We expect the result of these initiatives to be cash and earnings neutral in 2009, while generating approximately $4 million in savings in 2010.

Finally we have internally announced we will consolidate our controlled device businesses of two business unit into one unit. The planning is underway and we will start with the adjustments and changes in the third quarter as the plan is finalized.

To summarize the initiatives embarked on over the past 18 months have absorbed costs of approximately $22 million, most of which was incurred in 2008. For the first half of 2009 our controllable costs, which we define as labor, fixed overhead, variable overhead and SG&A expenses excluding restructuring charges was $52 million below the comparable period in 2008 and $38 million below the comparable period in 2007.

It is important to note that we have restructured much of our capacity by moving production lines into existing facilities, not reducing capacity. When the market turns around the impact of every revenue dollar will be magnified to a larger extent by these cost restructures. Though I’m not pleased with the results of this quarter, our management team has taken significant quick actions to respond to the current market conditions.

One could reasonably ask with a quarter like we just had, is there any positive news? First as we stated last year our plan was to have enough cash to carry us through to continue investing in the future of our company and to take advantage of opportunities from other suppliers’ weaknesses and to continue to invest in the near term launches to support out diversification efforts of our customers and finally to weather the storm.

We are doing just that. Market conditions are worse than expected and volume declines lower than anticipated, but we have kept our cash position fairly stable while funding further cost reductions and product development programs and product launch programs that are occurring.

We have not taken out capacity, but have reduced overhead centers. We have not forgotten about the topline and continue to invest in near-term program launches as well as product development to target new technologies and customers and grow our geographic presence.

Because of our past actions taken, we have the financial capability to do this. We are currently launching five engine gas temperature sensor product applications, most of which are on new European automotive or North American commercial vehicle platforms. In addition to the five that will be launched this year, we will launch an additional three in 2010.

We are launching two platforms for our new capacitive sensing technology and two new lift truck sensor platforms in the Ag off-road segment to the non-automotive customers. One of the lift truck products is a level censor and the other is a multi-level module which employs compounds co-developed by suppliers and supplied by our control devices and electronic units as integrated modules.

We have released for customer testing new technology applications that will be sold in the Ag, construction and material handling markets. Two of these new business platforms will utilize our cylinder position sensing technology while one will utilize our steering angle sensing technology. Distressed suppliers have provided us with opportunities to bid on new wiring business. We have verbal awards on some applications and continue to seek additional opportunities.

These are examples of how we are positioning the company to expand sales from our traditional core products with new customers and enhance our sales with our traditional customers. Finally and perhaps this is somewhat premature, we maybe seeing affirming of customer orders, an indication that the bottom has been reached and we are on a gradual recovery.

While the third quarter looks weak, especially in the commercial vehicle markets, we are seeing some preliminary sign of volume stabilization with a minor upturn in demand in the North American automotive market. Cash for Clunkers program may have a short-term stimulus impact on demand. In the commercial vehicle markets, we are seeing no signs of an upturn in the North American market, though Europe maybe showing signs of stabilization though at a very depressed level.

We are seeing signs that the emerging markets are starting to grow again namely in Brazil, China and India. We face a difficult second half, but the signs are encouraging. In conclusion, though the results of the current quarter were far from our desired results at the top and bottom line, we are focused on our longer-term plan while adjusting to the short-term reality of the severely depressed market.

We have adjusted and will continue to adjust our plans to respond to the market conditions. We have improved our cost structure to position Stoneridge for better profitability and cash flow when the markets do return. We have protected our production capacity, but have reduced the number of overhead cost centers.

We have not lost sight of the future growth, nor customer commitments for the topline. We have a number of launches across various areas of our product offering, approximated $45 million to $55 million late this year and next year.

We have continued to gain awards in new business with new technologies, new customers and have enhanced our position with cornerstone customers in key markets. We have located technical engineers to Europe to address our emission sensing business and in China to address our [wiring harness] business with some of our cornerstone customers.

Based on the current industry forecast, we are forecasting to have positive operating profit in the fourth quarter and positive operating cash flow depending on the timing of the near-term awards and their effect on working capital.

For the last four quarters, we have seen the market in distress and declines greater than anyone forecasted. We have modified our plans accordingly to adjust to the new reality. Even with the severity and length of this decline, we have the financial strength to get through the year, add to our product portfolio to strengthen our future and we will have the cost structure, which will magnify any volume increases.

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

George Strickler

Thank you, John. We started the journey three years ago to improve the operating and financial performance of the company. We were on track for record performance through the first half of last year. At that time, we were exploring business opportunities to enhance our topline growth. However, in the second half of 2008, the market declines which began in the US markets during the third quarter quickly stole over the emerging markets and had a significant negative impact on the European market.

As John explained, we were finalizing the major restructuring projects we had initiated in November 2007 when the significant downturn in the market occurred. We then quickly adjusted our strategic growth planning to a shorter-term focus to manage our cost structures, lower our breakeven level of managing liquidity.

Last year, our sales were $752 million. During the first half of this year, sales were $223 million which is an annual run rate of approximately $440 million to $500 million. We have taken down our controllable costs for direct labor, fixed and variable manufacturing overhead, design and development expenses and SG&A expenses by $52 million in the first half of 2009, compared to the first half of 2008.

We have completed the restructuring efforts to close your manufacturing facilities in Sarasota, Florida and Mitcheldean, UK. We consolidated the two plants in Canton, Massachusetts into one facility. We have completed Phase I of our restructuring our European operations. We have completed the program to consolidate one of our Mexican facilities under one management team.

These actions have cost $19.2 million during 2008 and 2009 but the annual benefit should be approximately $26 million. From these programs, we have reduced our global workforce to fewer than 5000 employees, a reduction of over 21% compared to last year. We have announced the second phase for our European restructuring in March and recorded an additional expense of $1.2 million. During the second quarter we anticipate the benefit to be $1.8 million in the second half of this year and $4.4 million next year.

We have aggressively been pursuing a priority to implement lean in our Mexican wiring operations. We have extended those programs to our Lexington, Ohio and European operations. At the end of June we announced this would our controlled device businesses under one management team. We will announced the estimated costs and benefits of the controlled device integration as it becomes more defined most likely in the third quarter.

Along with the restructuring efforts we have been modifying our workdays and work-shifts to flux with production schedules, respond to volatile and rapidly changing customer releases. We will be taking unpaid leave, including our senior management to adjust to the volatile customer demand.

Through all the restructuring efforts and modified work schedules, we have been able to reduce our controllable cost by $52 million through the first half, which is estimated to be about $107.5 million for the full year compared to last year.

We have begun to make plans to control our cost increases once the markets begin to rebound. One important item with our cost structure is we are not taking out capacity but have reduced costs by the elimination of overhead centers. If you will recall, our major restructuring initiatives involved the transfer of machinery to other manufacturing locations, which did not reduce our capacity.

We believe the position we took with our cost structure and liquidity will position us to generate the possibility of cash flows to permit the company to generate return on invested capital in the range of 10% to 15% when more normal demand returns. We have been able to lower our breakeven profitability level and a breakeven cash flow very quickly, which is a real tribute to the Stoneridge organization.

Even with a significant drop in sales in the second quarter our cash balance only dropped by $3.7 million in the quarter from $89.2 million to $85.5 million We continue to manage our working capital aggressively.

We are reviewing our customer schedules every month to adjust our capital expenditures, and design and development expenses, to reflect our customer’s activities on the product and platform plans without impacting our own growth potential. We will continue to manage our liquidity and aggressively pursue cost reduction opportunities to reflect the reduction in our markets until we see the markets starting to rebound.

Revenue of $102.9 million in the second quarter represents a decrease of $110.9 million or 52%. Our sales decrease was the result of the decreases in production volumes in our served markets, severe restrictions on new customer credit, and general economic conditions. Indeed, we believe that the recent well publicized financial difficulties of the Detroit 3 have further affected their sales performance.

Their second quarter light vehicle revenues declined from $62.3 million to $33.4 million, a decrease of $28.9 million or 48.4%. The decline was primarily attributed to the 56.2% decline in traditional domestic production and our control devices segment some of which was the result of the GM and Chrysler bankruptcies and subsequent shutdowns.

Medium and heavy duty truck sales totaled $18.2 million in the quarter a decrease of $72.1 million or 57.7% over the prior year. The revenue decrease was driven by the decline of 54.7% in the North American commercial vehicle production and a decline of 70% in European commercial vehicle production.

Finally unfavorable foreign currency exchange rates resulted in $5.1 million sales reduction. Sales to agriculture and other markets totaled $10.8 million, a decrease of $9.3 million or 46.3% below last year North American revenue accounted for 79% share of the second quarter revenue compared to 72.2% in the same period last year. The percentage increase of our North American revenue reflects the more dramatic effect of reduction in European commercial builds and unfavorable favorable exchange rates.

In the second quarter Electronics revenues were $65.9 million compared to $149.4 million last year a decrease of $83.5 million or 55.9%. Unfavorable factors affecting the second quarter performance were the 54.7% decrease in the North American commercial vehicle production the 70% decrease in European commercial vehicle production and unfavorable foreign translation.

Revenues for controlled devices are $36.4 million a decline from $63.8 million compared to the second quarter of 2008, which is a decrease of $27.4 million or 43%. The 49.1 % decline in production of North America light vehicles for the traditional domestic manufacturers is the primary reason for the decline.

Our second quarter gross profit was $13 million resulting in a gross margin of 12.8%. Our gross margin decreased 10.3 percentage points from the prior year level. This decrease was due primarily to reduced industry volumes and foreign exchange translation relative to the prior year.

Gross margin in 2009 was also unfavorably affected by volume sensitive expense items. Specifically, gross profit was negatively affected by an increase of inventory reserves and unfavorable volumes varying adjustment due to the significant drop in market and product forecast.

These items totaled $3.6 million for the second quarter and are not expected to be recurring in nature. Gross margin in the second quarter of 2009 was not affected by restructuring costs. This compared to the second quarter of 2008, which included $1.9 million in restructuring costs of [self-aid] production line moves.

Sales from low cost manufacturing locations accounted for 43.4% of total sales for the second quarter compared to 35.7% in the prior year. The increase is due to lower overall Stoneridge sales in the current quarter. With our China operations, our announced production line moves from our Mitcheldean UK to China and Estonia. In our copper wire initiatives, we expect our sales from low cost locations to be a key focus for growth in the future.

We will continue to expand our presence in the three low cost manufacturing locations, Mexico, Estonia and China. Selling, general and administrative expenses totaled $27.4 million in the second quarter, compared to $38.6 million in the [prior].

Decrease in SG&A is primarily due to cost structure savings, which are the result of the previously discussed restructuring initiatives and lower compensation related expenses in 2009. We have reduced our design and development expense from $13.3 million to $9.5 million as some of our customers have delayed some of their future projects and platforms.

We are however continuing to support near-term product launches and customer commitments which John discussed earlier. The second quarter income tax expense was $200,000 or 1% of pre-tax losses. As reported for December 31 of last year, the company is in a cumulative loss position and continues to provide evaluation allowance offsetting the Federal, state and certain foreign deferred tax assets.

As a result, no tax benefit was provided for losses incurred in the second quarter of 2009 for Federal and state tax purposes. The negative impact of those valuation allowances was partially offset by tax benefit for losses incurred in Sweden, which it is more likely than not that the benefit of those losses will be realized in the current year.

Due to the valuation allowance and pattern of projected earnings, the quarterly affected tax rates could fluctuate significantly. Currently, we are projecting that the 2009 annual effective tax rate will be between 0% and 4%. The unusually low effective tax rate anticipated for this year is due to the circumstances that caused us to write off our deferred tax assets in December of last year, which will continue to prevent the company from recognizing a tax benefit from domestic and certain foreign losses.

Once the market stabilizes and profitability returns and we are able to reverse the valuation allowance, we expect the effective tax rate to normalize and be in the range of 27% to 30%. The outlook for 2010 will be a tax rate comparable to 2009. Including charges for pre-tax restructuring costs in the second quarter of $1.6 million, Stoneridge recognized a second quarter net loss of $19.8 million or $0.81 cents per share.

This compared with prior year net income of $4.7 million, which included pre-tax restructuring charges of $3.7 million. Depreciation expense for the first quarter was $5.2 million and amortization expense was negligible as most of the intangibles had been written off in the prior year.

Earnings before interest, other income, taxes, depreciation and amortization were negative $8.8 million in the second quarter compared to a positive $20.8 million in the previous year, a decrease of $29.6 million. Our primary working capital totaled $73.4 million at quarter end, which [decreased] $62.5 million from the second quarter of last year.

As a percentage of sales, our working capital decreased from 17.5% of sales in the prior year to 13.1% of sales in the second quarter of this year. The primary reason for the decrease is reduced accounts receivable and lower inventory from lower sales activity.

Operating cash flow, net of fixed asset additions was a cash use of $3.8 million in the second quarter compared to a cash source of $4.5 million in the previous year. Our cash flow results in the second quarter were affected by lower sales activity, generating lower net income offset by lower working capital.

Capital investment totaled $6.7 million in the first six months of 2009 mainly reflecting investment in new products and in building expansion project in our Lexington, Ohio facility. Some significant areas of our capital investments were in emissions, switch and actuation products and wiring.

We are projecting our capital spend to be in the range of $16 million to $19 million for this year. Two of our most important measures starting in the fourth quarter of last year and continuing this year has been cash flow and liquidity. As of June 30 of this year, we have $45.5 million of availability under our $100 million asset-based lending facility.

We have no borrowings drawn against our ABL line facility, which has a maturity of November 2011. Our quarter end cash balance totaled $85.85 million compared with $81.3 million of last year. We will continue to manage our capital expenditures and working capital sustained to improve our cash flow.

We will continue to work to sell our closed Sarasota manufacturing facility. Based on current performance, we expect to receive dividends for 2009 from our Brazilian joint venture and going forward we expect we will continue to fund our operational growth initiatives through our free cash flow generation and available cash balances.

Now I would like to take a moment to discuss our 2009 outlook. As mentioned by John the environment for 2009 will most likely continue to be a challenge. The same is true for the entire industry, given the interdependence of the supply chains in the OEMs. Though we have positioned Stoneridge to manage through the economic and automotive downturn as we see it, we believe there is still abundant risk given the state of the industry as a whole.

Based on the effort of our restructuring programs, headcount reductions, adjusted 2009 compensation programs, flexing our production schedules and our reduction in design and development expenditures, we have quickly adjusted our 2009 cost structure through lower breakeven level.

Based on the market forecast we are experiencing, our goal is to maintain profitable operations and liquidity in these very difficult times by lowering our breakeven sales level for profitability and cash flow. Although the first half of 2009 will be far worse than we originally anticipated, we continue to expect Stoneridge to return to positive operating income in the fourth quarter where cash flow will depend on the bottoming and the market drop.

If the market stabilizes and some of the growth returns we will need to reinvest some working capital, especially in receivables. However, as we have demonstrated already we will manage our liquidity and cash balance to deal with market conditions. As I shared with you before, we took the aggressive actions to reduce our cost base, which has been reduced by nearly $107.5 million over the last two years.

We have announced one additional action to integrate our control device division under one management team. We are now developing plans on our August strategic planning sessions to control our costs with the anticipated market growth to ensure we generate the profitability and cash flow to finally generate a return of invested capital in the range of 10% to 15%.

From the new business plans that John shared earlier, in addition to the actions taken with our cost reductions, we are prioritizing our expenditures in capital, and design and development expense to target growth with new technologies, new diversified customers, and cornerstone customers, and addressing geographic opportunities. Most of our business awards in the second quarter reflect these successes.

In summary, we continue to modify our plans, respond to the rapidly changing markets. We are making further reductions in our European and Mexico operations. We are lowering our cost structures to offset the volume reductions. We have adjusted our compensation programs to contain costs. We have reduced our headcount over the last two years by 21%. We continue to adjust our work shifts and our plans to adjust to rapidly changing customer forecasts.

At the same time we are driving cost reductions, we continue to focus on liquidity and balance sheet strength. We continue to strengthen our balance sheet by managing working capital and reducing capital expenditures. In the face of new bankruptcies in the last 18 months we have minimized our risks and incurred no significant losses.

We continue to monitor business conditions and will take necessary steps to ensure Stoneridge is in a position to deal with the current economic environment while positioning the company for growth when the markets return. Our actions have not taken capacity out of our operations but positioned us to reduce our overhead centers to improve our capabilities, improving profitability and generating positive cash flows.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brian Sponheimer - Gabelli & Co.

Brian Sponheimer - Gabelli & Co.

You talked about getting share from distressed suppliers. I was hoping maybe you could talk a little more about that and behind that, regarding your own [discussions] with the suppliers, has there been anything discussed with supplier cases in which you have had to ship vendors to ensure a steady supply?

John Corey

Yes. I think that we can’t disclose who we are going to take business from, because I don’t think we have got verbal awards. They need to notify the other side, so that is all we can say right now.

Regarding our supply base the team has done a very good job in managing it better. We have meetings that looking at our suppliers capabilities. They are not only looking through the financial capabilities but also seeing if we are having any problems with the product coming in the door because that is always an indication.

In a few select instances we have had to move tooling to another supplier, and have a couple of programs that are actively underway now to resource business to suppliers that are more financially capable and operationally capable and on the supply side what we have really seen is the smaller suppliers that have had some problems with liquidity and availability. We have developed a list of those. We work with them and in three cases we have had to switch our tooling and capabilities so that we can respond to their financial difficulties.

One other things we have done also is selectively where we felt were not sure of a supplier’s future, we have increased inventories from that supplier until we could get a better fix on it so we wouldn’t have a supplier disruption.

Brian Sponheimer - Gabelli & Co.

Okay. Can you give me any idea of the timing that took place on these three instances where you had to move? Whether it was earlier in the quarter or later?

John Corey

We actually have done all the moves we are working with one remaining one that we’ll have in place by September, so there will be no disruption in any of our production capabilities.

Brian Sponheimer - Gabelli & Co.

Secondly, Banko Santander just announced that they are active on their Brazilian unit. So it appears that the Brazilian market is opening up somewhat. Can you give an update on the PST business and where that stands with regards to potentially setting that off?

John Corey

We’ll do that if we had recourse to. Any spin-off or public offering of that business will have to be done in conjunction with our partners and done at the right evaluations. I think the market is probably a little bit early there. The market as we said earlier is starting to come back. We have got new program launches into that market. I would think that we will get down there in a couple of weeks and, we will look and talk with them about the conditions for perhaps potential IPOs sometime next year.

George Strickler

Most of the IPOs that have been going along in Brazil have really been with large cap. I think there is still a difficult market for medium and small cap kind of companies. So as John said it is going to probably be out there a little later than, lets call it sometime in 2010 late if the markets respond and then your first question the Brazil market certainly has started to rebound quicker than the North American, European market.

We have seen it in the second quarter and I think what we are currently looking at in the third quarter is they are returning to levels before the stress period of fourth quarter last year.

Operator

(Operator instructions) Your next question comes from Brett Hoselton - KeyBanc.

Brett Hoselton - KeyBanc Capital Markets

I have got a couple of questions and then Matt has a couple of questions here. My question is with regards, first and foremost to your backlog. You have been talking about your three to four year backlog of around $250 million. Is there any reason to believe that that has materially increased or decreased over the past several months?

John Corey

I wouldn’t say it is a material increase. I don’t think that we have lost any programs. What we are seeing is maybe some stretch-out of programs that we thought are being pushed out a little bit far. The customer is managing their investment also but I think the program awards are still good.

Now depending on the volume, we quoted those numbers volume expectations are much higher. So from a volume related perspective that might be down but not from a program related perspective.

George Strickler

Brett in our August planning session we are going to come out and really try to quantify what the market projections look like versus to product launches and frame that in a way with current production schedules and estimates.

The other thing is somewhat choppy in this is government orders. They don’t seem to be as easily predictable as our other lines of business and so that adds a little bit more uncertainty in terms of how that has been coming into the forecast and what we experience.

Brett Hoselton - KeyBanc Capital Markets

Then, as far as the potential take over business, I know that you can’t necessarily identify, well, anyway a number of different factors. I guess my question that would be, can you give us a sense as to the order of magnitude and potentially the timing? Is this potentially a $5 million worth of business? Is this $50 million worth of business? Is this something that could impact the back half of the year or is it something that is 2010 and beyond?

John Corey

I think in most cases the award would total probably between $5 million to $15 million in total if we looked at it and some of the awards we were looking at. I think assuming that depends on the customer, but we would probably see most of the benefit of that happening next year, although we might launch programs, some of those programs this year.

Brett Hoselton - KeyBanc Capital Markets

The 5 to $15 million John is that kind of an all-in number given all the programs that you are looking at or is that a per program number?

John Corey

No, that’s kind of right now, an all-in number as we look at it. We haven’t factored in some other awards that might be coming and there are still decisions out there to be made on.

Brett Hoselton - KeyBanc Capital Markets

I’ll turn it over to Matt here.

Matt Summerville - KeyBanc Capital Markets

George, can you go over some of the nonrecurring items in the gross margin line and maybe in the SG&A line that won’t occur again in the third quarter?

George Strickler

Well, I think they were really wrapped around. You can imagine, as we have created a global manufacturing footprint across our organization and our supply lines, our strategic supply that sort of gets out of sync a little bit when you are looking at demands and as they come down, we have had pipelines of materials.

So, we generally have a policy within our company, we look at what we call excess and obsolete inventories and we have had to make some adjustments through some of our reserves that we normally do in normal practice of our accounting and those were reflected in the second quarter, really wrapped around those situations with inventory.

That represented $3.6 million in the second quarter. I only highlighted because it’s a nonrecurring kind of thing and it will not have an impact on operations as we move forward. I think we are finally starting to see the bottoming of the market.

Our inventory positions are starting to stabilize, even though we can improve our position of inventory, but the pipelines are getting more consistent with what we see as production schedules as opposed to the violent drop that we experienced in the first and second quarter.

Matt Summerville - KeyBanc Capital Markets

As far as the Ag segment goes, was that down 50%? Did I get that right?

George Strickler

I think it was down. I think we quoted a little over 40%. Originally, they were holding fairly firm, but on specific platforms it’s been down fairly dramatically in the second quarter.

Matt Summerville - KeyBanc Capital Markets

Is that expected to continue? What percentage declines are you expecting in Ag and other for the third and fourth quarter?

George Strickler

We are looking at some current forecasts right now and we are starting to see some disparity between those forecasts. We never envisioned the Ag market would be down. I think we had some sort of unusual adjustments in the second quarter, so I don’t think Ag will continue to [run].

Matt Summerville - KeyBanc Capital Markets

As far as some of your programs coming online from your backlog, can you give some of the timing of some of those launches? Was it just like a negligible in the second quarter and are you going to see a real uptick in the third and fourth?

George Strickler

No, the programs that we are launching now, most of them are into the last half of this year will be primarily programs that come on the fourth quarter, which will have a benefit in 2010 as we go forward. Some of our longer lead time programs, we have to invest in those this year in order to be ready to launch those programs next year.

And instrumentation even goes out to 2011. So, we have to make the D&D investments continue into those things in order to support the launches, but the business is firm there. We are continuing to manage that appropriately to go after it, to look at that to stay in touch with our customers, to make sure that they are on still on schedule with their launches.

So, we are not out of sync. So, what you’ll see is that most of what happens this year, we are spending the money and the benefit will come next year when the revenues really kick in.

Matt Summerville - KeyBanc Capital Markets

So, it’s more of a 2010 story as far as some of the launches and some of the backlogs?

George Strickler

I think some of it as John said will start in the fourth quarter, but predominantly in 2010.

Matt Summerville - KeyBanc Capital Markets

As far as some of the new restructuring charges and some of the new restructuring savings associated with moving control devices from two segments to one segment, could you just ballpark, maybe the charges and the savings you expect from that? I know you are working on that now, but are you looking at zero to $5 million in new restructuring charges or $5 million to $10 million or greater than 10? The savings coming off that as well, if you could just ballpark it in a range?

George Strickler

We haven’t disclosed that publicly, but I think from our experience, it will look very similar to what Sarasota was. They are the same kind of operations, so we have got a long way to do in our plan yet, but I think it’s going to be somewhat in that range. As we mentioned, we’ll disclose that in the third quarter as we firm up the plans.

Matt Summerville - KeyBanc Capital Markets

Sarasota, have you been able to sell that facility yet?

George Strickler

No, the commercial real estate market has been pretty tough. We are not a distressed seller and we’ll sell it for the right economic value, but we are working on it very actively.

Operator

There are no further questions at this time. I would like to turn the call back to Mr. John Corey for closing remarks. Please proceed.

John Corey

Again, thank you. I just have these closing comments. It is a very difficult market environment. There still continues to be some uncertainty out there and I reemphasize, I think what we are seeing now is that we have reached the bottom.

We will start to see a gradual upturn from this and we are structuring our business appropriately. One of the things that we have always tried to do in this business was to try to anticipate the forward momentum of the markets and how we need to position ourselves for those things.

To that extent, the next big challenge for us is now that we have taken this cost out, George and I and the management team will be now assessing what’s permanent, what comes back as volume grows with the intention of making sure that we leverage the savings and just don’t start plowing back costs into the business.

So, that’s going to be the next level of this. As we looked forward though, the company still remains well positioned. As we have said all along we are following our plan. There is no need for us to deviate from that plan although we have as we said adjusted for some of the realities that we see in the market.

Those are primarily of how we are adjusting our business from a cost structure to adapt to those things. But we are still going to be aggressive in trying to win new business and go after new business and I think that as the market returns, we will see the benefits of all these actions.

With that, I would like to thank you for joining us today.

Operator

Thank you for attending today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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Source: Stoneridge Inc. Q2 2009 Earnings Call Transcript
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