Stoneridge Inc (SRI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 Stoneridge earnings conference call. My name is Allison and I'll be your operator today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I'd now like to turn the call over to Mr. Ken Kure, Corporate Treasurer and Director of Finance. Please proceed, sir.

Good morning, everyone, and thank you for joining us on today's call. By now you should have received our fourth-quarter earnings release. The release and accompanying presentation has been, or will shortly be, filed with the SEC and has been posted to 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 Executive Vice President and Chief Financial officer.

Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties, and actual results may differ materially. Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-K filed with the Securities and Exchange Commission, under the heading forward-looking statements.

During today's call, we'll 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 the current market conditions, operating performance in the fourth quarter, our growth strategies, business development, and his thoughts on future initiatives, including our 2013 guidance. George will discuss the financial and operational aspects of the fourth quarter, and our 2013 guidance in more detail.

We have prepared and published an earnings presentation to provide more detailed schedules to help your understanding of our fourth-quarter results, trends for continued improvement, and 2013 guidance that we released on February 7, 2013. A copy of these items can be found at our website at www.stoneridge.com in the Investor Relations section.

After John and George have finished their formal remarks, we'll then open up the call to questions.

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

Good morning. Fourth-quarter results announced today are consistent with our February 7 release, which updated our estimated fourth-quarter 2012 results and provided our guidance for 2013. Revenues in the fourth quarter were $222.7 million, an increase of $36.7 million or 19.7% over the fourth quarter of 2011. Our fourth-quarter results included consolidated PST sales of $44.5 million. Excluding PST's fourth-quarter revenues, sales for the Stoneridge base business were $7.8 million, or 4.2% lower than the fourth quarter of 2011.

Earnings per share was $0.10 compared to our fourth-quarter 2011 EPS of $1.56, which included a $1.72 per share gain for the purchase of the additional 24% share of PST on December 29, 2011. Our fourth-quarter results reflect the extended weakness in the commercial vehicle markets; especially in Europe, where OEM manufacturers reduced production days in December to adjust their inventory levels; and in Brazil, where sales were slightly improved over the third quarter, but not at the double-digit rates we projected for the fourth quarter.

As discussed in prior calls, each business unit reduced cost structures as much as practical with the market demand. Where possible, we have implemented pricing adjustments to partially offset higher commodity costs, and are continuing to work to reduce material costs and improve manufacturing productivity.

Slide 13 of our deck shows the direct material impacts of these actions on Stoneridge's core gross margin for the year, which are helping to keep our core gross margins nearly unchanged on the lower volumes. In the fourth quarter, we generated operating cash flows of $35.5 million, compared to $18.3 million in the fourth quarter of last year; in part, due to inventory reductions, cost control, and lower receivables due to lower sales in December.

Slide 4 of our deck has a complete P&L breakout on the fourth quarter of 2011 versus the fourth quarter of 2012. Slide 9 identifies Stoneridge's core sales decrease versus the prior year's fourth quarter, which was primarily from the commercial vehicle business, for reasons previously reviewed.

Slide 16 provides the details behind the revenue change from the third quarter of 2012. Our net income of $0.10 per share for the fourth quarter was $0.08 above the third-quarter earnings per share. Slide 17 of our deck identifies the major variances between the third and fourth quarters, notably volume increases in our core business, cost reduction benefits, and mix. Sales mix in the fourth quarter improved operating earnings with higher car alarm sales in PST's business, while Control Devices and Electronics businesses experienced lower direct material cost as a percentage of sales, as can be seen on slide 13 of our deck.

Agriculture and equipment sales increased by approximately 6.4% to $41.3 million in the fourth quarter over the third quarter. Compared to the prior year, ag sales increased by about $2.6 million, or 6.7%. Slides 9 and 16 provide the details. Sales in our passenger car and light truck category, which are predominantly Control Devices sales, were $50.2 million in the fourth quarter, compared to $49.5 million, a 1.4% increase over the third quarter; due primarily to higher production schedules of the North American pass car producers, and normal seasonality.

New and replacement business awards for Stoneridge's core business in the fourth quarter were $113.9 million, representing $28.6 million in new business awards and $85.6 million in replacements awards. The large amount of replacement business reflects the renewal of a contract with a large ag customer.

Minda Stoneridge, our unconsolidated JV in India, posted fourth-quarter sales of $10.4 million, a decrease of 4.2% versus the fourth quarter of last year. The sales decrease was driven primarily by a 5.1% reduction in the valuation of the Indian rupee compared to the US dollar, and a general weakening of the Indian economy. Excluding the effects of foreign exchange, Minda's sales are up by less than 1% compared to the prior year, and are being adversely affected by the weaker economic environment. Our share of Minda's net income from operations in the fourth quarter was a profit of $181,000, but was offset by a year-end deferral tax adjustment, making net income essentially breakeven.

PST's fourth-quarter sales were BRL91.6 million compared to BRL88.8 million in the third quarter of 2012, an increase of 3.2% due to increases in car alarm sales in the aftermarket and dealer channels. PST's fourth-quarter sales in US dollars were $44.5 million, based on an average exchange rate of BRL2.06 to the $1; compared to $62.8 million in the fourth quarter of 2011, based on an exchange rate of BRL1.80 to the $1, a devaluation of currency of about 15%.

PST's gross margins, excluding $300,000 for purchase price accounting, was 44.3% in the fourth quarter of 2012 compared to 41.2% in the third quarter of 2012. The gross margin increase is due to volume sales of higher margin car alarms, and the benefits from the second-quarter cost initiatives of approximately $2.2 million. PST's fourth-quarter operating income included purchase accounting of $4.6 million, or 10.3% to net sales, which was the highest level of 2012, as profitability is returning to more historical levels. The improvement in operating income was significant, and driven by approximately $2.2 million in benefits from the cost reductions completed in the first half, as shown on slide 11 of our deck.

Summing up, while the fourth quarter improved, we continued to experience weak global commercial vehicle markets and customer responses to these changing market conditions. Forecasting operational requirements is a challenge, as we can't adjust our production schedules, inventory flows and headcount requirements as quickly as the customers adjust their demands to us. However, the cost reduction actions taken in the first half, and the continuing actions in the third quarter, have helped offset the volume reductions and helped us improve our fourth-quarter results, and will continue to improve our results in 2013.

To recap the year, we began 2012 with financial performance in the range of expectations for the first quarter. Beginning in the second quarter, the global economic slowdown significantly impacted our Brazilian operations and muted the expected market improvements in the North American commercial vehicle segment, as we've discussed on prior calls. As we begin 2013, we see a slow recovery in the first half, gaining momentum over the year, driven by improvements in global commercial vehicle and continuing growth in North American automotive and ag markets.

We see sales to our ag customers increasing 2.5% in 2013, and passenger car sales in North America increasing by 2.5% as well. We see North American Class 8 production in the 240,000 to 250,000 unit range for 2013, and have planned for a modest growth from our North American commercial vehicle customers. Finally, in Europe, we see markets that will be flat to down 5% in 2013 compared to 2012. Even with the modest increase in sales volume, we expect our profitability to improve solidly during 2013 because of the cost initiatives we've implemented in 2012; continued efficiency improvements across our operating facilities; and stabilizing currency and commodity markets.

As previously announced, we see our EPS for 2013 in the range of $0.75 per share to $0.95 per share, as published in our guidance on February 7, 2013.

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

Thank you, John. Before we discuss the fourth quarter and 2013 guidance in our press release, we indicated that to adhere to accounting guidelines, we will disclose four operating segments, starting in the fourth quarter of 2012. The four segments will be Control Devices; Electronics; Wiring; and PST. We have a leader over each one of the four reportable business units who are responsible for developing a global product, customer and technology strategy for each business segment. This will allow our investors to better understand the four distinct business units in consolidated Stoneridge.

As John has shared with you his thoughts on the changes in the markets and the macroeconomic factors that have affected our performance in the fourth quarter, I will focus my comments on near-term market conditions and how we will improve our profitability in 2013 on a modest increase in sales. Even with the difficult market conditions, we have maintained cash flow generation as one of our primary objectives for the year. And as indicated on slide 19, we improved the total debt to EBITDA ratio from 3.5, at the tail end of last year, to 3.3 at December 31st of 2012.

With our 2013 guidance, we expect our debt to EBITDA to be in the range of 2 times to 2.5 times by the end of this year. And during 2012, we have reduced debt by $65.7 million. We have paid off our core business' ABL debt balance of $11 million in the fourth quarter, while PST reduced their debt by $9.8 million during the fourth quarter. PST has paid down their high interest real-dominated working capital loans at the end of the third quarter, and will begin to pay down their US dollar-denominated debt in 2013.

In addition to our core business paying $38 million in our ABL facility, PST has reduced its debt by $29.7 million in working capital loans. See slide 19 of our deck. The key aspect of our improved profitability is a recovery of PST's sales volume; mix of product sales; the benefits from the cost initiatives that were implemented in April and May; and the continued growth of our tracking device business in Brazil. PST sales levels have been highly volatile from month to month, but we appear to have hit the trough in the second quarter of 2012. PST's sales recovered in the third quarter by $5.3 million, or 13.8%. We expected the fourth-quarter sales to be in the 10% to 15% range above the third quarter, and slightly less than the first quarter of 2012 sales.

However, we only experienced an increase in US dollar sales of 1.6% compared to the fourth quarter; but improved our operating profit margins, excluding purchase price accounting, to 10.3% in the fourth quarter, which was the highest level in 2012. We estimate that the favorable operating income impact of higher volume in the fourth quarter compared to the third quarter was approximately $200,000, based on increased PST sales. PST experienced a more favorable mix in the fourth quarter due to a richer percentage of higher-margin aftermarket alarm system and tracking systems, and higher-priced audio products, which affected our mix favorably by approximately $1.4 million in the fourth quarter of 2012 compared to our third quarter.

PST recorded slightly higher purchase accounting expense in the fourth quarter by approximately $300,000 compared to the third quarter. And we expect 2013 core purchase accounting expense to be slightly less than the levels of expense in the fourth quarter of 2012. And, finally, the impact of PST's cost reduction initiatives, implemented in the first and second quarter, favorably affected operating income by approximately $2.2 million in the fourth quarter compared to the first and the second quarter, which were about the same as we experienced in the third quarter.

Our Wiring group continues to make progress in improving their operating performance. Though the North America Wiring business experience lower than originally planned sales levels in the fourth quarter of 2012, we still improved our sales per employee by 14% compared to last year, as our productivity continues to improve. See slide 14 of the deck.

John and I shared with you today our management teams' actions which address the overall low production volumes from slowing markets that we experienced in 2012. Our sales volume has been reduced for the year, due to PST, as a result of Brazil's GNP running at less than 1.5% this year; softness in the European commercial vehicle markets; and lower levels of commercial business in North America.

Even with the revenue drop, we have been able to maintain our gross margins in both our Stoneridge base business and PST to ensure we continue to deliver our profitability and cash flow targets. We have implemented specific cost reduction initiatives at PST, European Electronics, and our Wiring business. During 2012, we've continued to improve our productivity and lean initiatives to improve our direct labor and overhead cost structures for the North America Wiring business and the European commercial business.

We have worked diligently since the fourth quarter of 2011 to redesign our products; raise prices to cover commodity cost increases; and work with suppliers to drive down raw material costs as a percentage of net sales. Based on improved profitability, continued tight management of our inventory and capital expenditures, we generated sufficient cash flow to reduce our -- about $21 million of debt in the fourth quarter, for both Stoneridge's ABL and PST debt.

We believe we have taken the actions necessary to position the Company well for 2013. We still believe the market dynamics are stable, and will growth moderately for the pass car and light truck and ag markets for 2013. The fundamentals of the North American commercial vehicle market are such that the North American commercial fleet is running at 6.7 years of age, with increasing maintenance costs and more fuel-efficient engines being offered that may lead 2013's Class 8 market to run in the range of 240,000 to 250,000 units.

We expect our core business sales in the first half of 2013 to be lower than the first half of 2012, and the second-half sales to be higher than the second half of 2012. We believe the cost action we've taken throughout 2012 will benefit our core business and will improve our operating margins as the year progresses. We have taken cost actions necessary in PST while the Brazilian market has improved in the second half compared to the significant drop in the second quarter.

In 2013, we expect PST's sales to be slightly lower than 2012 levels, with lower levels in the first half of 2013, and higher levels in the second half of the year. Though the Brazilian government is forecasting a GDP growth in the range of 4% for 2013, we have taken a more modest view and have planned for a 2% GDP growth rate in 2013, after experiencing lower consumer demand in purchasing power last year.

Finally, the cost actions that we've taken in PST will improve our margins throughout the year compared to 2012, and will contribute to continued operating income improvement and cash flow generation at PST. And, finally, we continue to have confidence that we can deliver our 2013 guidance of $0.75 per share to $0.95 per share.

We will now open up the call for questions.

(Operator Instructions). Justin Long, Stephens.

Good morning, guys. The first question I had for you, it looks like you benefited pretty substantially from working capital improvement in the quarter. How does that change your thought process in terms of expectations for 2013 free cash flow? Is it fair to say that there was some pull-forward into the end of 2012? Or are there other areas on the balance sheet that you think can help drive cash flow, outside of just the improved profitability you are forecasting?

Justin, I think a lot of -- when we said we reduced inventory $28 million, a lot of that was really bringing the inventory down that we had higher levels in the Wiring business in PST. I think the inventory levels we're looking at today, we do have some continued improvement in PST, probably in the range of maybe $5 million to $8 million. But from here, it's really the cash generation -- which we've always said tends to run in the range of $25 million to $30 million -- will come from profitability and the continued management of our working capital, specifically inventory and our level of capital expenditures.

And on Brazil, it seems like things are starting to an improve, or at least stabilize. But I get the impression that it's a lot more difficult to gain visibility into this market. Are there things that you're planing in Brazil? Maybe further diversification in terms of the product mix going forward that might help reduce some of the volatility you've seen in this business over the last year.

Well, the products that we are launching, the cargo tractor and the home alarm products, will start to launch and benefit somewhat in 2013, and then more in 2014. But there will be no major new initiatives there. We want to leverage some of our investment we've put in into those products, and into the engineering, and try to leverage that investment.

Over time, though, you will see that we'll start looking at how we can bring, perhaps, Stoneridge products down into Brazil, notably for the OEM manufacturers. And then products that we can take from Brazil out to other parts; we are going to engage in some studies around the various global markets for alarm systems, and look at the opportunities there.

Justin, one other thing though, we are in incentivating demand at the local level. And, as you know, we have no planned orders because we are more in the aftermarket dealer and retail business and mass merchandisers. But we have created a unique program. We have 15 promoters now around the country that they visit 100 small dealers every week. They have to visit them twice during the month. They each are fitted with a vehicle that has our parts on it that can be sold to the small dealers; and also with an iPad that they can get direct feedback from the marketplace, in terms of pricing activities in different parts of the country, or things that we need to understand about the market.

I think our guys are starting to do a much better job in understanding the demand in the market. Because a lot of that, we can actually create demand by being more visible with our products and our activity with our dealers. So we are starting to focus and spend more time in those areas to understand the local market better.

That makes sense. And, John, you mentioned potential discussions with OEMs about leveraging some of your products, maybe domestically in the Brazilian market. Are those discussions happening now? Or is that something you expect to play out longer-term -- call it a few years from now?

It will play out longer-term. We have had discussions with people, notably notifying them of our presence down there and what we our capabilities are. I think one of the things that we have to consider as we look at maybe a potential product shift to more elite, it is a different engineering alignment, and then the support levels we would bring here. But I would say that 2013 will be a year to really start scoping that out, and then looking more towards 2014 in the future.

Okay, great. And in terms of the seasonality of the business, you gave some color in terms of how you expect the topline to progress in the first half and the second half. But from an earnings perspective, is there anything outside of the normal seasonality that we typically see that would impact the cadence of earnings throughout this year?

I think, Justin, that there will be no, what I call, major seasonality. But I think with what we've alluded to is that demand picks up, especially more in the second half, both in Brazil and in our North American commercial market. So if you look at earnings trends, I think it's going to be somewhere about 40% weighted in the first half and 60% in the second half. So, that follows the sales trend, and then profitability just flows from that.

Okay, great. And I think my last question was on M&A. Are you seeing any pickup in activity as it relates to the M&A market? It appears from a macro perspective, things are at least getting incrementally better. So just curious what you are seeing out there today.

We haven't really seen any major adjustment. I think as we have always stated, though, that we are active in terms of looking at M&A now. In fact, we had a process pretty well in place in 2008, until market took a downturn in the second half in 2009. We continue to explore opportunities. We have gaps -- our European business, especially in Control Devices. We are clearly growing the emerging markets in China, India and Brazil, which lends itself to opportunities. And, clearly, the sensor market, globally, is very fragmented. So we believe we have opportunities, both in the automotive space and outside of that, to strengthen our Control Device business.

And these acquisitions I'm talking about tend to be what we consider bolt-on, that we can handle with our own capital structure. The sales levels will tend to be somewhere in the range of $30 million to $80 million, and I think that we've been fairly disciplined as we look at businesses, in terms of EBITDA multiples. There is clearly a variance right now between debt valuations and equity valuations. But our philosophy has been that we tend to stay in the range of 4 to 5 times EBITDA. So I think you'll find that we'll be a very disciplined buyer.

Justin, are you still there?

Justin's line has disconnected. I'm sorry, yes. Jimmy Baker, B. Riley Caris.

Hi. Good morning, guys. I have a couple questions on your net new business cadence that you updated earlier this week. But first, I did notice that despite the $150 million of net new business in your core segment, that you actually anticipate PST jumping from about 19% of sales here in 2012 to 25% of your total business in five years. So can you maybe just talk about how you arrived at that magnitude of growth for PST, and if we should expect any change in the margin profile of the business as it ramps into that level of revenue?

Well, I think -- the two things that I talk about -- the two most recent launches will be the cargo tracker -- which is the security system, the tracking freight in the Brazilian and Argentinean markets. And so that will launch. And we think that is going to be a very good market for us, and have high growth rates in that market, because there is a high theft problem down there.

And then the second will be the home alarm market, which is going to be a more gradual approach, but we'll grow into that. And that will allow us to leverage our service center business. Because, similar to what you do here, we'd sell a home alarm; we'd install a home alarm through an independent installer; and then we would monitor that home alarm through our service center for a fee.

So, over time, you'll see that the margin on that business should potentially improve. But I think that, as we look at price pressures and other things, we'll be happy to maintain the margins in the ranges that they are at today, targeting a little bit higher. I think our expectation is somewhere 45% to 47%. And so we're targeting to get to there. But I think as we see everything happening, that that we feel comfortable trying to drive to that range.

And, Jimmy, just to add on to that is -- we are seeing a fundamental shift in the market in Brazil. We really started out in the aftermarket, the accessory market. And now we moved into the dealer channel, especially with the OEMs. But now, we've built an infrastructure that tracking has become a significant part of our business. And, today, it's about 10% of our overall sales volume. But now, looking over the next five years, we'll continue to grow, but not at the same pace we had the last 5 to 10 years in alarm systems and accessories. Our growth is going to come from, as John mentioned, is in more of the tracking device.

So, it's not only our existing tracking device business with commercial and automotive and motorcycle, it will now expand beyond that into cargo and home security. And that tends to be a very rapidly growing market. It will grow more double-digits in that side. And our traditional business will grow more in the range of probably somewhere between 2.5% and 7% over the next five-year period. So that's why you're seeing a little bit of the shift and then that growth.

And then I also wanted to comment on the $150 million net new business, that does not include anything with PST. That's the old Stoneridge core business. As we get better at PST, we will probably have a definition in growth for PST. But the $150 million is traditional Stoneridge base business.

George and I will be down and Brazil by the end of this month, and one of the things we are going to investigate is, we think there's been an indication by one of the large audio producers that they are going to exit the market. That could create some opportunities for us to fill in some share points around our audio line. But, of course as you know, our audio line doesn't command the same types of margins as our alarm line does. However, it could give us some nice volume growth. So that might have a play in things. But we're going to look at that further when we're down there. So there's a lot of moving items into the Brazilian market.

Right, that's helpful. Thanks for the color there. I'm also interested -- just getting back to the $150 million in net new business in your core segments -- I think you previously expected, at the midpoint, about $61 million in net new business during 2013. And now that's reduced to about $23 million at the midpoint. So, I'm wondering maybe what other programs, other than the Chinese EGT, that maybe was lost or pushed out?

And then for 2014, it looks like you went from an expectation of a midpoint of net new business at about $16 million to now 0. So can you bridge those two changes in your net new business cadence?

Well, in 2013, I think some of that is reflected more in the market. But we had a delay -- and we have lost no new business, Jimmy, to start the conversation that way. But, clearly, EGT in China has something that's continued to be pushed. If you hear the current market, it appears that the government, because of Beijing and other things going on with the smog, that they are starting to accelerate that again. It's been pushed to right around July of this year. I think time will tell. If that begins to pull in, then that will help us on that. But right now we've assumed that it would launch. We are doing PPAP right now. We have a new unit sitting in China that got there late in 2012. So that could have a significant influence over that number, both in 2013 and 2014.

And then we had a couple of delays, really in two commercial accounts -- they were both in Europe -- that are now starting to accelerate and be -- one will be late in the second quarter; the other one will be in the third quarter. So I think those platforms are coming back now. And I think some of it was a little uncertainty in the market.

In 2014, the reason for that drop is we had -- there is a business that rolls over, and rolls out in 2014. And until we have final approvals and discussions, we just assume that would be lost at this point. We are working vigorously to back fill that position, not only with the existing customer, but also bidding and quoting on new business. So, I think -- and already we've seen, recently, that we've picked up about $20 million of additional business outside that contract that we have. So if we had to amend that right now, we'd be looking at about $20 million of growth in 2014. So we're working hard at backfilling that 2014 year right now.

Okay. And, last one for me, and I'll back out in the queue. This is just a point of clarification that I'm not sure is very well understood. Has Navistar's move to SCR had any impact on your content, or put any of your content at risk?

No, it really doesn't have any significant impact on us. Our harnesses are -- the chassis harnesses and stuff are not significantly impacted by the change in that.

We may pick up some additional leads on some things, but we don't expect any significant change.

And, Jimmy, the only business it will impact that with the Cummins engine -- they have a sensor that we were selling through Cummins, through Tenneco, that was supporting the Navistar. So there is a little bit in of impact, but it's not significant. It's not significant.

Okay. Thanks very much for the time.

Robert Kosowsky, Sidoti.

Hi. Good morning, guys. How are you doing? One quick question -- what's the tax rate assumption we should be using for this year?

For 2013, I think it's going to be split. The effective tax rate in Brazil right now is running at about 19%. And I think most of you have seen the European rates have come down. Our Swedish operation, which is our significant profit maker, is down to 22%. And in the US, as you know, we have a tax loss carryforward. So the blend of earnings that we're looking at in the guidance this year that we just provided -- in the $0.75 to $0.95 -- the overall effective tax rate will probably come in between 14% and 17%. And the cash taxes paid on that, though, will tend to be somewhere between $5 million and $8 million.

Okay, that's helpful. And then otherwise, looking at your operating income forecast, it almost looks like at the midpoint you're looking for maybe $20 million of growth, 2013 versus 2012. And I'm just wondering, I can go through some of your prepared remarks and pull out about $7.5 million from amortization, from PST cost cuts. And I'm wondering what the other drivers are for that $13 million or so, given that we're going to have pretty flat volume throughout the year.

Well, I think the other side that's probably missing out of this is that when John and I both inferred it, is the lean enterprise that we are growing in the Wiring business. We are starting to make significant trends, not only in the Wiring business, but we're taking that across the world on driving efficiency and productivity across the organization. So, a combination of that and the cost reductions we have, and some of the mix business and the profitability of PST, is what's really accounting for that change.

Okay. How are you situated for copper going into this year? And same thing for [peso], because I believe last year you had about a $4 or so average cost position, I believe.

Well, this year, we really have no material hedges outstanding. We now have 96% of our contracts with our customers that are covered, some surcharge mechanism. We actually have a contract with one customer that we buy forward, based on their forward requirements of copper. All the other surcharge mechanisms we have in place now, they are quarterly adjustments. So we have, I think, through this program that's really been done with our wiring management team, we've taken a lot of the volatility out of copper. So our ability to flex with the volatility we see in the market will be much better than we experienced in 2011.

Okay. Thank you very much, and good luck.

(Operator Instructions). Irina Hodakovsky, KeyBanc.

Hello, everybody. How are you doing? I just wanted to ask if PST appears to be the biggest driver of your margin improvement for next year. 1Q tends to pull back sequentially from 4Q, just going back through perhaps a history in the performance. And since 4Q was substantially below your expectations, do we expect a deeper decline in 1Q, and then stronger recovery in the second half, or a more gradual performance?

No, I think when we look at the fourth quarter, I think we -- the two impacts were, as we said, that Brazil did not improve as we thought; and then the rather sudden cutback in commercial vehicle production coming out of Europe in the December months. As we look at the first quarter, we expect that we should be better than the fourth quarter because of these cost reduction actions we've taken. And we have factored in the volume.

I think one of the things, the story on the fourth quarter is that, as you'll see, with the lower volumes and we were able to outperform. And so that's a reflection of the manufacturing initiatives to improve operations, and the cost reductions that have gone on to take this out of the business.

And, Irina, what we've seen is the schedules that we've had in the first two months already are more stable than what we experienced -- and John was right, we had a significant cutback in Europe in December, which had a major impact on us. And Brazil's growth wasn't there. So far in the first two months, we are trending that we will be at least be equal to or better than what we had in the fourth quarter. And it's a combination of the efficiencies we're driving -- in our Wiring operations especially -- but really across all plants; the cost initiatives; and then the mix of business.

So, 1Q sounds like about flat with 4Q. And then just ramping up, there is the back half. And how do you see your margin improvement going through? Is that also -- the cadence with that improvement steadies throughout the year, more weighted towards the back half, driven volume? Or -- how are you breaking out the internal improvements and how those are going to come up, versus volume improvements? And what will be driving those in the back half?

Well, I think -- and if you look at 2012, most of our cost actions and improvements, we took aggressive actions in the second and third quarters and they started the benefit of fourth quarter. Those will all be there in the first quarter. So I think you are correct that those will flow through. And as we see the volume come back, we'll be able to leverage that. That should improve our margins.

Okay, sounds great. Thank you, guys, very much.

Jimmy Baker, B. Riley Caris.

Hi, thanks for the follow-up. Just a quick one here on your Other Expense like. It's become quite pretty sizable line item for the full year, reaching nearly $5 million. Can you remind us of what's running through there and why it has ticked up recently?

Well, most of it, Jimmy, goes back to the second quarter 2012. And that's when we had the significant exchange difference in Brazil. In fact, it was roughly about $2.6 million in the second quarter. And then we've had continued exchange difference, both in Brazil -- because Brazil continued to devalue, and stabilize finally at about 2.05 at the peak. Now it's come down, as you know; it's sitting at about 1.98. So most of it had to do with the currency exposure that we had, both in Brazil -- which was most of that expense. We had some in Europe in the third quarter.

Understood. So, if -- let's say the real holds here, you might actually recognize income in that line in the back half, when you lap against that? (Multiple speakers)

We're still sitting there with about $20 million to $22 million of dollar debt. And, at the end of the year, it was sitting right around 2.03. And the real has been around 1.98, 1.99. So we should at least be -- it should be no impact -- or a benefit, based on the current rates that we're seeing. So, yes, I think that line is going to be rather minimal this year. In fact, that's what we are seeing right now, as the currencies and commodities are fairly stable.

Okay. And did you give a CapEx expectation for 2013?

No, but it'll run, in our base business, between $21 million and $23 million, which is about what it did last year. And then in PST, it's a little unique, because they tend to show capital of about $10 million. But what we found is we were not accelerating at the addition of new subscribers as rapidly as we wanted. So what we started doing is buying the tracking devices. And then we put it in the monthly service fee that they reimburse us over the contract.

So the real capital -- and we are recovering $6 million, and that's what the tracking device cost us. So, Brazil's real capital last year was around $4 million, and they'll spend about $5 million this year. And then the others recovered through our month recovery of service fees to our subscribers. So, real capital, I would look at as $21 million to $23 million, Stoneridge base business; and about $4 million to $5 million for PST.

Got it. Thanks very much.

Thank you. I'd now like to turn the call over to John Corey for closing remarks.

Thank you. I think if you look at 2012, we started the year in a fairly good position, and then the markets weakened rather significantly. It started with Brazil in the second quarter and then continued in the commercial vehicle markets, both in the third and fourth quarters. Our plan in 2012, after we saw that start, was that we went after the cost reductions and we went after generating cash flow to pay down debt.

And I think you can see that in our fourth quarter results. We see the impact of those cost reductions. So I feel we've done a good job there. And we've done a good job in reducing our debt structure and generating cash. So, as this leads to 2013, our outlook really is for very modest growth. And I would view that that would be good, because rapid swings up or down just cause havoc for suppliers. But modest growth, and with this cost base that we've put in place, in controlling that cost we will deliver these results. So, with that, I'd like to thank you.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect, and good day.