Stoneridge Inc (SRI) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q2 2011 Stoneridge, Inc., earnings conference call. My name is [Jo], and I'll be your operator today.

During the presentation, all parties will be in a listen-only mode. After the speaker's remarks, you will be invited to participate in a question-and-answer session. As a reminder, this conference is being recorded.

I would now like to hand the call over to the host for today's call, Ken Kure, Corporate Treasurer and Director of Finance.

Good morning, every, 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 or will shortly be filed with the SEC and has been posted on our website at www.stoneridge.com.

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

Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risk and uncertainty, and actual results may differ materially. Additional information about such factors and uncertainties 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 also will 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 the current market conditions, operating performance in the second quarter, and our growth strategies, business development, and his thoughts on future initiatives. George will discuss the financial and operational details in the quarter and future outlook. After John and George have finished their formal remarks, we will open up the call to questions.

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

Good morning. Revenue growth in the second quarter continued the pace experienced in the first quarter, driven by the continued improvement in the commercial vehicle and the strength of the ag markets. However, the increase in revenues was not fully converted in terms of profitability due to operational inefficiencies in the North American wiring operations, rising commodity costs, and a weaker US dollar, impacting our three Mexican manufacturing facilities. We will update you on the programs to improve operational efficiencies as we review the results.

Sales revenue for the second quarter was $190.4 million, an increase of $24.2 million, or 14.5% over the prior year second quarter, and $2.6 million, or a 1.3% decrease versus the first quarter of this year. Our second quarter sales represent an annualized run rate of $760 million, which is at the midpoint of our annual guidance of $750 to $775 million, and higher than our record year revenues of $752 million in 2008.

We reported earnings per share of $0.14, which was $0.02 below the prior year second quarter, and short of the marginal contributions at the gross margin line we experienced last year, but inline with our programs to address the operational currency and commodity issues explained in the first quarter analyst call. George will provide more details on this when he reviews the financials.

Sales in our agricultural and equipment category increased versus the prior year by approximately 34%, to $35.2 million. This is a continuation of the first quarter growth where sales in the agricultural and equipment category increased by 45%. Sales to our commercial vehicles with customers increased by 18%, to 100 point -- $102 million point one -- $102.1 million, as a result of increased medium and heavy-duty truck production in North America and Europe compared to the prior year.

Sales in our passenger car and light truck segment were $53.3 million, which is a decline of 2.6%, compared to the prior year. While North American automotive production improved versus the second quarter last year, the volume increase was reduced by scheduled program roll-offs as we aligned our product portfolio around key product families.

Overall we continue to see positive market growth trends in both commercial vehicle and automotive for the remainder of this year and into next year, based on industry forecast.

Looking at our overall business, the operating and financial performance from our European, North American electronics and control device businesses, and our joint ventures in India and Brazil, met expectations and continued to do well. All of our businesses are performing at or better than expected, except for the North American wiring business, which is negatively impacting our gross margin conversion.

As discussed on the first quarter call, we are addressing inefficiencies in meeting customer demand. In the second quarter we have assigned teams from other locations to work with the local management and staff of the wiring operations to facilitate improvement. Labor cost increases and inefficiencies in the second quarter were about equal to the first quarter performance, as unplanned turnover in some areas did not allow for us to reduce manpower in the selected areas until late in the quarter.

[Process] improvements and slowly stabilizing production schedules, allowed us to more effectively meet customer demand, reducing our premium freight by $2.1 million, compared to the first quarter of 2011. Our realignment of operations under the new Vice President of Operations is starting to have an impact on our performance. Initially he has focused on the wiring business, and we expect there will be continued improvements in performance in this -- in the third and fourth quarters, demonstrated by improved manufacturing efficiency, reduced headcount, overtime -- reduced headcount, reduced overtime, and lower premium freight.

The other negative cost impacts in the wiring business were a result of the copper price increases, and the strengthening of the Mexico peso to the US dollar. As we obtain our contractual commodity cost adjustments, we should see less impact from these costs. Our cost recovery from program agree -- from customer agreements on commodities and pricing actions where we are not covered by a commodity agreement, will benefit this year in the range of $3 to $5 million, and an annualized benefit of $8 to $10 million.

Our gross margin in the quarter was 19.8%, which was below our 23% to 25% target range, and below the 23.6% we recorded during the second quarter of 2010, driven primarily by the impacts of the writing operations and the cost of the materials. George will provide more details on these factors as we -- and what we are doing to address these.

As previously announced, we are opening a new facility in Mexico to support a key customer. The cost associated with the initial startup of this facility in the second quarter was approximately $600,000.

Our current forecasts project third and fourth quarter negative impacts to be approximately $1.5 million in each quarter, which is an improvement of $300,000 per quarter for the third and fourth quarters, from what we discussed in the first quarter call.

Compared to the plan expenses presented in the first quarter, the current cost impact for the Saltillo facility in 2011, will be a $1.1 million improvement over our previous estimates due to the timing of the move and managing of cost accordingly. We continue to forecast 2011 capital expenditures in the range of $25 to $30 million, which includes new plant expenditures for machinery and equipment of $5 to $6 million.

While our new facilities will handle the transition of existing business, it will also provide additional capacity to accommodate the growing requirements of our North American business.

New business awards in the quarter were $85.3 million, which were $44. 7 million above the first quarter and $54.3 million above the prior year second quarter. Our second quarter awards were a record for the company -- for awards in the company's second quarter. The mix of business awards were 54 point -- $54 million in replacement business and $31 million in new business. In the new business wins, we won $22.8 million at EGT Sensors, one with [a] North American OEM and one with a European OEM. These awards and the ones previously announced, demonstrate the good growth prospects for our [emission] products.

We have also been recently notified of a major business award by European-based global leader in construction in the construction equipment industry. This award is not included in the $85 million previously mentioned and consists of a variety of electronic and instrumentation product. We will provide more details on it in our third quarter update.

And finally, we won approximately $9 million in replacement business for military products with Navistar. These products will be produced over the last half of 2011.

Minda Stoneridge, our JV in India, posted second quarter sales of $15.4 million, an increase of 42% on a comparable reporting period. The sales increase was driven by market growth and new business awards. India, however, is not immune from material escalation, and the JV did experience higher material costs which impacted margin. Our share of net income was $213,000, which was lower than what we had expected due to the higher material costs.

They have begun taking pricing actions to recover these increases in material cost, and we expect some benefit from this in the future quarters.

Minda's annual sales projections should increase to $50 to $75 million in the next two to three years, compared to the $33.4 million in 2010. The Indian economy remains robust, and demand for vehicles is increasing, which is a positive sign for the future.

PST, our Brazilian joint venture, reported second quarter 2011 sales of BRL of 99.9 million, an increase of 34.9% from the BRL 74.1 million in the second quarter of 2010, and an increase of BRL 10.7 million, or 12% over the first quarter of 2011. PST's second quarter 2011 operating margins increased to 9.3%, from 8.5% in the second quarter of 2010.

PST has also launched their audio line late in the second quarter, and has had experienced good acceptance in the marketplace. They have, however, experienced some supply issues which have delayed the full benefit of the sales of audio products. These supply difficulties are being resolved, and we expect to see further improvement in performance in the third quarter. PST is forecasting sales to grow nearly 30% in 2011, from the BRL 320 million level last year.

Finally, I want to provide an update on the component supply from Japan. Many of our electronic components, microprocessors, capacitors, motors, and LCD displays are sourced either directly or indirectly from Japanese suppliers. Due to the progress of the Japanese recovery, at this point we no longer see sourcing issues related to the Japanese crisis. I am grateful for the hard work and diligence of our team and the support of our customers as we work through this situation.

In summary, our second quarter operating performance, while better than our first quarter's operating performance, was not to our expectations. We discussed our plan for improvement on the first quarter call, and we are tracking to that plan. We had hoped to beat the plan, but our progress is taking longer as demand remains strong and improvement is never a straight-line journey. However, we did make progress in the second quarter, primarily in the reduction of premium freight due to improved output. The wiring operations have our full attention to return them to improved levels of performance and leverage the market growth.

Overall our major served markets continue to improve. Our European and North American electronics businesses, control device business, and the joint ventures continue to perform better than our plan. North American automotive production forecasts are projected to be between 12.8 and 13.1 million units for 2011. The fundamentals of the commercial vehicle market continue to improve - combination of the age of the fleet and improving freight conditions have released [pent-up] demand for new commercial vehicles, especially in class eight, which continue to increase production volumes -- and we should continue to increase production volumes in this served market.

Currently industry forecasts indicate that the commercial vehicle recovery will continue over multiple years. We expect continued growth in the construction and ag market, as this segment represents approximately 18% of our sales in 2010.

Looking out over the next five years, our net new business awards are in place and we continue to enhance our long-term pipeline with new wins, some of which we have shared with you today. Continuing market improvements and growth with our customers from new programs this year and next will drive our top-line sales.

As we restore our operational performance and recover commodity costs and current -- currency impacts through our contractual terms, we will restore our financial performance into the targeted ranges.

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

Thank you, John. Our second quarter sales increased by $24.2 million, or 14.5% over last year. Our second quarter sales were positively affected by increased volume in all three of our segments. Our second quarter sales performance reflects increased production demands in our passenger car and light trucks and medium-duty and heavy-duty segments.

Our earnings performance has improved compared to last year, but we did not convert at the marginal contribution rate of $0.25 to $0.30 per dollar of sale, at the gross margin level as we did last year. Assuming we achieved our targeted marginal contribution of $0.25 per dollar of sale at the gross margin level, we would have improved our reported gross margin of $37.7 million, by $6.1 million, or $0.25 per share.

Of the $6.1 million shortfall to our targeted marginal contribution, operating inefficiencies due to excess headcount, overtime, and premium freight, accounted for $2.3 million, higher copper prices and a stronger Mexico peso, for our peso-denominated labor conversion and overhead costs at our Mexican facilities, account for $3.4 million, the cost impact of starting up the new Saltillo manufacturing facility, accounted for $600,000.

These amounts were inline with the plan laid out in our first quarter call, except the labor inefficiencies which were $1 million higher, though there was a favorable offset in the Saltillo startup expenses of $500,000.

Premium freight improved significantly as we have reduced our customer backlogs dramatically. We [have] expected improvement of $1.9 million for premium freight during the second quarter, compared to the first quarter, but managed to improve by $2.1 million. This is a significant improvement over the first quarter results, where the unfavorable impact for premium freight was $2.4 million.

For the most part, we have caught up with our customer backlogs in early April. We now believe the premium freight will negatively affect us in our Mexico operations by about $300,000 over the next two quarters.

As we indicated during last quarter's call, to meet the demand forecast for the first quarter and continuing in the second quarter, we needed to ramp up our headcount, which resulted in overtime, excess people in training to manage customer backlog, which was our first priority. These actions cost nearly $1.9 million in the second quarter, and $2 million in the second (sic).

We had expected to improve our labor inefficiency by $900,000, however, planned headcount reductions did not occur until later in the second quarter. However, we have reduced our direct labor headcount by nearly 700 people, by the end of the second quarter in our wiring operation, and additional 190 people by the end of July. The benefits of the headcount reductions will be realized in the third quarter, and will put us back on plan with our manning and headcount.

Consistent with the forecast presented in the first quarter call, we will incur excess cost for labor inefficiency in the second half of $1.6 million, an improvement of $2.3 million over the first half performance. We continue to improve efficiency levels to properly staff our Monclova and Chihuahua facilities to meet customers schedules.

The negative impact caused by the market changes for commodities, specifically copper, and currencies we can control in the medium and long term, still are very difficult to control in the short term.

In the first quarter, we were impacted by copper increases and currency impacts of the Mexico peso, which totaled $3.3 million. During the second quarter, we were impacted by $3.4 million, which is $100,000 more than the first quarter. This was primarily due to the further weakening of the US dollar against the Mexico peso.

With the current economic situation, the Mexico peso has weakened from 11.60 in our plan, to today's rate of 11.94, a change of 2.9%. Our cost increase for the rise in copper prices, excluding the effect of any surcharge billings, was $1.3 million, compared to last year. And our labor conversion costs and overhead costs from the increase in the peso to the US dollar, was $2.1 million. We have copper pricing surcharge mechanisms in place for 55% of our customer contracts, which we recover 50% in the first six months, and the remaining 50% in the third and fourth quarters.

With these contracts in place, and assuming the current copper price in the range of 4.40 per pound, compared to our average price last year of 3.79 per pound, we now believe we will recover $1.6 million for the year through surcharge billing. But by the fourth quarter, the annualized recovery rate will be up to $3.1 million. We are projecting we will consume about nine million pounds this year, compared to approximately six million pounds last year. At the end of the second quarter, we had copper hedges in place, that locks nearly 40% of the remaining consumption in 2011, at $4.15 per pound. And in May, we bought forward 20% of our 2012 copper exposure at a rate of $4.05 per pound.

In regards to the cost increases for commodities and currencies, we are pursing price recoveries to offset the cost increases. We believe that the price recoveries we are currently negotiating or have with copper surcharge mechanisms benefit us between $3 to $5 million in the second half of this year, and an annualized benefit for 2012, of $8 to $10 million. This will offset a significant portion of the cost increases for commodities and currency movements.

Now I 'd like to cover with you some of the details regarding the financial performance from the quarter. Revenue of $190.4 million in the second quarter of 2011, represents an increase of $24.2 million, or 14.5% over the second quarter of last year. Our sales increase is the result of increasing production volumes in our served markets, new business sales programs, and continued economic improvement in all segments of our markets.

For the second quarter, light vehicle revenue decreased from $54.7 million to $53.3 million, a decrease of $1.4 million, or 2.6%. The decrease was primarily attributable to scheduled program roll offs as we align our product portfolio around key product families.

Sales in the medium and heavy-duty truck market totaled $101.9 million in the quarter, an increase of $15.4 million, or 17.8% over the prior year second quarter. The revenue increase was primarily driven by an increase of 60.8% of North America commercial vehicle production. Our sales with our top ten customers were up $10.5 million, or $8.7 compared to the second quarter of last year.

European commercial vehicle production is showing an increase of 37.4%. [And] sales to ag [in] other markets totaled $35.2 million, an increase of $10.1 million, or 40%. North America revenue accounted for 72% of the second quarter revenue, and six -- 78% of the same period last year.

In the second quarter, electronics revenues were $124.1 million, compared to $102.7 million in the same period last year, an increase of $21.4 million, or 20.4%. Favorable factors affecting the second quarter performance was a 60.8% increase in North America commercial vehicle production, and a 37.4% increase in European commercial vehicle production.

Though production in North American commercial vehicles showed a robust increase, sales to our largest customer increased only 24% in the second quarter of 2011, compared to the second quarter of last year.

Revenues for control devices of $66.3 million, increased from $61.3 million, compared to the second quarter of last year, which was an increase of $5 million, or 8.1%. The increases in production of North America commercial vehicles and increased volume in ag customers were the primary reasons for our sales increase.

Our second quarter gross margin was 19.8%, which fell short of our capabilities and our targeted range of 23% to 25%. The controllable costs for premium freight, excessive headcount, overtime, and operating inefficiencies, represented nearly $2.3 million, which we reduced our gross margin by 1.2 percentage points, and impacted our marginal contribution by $0.10 of dollar sales.

The commodity and peso exchange rate, cost approximately $3.4 million, which also reduced our gross margin by 1.8 percentage pointed, which were implementing price recoveries to offset the cost increases. We are very focused on addressing the issues to improve our second quarter performance and the rest of the year.

Selling, general, and administrative expenses totaled $30.3 million, which is lower than the $31.4 million the second quarter of last year. SG&A as a percentage of sales is 15.9%, the lowest it has been since the third quarter of 2006. Our design and development expense was $7.3 million, which is lower by $2.7 million, in comparison to the second quarter of last year of $10 million. During the second quarter, design and development expense is favorably affected by cooling and development income from European customers.

Income tax expense for the second quarter was $1.2 million on pre-tax income of $4.4 million. As reported on December 31st of last year, the company's in a cumulative loss position and continues to provide evaluation allowance offsetting its 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 related to the earnings of our PST joint venture, which is then affected by our valuation allowance position.

The increase in tax expense for the three months ended June 30th, compared to the same period for last year was attributable to the improved financial performance of the European operations, as well as the improved financial performance of the PST joint venture. The quarterly effective tax rates may fluctuate significantly due to the interaction of the valuation allowance and the country-specific levels of profitability, as well as the deferred tax expense related to our investment in PST. And we anticipate an annual effective tax rate of approximately 22% to 26%. We anticipate cash taxes to be approximately $3.4 to $3.8 million this year.

Stoneridge reported second quarter net income of $3.4 million, or $0.14 per share. This compared with prior year net income of $3.8 million, or $0.16 per share.

Depreciation expense for the second quarter was $5 million and amortization expense was negligible, as most of the intangibles had been written off in December of last -- of 2008.

Our primary working capital of $120.9 million at quarter end increased by $28.1 million from the second quarter of 2010 levels, with inventory accounting for $23.8 million of the increase. As a percentage of trailing 12 months of sales, our primary working capital increased from 16.4% of sales in the prior year second quarter to 17.2% of sales in the second quarter of this year, though our primary working capital days increased by 18%, compared to the second quarter of last year.

Current working capital levels for receivables and payables are a function of increasing sales and operating activities we are now experiencing. Inventories, though, are high at $73.3 million and 43.2 days in inventory. Historically, we have managed our inventories in the range of 35 days to 38 days. Our higher than normal inventories are due to operating difficulties in the wiring business and pre-buys to cover potential shortages of components which was exacerbated by the Japan situation. As part of our improvement plan, we are working to reduce our inventories over the next two quarters by $15 to $17 million, or about eight days of inventory.

Operating cash flow was a use of cash of $7.6 million in the second quarter compared to the use of $200,000 in the second quarter of last year. Our cash flow results in the second quarter were primarily driven by the increase in inventory and accounts payable, while accounts receivable improved from the previous quarter. Operating cash flow will benefit our inventory reduction program in the second half.

Capital investment for the quarter totaled $9.8 million, mainly reflecting investment in new products in the electronics group. We are forecasted to finish the year with total capital spending in the range of $25 to $30 million, which includes $4 to $5 million for the new facility in Mexico.

As of June 30th of this year, we have $78.5 million of availability under $100 million asset-based lending facility, a significant improvement from the $61.3 million at December 31st, last year. Our borrowing basis increased by $10.8 million since the first quarter of last year, as increased accounts receivable balances are the direct result of higher sales. As part of the bond refinancing in October of last year, we extended the maturity of our ABL to November 1st of 2012.

Our second quarter ending cash balance totaled $36.4 million, compared with the $74.6 million at the end of the second quarter of last year. Our cash burn was mostly driven by increased accounts receivable caused by increased sales, inventory driven by increased sales, operating inefficiencies, and component pre-buys in the wiring business, and lower profitability in the wiring business.

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

Going forward, we expect we will continue to fund our operational growth initiatives, mostly through our free cash flow generation and available cash balances.

All of our businesses continue to show significant growth, as the markets are now returning for the North American commercial vehicle market. Our first quarter profitability was disappointing, as we did not convert and our second quarter -- did not convert the gross margin level of our $0.25 to $0.30 target of marginal contribution on our 14.5% sales increase.

We provided our detailed plan in our first quarter analyst call of how we plan to respond to operating issues for the wiring business. We updated you on our progress against those plans for the second quarter. We have seen the improvement in second quarter, except for direct labor headcount. However, we reduced our headcount according to our first quarter plan, but they came our later in the second quarter, so we will recognize the cost reduction benefit in the third quarter.

We are working to recover the cost increases resulting from escalating commodity prices in the strengthening of the Mexico peso. Our current forecast is a benefit from cost recoveries of $3 to $5 million this year, and an annualized benefit of $8 to $10 million next year.

The last subject we'd like to update you on is PST. Over the last several months, we have continued our negotiation discussions with our Brazilian partners to purchase an additional shareholder stake in PST. We believe that most of the commercial [issues] have been addressed, but our partners need to address their estate and tax planning issues relating to the transaction before they can proceed. And we will continue to actively pursue a transaction to purchase an additional stake to be completed this year.

However, regardless of the timing and completion of the transaction, one thing remains important. PST has significant growth opportunities, as we indicated earlier, and the top-line growth will be in the range of 30% this year. 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 forecast by the PST business.

In summary, we are working to address our operating inefficiencies for the wiring business and deal with the market changes for commodities and currencies. Our plan that we laid out in the first quarter is being managed very aggressively and with urgency. At the same time we are pleased with the continued market growth which is being enhanced by our new business wins.

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

Okay. (Operator Instructions) We do have our first question from the line of Matt (inaudible). And go ahead, please, your line is now open.

Good morning, gentlemen.

Morning.

Morning, Matt.

The first question I have, now, my production estimates for medium duty were up 40% in North America. I had heavy duty up 76%. And then I had European up 28% on the commercial side. Did I get it right that you guys were up only 18%?

Yes, that's correct. I think if you look at one of our largest customers, they're not participating in the same rate in the robust growth [as] the market recovery is, and so that's impacting us somewhat.

But they were up 24%, you said, right?

Right.

So what else was under performing there?

Well, it was the mix of the business too, Matt. Class eight had a lot of the largest increase, and we're more medium, five through seven, and that part was weaker than the class eight growth.

And you mentioned scheduled program roll offs in the light vehicle side. Can you discuss those, too?

Yes. I think a couple years ago we talked about how we were going to remodel our portfolio in some of our automotive products to shrink some of the areas. And so as we've looked at certain products and we don't see that we're competitive on those, some selective switches and the fuel shutoff valves, those things are at end-of-life. And as they come [off] at the end-of-life, we're not renewing the quoting process on them.

That's why if you look at -- you see the shift that we talked about two years ago, we talked about the shift more towards the emission segment, and so you see the good growth we're having in that segment, now we're starting to see these end-of-life of some of these programs that aren't going to be key to our future.

And, Matt, you also saw the control devices in total was up, and some of their growth is really coming from the commercial and the ag side as opposed to the pass car and light vehicle.

And then on the PST, would you consider the results of PST this quarter weak or kind of as expected?

They're weak from the standpoint that our audio business was going to accelerate. Really that program was supposed to start really late first quarter, so it was geared for the second quarter and really got pushed to late second quarter, Matt, because of what John referred to is that we had to have a full line to really introduce and launch that across the market. That was done late in June. But so far what we're seeing in July, the results are much better, and I think we're going to -- we'll see a much better second half for PST.

And then on to the working capital and the cash burn. Is it right that you guys just built inventory because you were a little bit worried about some of the materials coming out of Japan?

Well, I think it's a combination of factors. You might recall last year there were connector issues of getting -- obtaining connectors from various suppliers. And so we've started -- we started adding in for that, to make sure we could run our wiring businesses effectively.

Yes, the Japan crisis that hit us and came on that, and then we were adding inventories to get ahead of the build, as we looked at the production schedule. So it's a combination of those three factors.

But the major factor would not be the Japan or the component shortage, Matt. It's more built based on what we're trying to do to catch up with the customer backlogs. And then we do have excess inventory as a result of all of that. And we are working over the next three to six months to reduce that inventory and get it more back inline in the wiring business.

When -- I mean, it's been two to three quarters now where you've seen the cash balance decline. When do you see that begin to reverse?

Well, I think clearly we'll see sales continue at a pace on our projection on that 760 to 770. So that'll be flat. It really depends on the profitability of the wiring business, for one. But that should start to build in the fourth quarter. And then clearly, as you know, when sales come off late in the year, then you'll start to recognize cash. So we'll see improvement here in July and August, and then September's usually a big month, and then it will continue to improve late in the year in November and December.

All right. And then the last question. I think, you know, you attended our conference and we had you on a [non-deal road show]. I think the general sense coming out of those meetings was that the sales environment was pretty good, the production environment was pretty good, and you were moving toward the high end of your guidance on the sales side and potentially even towards exceeding it. Is that still the case?

I think we still feel comfortable that based, particularly based on the new business awards we saw in the second quarter and the growth of the markets, that we tend to feel that we should see some further upside. As we read the same thing everybody else reads, we're concerned now about the, maybe on the automotive sector, as to how much impact the economy is going to have. I mean, there seems to be some question as to whether that's going to be as strong as everybody projects. But so far we haven't seen that. So we still remain convinced that we'll see positive upsides on this.

All right. Thank you very much.

You're welcome, Matt.

Thank you for your question. Your next question comes from the line of Robert Kosowsky. And go ahead, please, your line is now open.

Hi. Good morning, guys. How you doing?

Hi, Rob.

I was wondering if you can go over, say your headcount in Mexico, what it was, say January 1st, March 31st, and June 30th, and July 31st, because I know you threw out some numbers, but I didn't get them entirely.

What we've said so far, Rob, and really without the absolute totals, but we, through the end of June, we've taken out 700 directive and indirect employees, and an additional 190 through the end of July. That would put us back on our plan, as we indicated in the first quarter. We still have some to go to the level that we want to hit by late third quarter, fourth quarter. But this puts us clearly back on track.

And so how delayed was it? And what was the source of the delay?

Well, we thought we --

(Inaudible - multiple speakers)

Well, I think we saw -- we expected to have a more uniform reduction over the second quarter. It really almost backed up right into June, and then continued on in July. And as I said, as we got into looking at this and how we were going to improve our production and manage our efficiencies, we kept the labor on and didn't get it out because we had some key turnover in areas that impacted us, and so we didn't get the [efficiency] output that we wanted.

But in June we did. I think, as George said, it was over 700 people. In July, we continue to that trend, and we expect to see that continuing going forward.

Okay.

It really was more of a timing issue rather than -- I mean, the programs are working. It was the timing of how fast we thought we could get through it.

Okay. And you -- have you been able to, I guess judging by the premium freight going down, you've been able to hit delivery times from your customer standpoint, I assume?

Yes. We're still working to clear out some of the backorders that we have. But our -- the premium freight does reflect the improvement that we've had in the ability to deliver product. We continue to work on those issues, and that's how we're going to continue to drive manpower out as we balance the production lines.

Okay. Do you have like revenue and pre-tax income numbers for the segments handy, by any chance? Just kind of curious what the margins were on control devices.

We -- I don't think we have that just yet. We'll be publishing our 10-K tomorrow -- or 10-Q tomorrow, and that'll have our official segments. But we didn't have them in the speech.

Okay. And just two other questions. So is PST a little bit more seasonal now than it was, say in like '06, or '07? And so, it seems like you feel pretty comfortable you're going to see some strong margin expansion, I guess second half of the year versus first half of the year?

I think we could find [out] with the addition of the moving in the consumer electronics segment, the audio line, that will put some more seasonality into that business, as you'll work around things like Father's Day and Christmas, and it'll put more demand into the quarters before that. So there will be some more seasonality on that business.

Okay. And just finally, the tax rate, you brought that up, 22% to 26%, from I guess previously it was about 20%. Is that correct?

Right. And it's really a function of where the profitability is being made right now, Rob. And right now, with -- between PST and Europe, that's what's really driving the higher effective tax rate. Europe is doing extremely well, so that had an impact of raising the overall tax rate.

Okay. Thank you.

You're welcome.

Thank you for your question. Your next question comes from the line of Stefan. Go ahead, please.

Hi. It's Stefan Mykytiuk from Pike Place. Good morning.

Hi, Stefan.

I'm a little confused with some of the numbers you guys threw out in terms of the recovery of the copper and then the recoveries through some other pricing. There was -- it was the $3 to $5 million benefit you were talking about in the back half that you'll get and then $8 to $10 annualized.

Right.

But then, George, I think you said something about $1.3 million or $1.6 million recovery by Q4. Can you just kind of go through all those again, please?

Well, I guess to go back, Stefan, and talk about [it in aggregate]. In the first quarter, we indicated that copper was about 1.7, and Mexico peso was about 1.6 million. And that was 3.3 million. We felt based -- and that was done at a peso rate of about 1.60 and copper was done around 4.30. From that level we got surcharge mechanisms in place that we recover over a period of time. So when I refer to the 1.6 million, that is the surcharge mechanisms we actually have in place of what we're recovering in the copper piece, which is the -- that 1.7 million that we -- or 1.7 million that we incurred in the first quarter. And that comes over the period. And then those build. And so annualized, that is about $3.1 million, that will then be in full place by the time you get to 2012.

When I said there's price recoveries of three to five, that does incorporate some of the surcharge mechanisms that we have in place, because it's a combination of three things -- four things in the pricing we've done. We've looked at pricing in the pass car and light vehicle, and we've moved on that within the control device business. And then within the electronics business, we have the copper surcharge mechanisms, which the 1.6 is imbedded in all that. And then we've also had actual pure right -- price increases to specific customers on platforms. And then we also have the ability to price within engineering design changes. So it's a combination of all those that accumulate that. So when we said three to five, the 1.6 million is incorporated in that, and then when you get to the eight to 10 million, that's got the copper surcharge billing mechanism in it.

So just to simplify, though, in the second half of the year, we'll get $3 to $5 million of gross profit back through pricing recovery?

Yes, that's what we're projecting right now.

Right.

Okay. And labor costs are going to improve in the back half, [ex] the new facility that you told us will be 1.5 million a quarter?

Yes. We said that we incurred 1.9 million in the first quarter, two million, and we said that the cost would be about 1.6 million split between the two quarters, third and fourth quarters. So it would drop in the average about 800,000 a quarter. So we'll pick up a benefit of roughly about $1 million each quarter.

Okay. So three to five million of pricing recovery in the back half and then 1.6 million of labor efficiency improvement in the back half.

Right.

Exactly.

Okay.

And then I don't know what's going to happen with currencies, and we're looking at that. But this was built around 11.60. And as of today, the peso's trading 11.95. So we continually look at these things, and we'll either lock positions that we feel it's prudent, and we'll actually look at this, this as an opportunity and maybe buy part of our pesos now and lock into a position that would benefit what we've shared with you.

Okay. All right. And then last question is just, PST, the -- or I guess just in total, the JV income this quarter was probably a little less than I would have expected. And I'm wondering, is there -- can we feel confident that we're going to see year-over-year growth in the next couple quarters on that line item? Or is there something else going on there that's dampening the results?

Well, I think what you say, as we said, in India, it's -- we're seeing some higher material prices like we are around the rest of the world. So they have to push to recover that pricing action. And they're undertaking that program. That's relatively a small amount.

In PST, it really was expenses associated with the launch of the audio line and some other things. So as that line rolls out now, we should see greater profitability coming back into that business.

And we see it'll get back more in the normal levels that we saw third, fourth quarter last year, for the third and fourth quarter this year.

Okay. Thank you very much.

You're welcome.

Thank you for your question. There are no further questions at this time. (Operator Instructions) We do have your next question from the line of Robert Kosowsky. Go ahead, please, your line is now open.

Okay. Just curious on some of the cost cuts that you mentioned with Stefan. So it seems like a lot of this is kind of just already in hand. There's not too much risk of executing on, I guess the labor cost improvement that you're forecasting right now? Whereas, there may have been more a risk, I guess maybe in early May from when you gave the initial outlook?

Well, I don't think (inaudible) anything. It's in the execution of it and making sure we can do that correctly. We're -- the fact that we're able to see our production improving and the trend stabilizing there, as we start to reduce the headcount over this last month, I think gives us confidence that we are moving in the right direction.

But I never want to say that operations is just a slam dunk, as we were pointing out here in our wiring business. But we do feel, with the folks that we're putting down there, the teams and the emphasis on the things that those teams are working on, everything from linking purchasing and requirements to customer demand to shop floor material locations, et cetera, going through that, we think that we'll drive that headcount out and be able to achieve these things.

There's a variety of initiatives that are underway in those operations.

Okay. But is it safe to assume that the P&L looked a lot better in July than it did in May?

We haven't closed July yet.

Yes.

But that's -- we believe that a lot of the people came out, so we should start to recognize the labor efficiency this month, July, August, September. So we feel pretty comfortable, we know the people are out. So, and that puts us well -- in fact, it puts us a little ahead of the plan when we mention the 700 and the 190 people. So that gets us a long ways to where we needed to go -- to be, and we got some more to do in the third quarter. But I think we feel comfortable.

Okay. How many more people do you think you need to lay off?

Well, we're really, if you look at the original plan, we said it was north of 1,000 to 1,200 employees. So we're clearly within the shooting range of that target. And that is still the target.

Okay. And then just one last question. Seems like you guys have handled the, I guess industry-wide supply chain issues pretty well. Do you see any other kind of components that are in shortage right now that you're kind of worried about, or something that could become, I guess maybe an issue in the back half of this year as you get the better build rates in North America?

No, we have not seen anything that would cause us concern. I mean, electronic components are always -- one that could impact us the most, but -- end connectors. But we haven't see that. Those supply chains seem to be stabilized and product seems to be flowing freely. And I think even with the recovery of the Japanese automotive production, we haven't heard anything from our suppliers that would indicate that there should be an issue.

Okay. So external outside of the commodity and peso looks good. It's just getting the labor in order and that's about it.

Well, and we continue to -- I think one of the challenges we all have is I think there's price pressures out there, and we got to continually monitor the cost, and then what price recoveries we need to offset those increases. But our guys have stepped up and have done a pretty good job of really looking, and we've identified where we got to go get external recoveries, and they've worked very hard at that in this last quarter.

Okay. Thank you very much. Good luck.

You're welcome.

Thank you for your question. There are no further questions. I'd like to turn the call back to you.

Yes. Thank you for joining us on today's call. I would just like to reiterate a couple of points. One, all our business segments perform -- are performing as planned, with the exception of the wiring operations. And so we're seeing good growth in European electronics. We're seeing good growth in the control device business. And we're seeing good growth in the North American electronics business, and as we drive this.

So the issue for us has been improving the performance of the wiring operations. We have dedicated teams down in those operations. We launched those teams in the second quarter. We have our new Operations Vice President that's overseeing the work that those teams are doing. And I think as we start to look at this and we see the results of headcount coming out in June, we saw some improvements in May, and we saw some reductions in premium freight, we're getting our hands around this issue. And so we feel confident that we will be able to get this wiring business back inline and in performance.

And then with the growth prospects that we see from commercial vehicle, we think that could be a very strong contributor to us in the future.

So the task in front of us is clear and the benefits of accomplishing that task are also clear to our team. And we look forward to sharing the results with you on our third quarter call. Thanks very much.

Thank you, ladies and gentlemen. That concludes your conference call for today. You may now disconnect. Thank you for joining. Have a very good day.