Stoneridge Inc (SRI) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2013 Stoneridge earnings conference call. My name is Alison and I am your event manager. 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 would now like to turn the call over to Mr. Kenneth 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 first-quarter earnings release. The release and accompanying presentation has been or will shortly be filed with the SEC and are 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 risks and uncertainties and actual results may differ materially. Additional information about such factors and uncertainties that could cause the actual results to differ may be found in our 10-K filed with the Securities and Exchange Commission under the heading Forward-looking Statements.

During today's call, we will also be referring to certain non-GAAP financial measures. Please see the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

John will begin the call with an update on the current market conditions, operating performance in the first quarter, our growth strategies, business development and his thoughts on future initiatives. George will discuss the financial and operational aspects of the first quarter in more detail. We have prepared and published an earnings presentation to provide more detailed schedules to help you understand our first-quarter results, trends and continued improvement. A copy of these items can be found on our website at www.stoneridge.com in the Investor Relations section.

After John and George have finished their formal remarks, we will then open up the call for questions. I will turn the call over to John.

Good morning. First-quarter results announced today are consistent with our expectations and the 2013 guidance previously provided. Revenues in the first quarter were $235.7 million, a decrease of $26.6 million or 10.1% over the first quarter of 2012, driven primarily by lower market activity in the North American and European commercial vehicle markets and continued softness in Brazil. However, revenue continued to improve in the first quarter of 2013 by $13 million or 5.8% over the fourth quarter of 2012 and $16.4 million or 7.5% over the third quarter of 2012.

The trend of the market has been improving over the last three quarters and from the improvements in our margins, we have been able to leverage these revenue gains over the last three quarters.

We think we are positioned to improve gross margins and operating margins as the markets continue to recover in the second half of the year, which is what is projected in our annual guidance. Earnings per share was $0.15 compared to our first quarter of 2012 EPS of $0.22. We maintained operating margins in our core business at 4.8% despite sales being lower by $15.3 million.

For consolidated Stoneridge, including PST, our operating income has progressively improved from 3% in the third quarter of 2012 to 3.9% in the fourth quarter of 2012 to 4.4% in the first quarter of 2013. Our EPS similarly has improved from $0.02 a share in the third quarter of 2012 to $0.10 a share in the fourth quarter of 2012 to $0.15 in the first quarter of 2013.

Operating margins, excluding PST, improved in the first quarter of 2013 versus the fourth quarter of 2012 rising to 4.8% from 3.2% in the fourth quarter over last year. PST's operating margins excluding purchase accounting were 6.9% in the first quarter, a decline from the fourth quarter's 10.3% on lower sales which is in part due to seasonality and mix.

Historically, the sales progression of PST is weakest in the first quarter growing each quarter to be the highest in the fourth quarter.

Stoneridge's market portfolio mix of automotive, ag, and aftermarket in Brazil helped enable us to offset the full impact of the commercial vehicle market softness in North America and Europe. The market mix combined with cost reductions in 2012 benefited our results.

Material costs as a percentage of sales also improved. Slide 12 of our deck shows the direct material impacts of these actions on Stoneridge's core gross margins. In the first quarter, operating cash was an outflow of $600,000 compared to a $5.9 million inflow in the first quarter of last year. Inventory increases at PST to support seasonal production ramp ups and accounts receivable increases in our core business from sales increases in February and March of this year compared to our November and December rate from last year.

Slide 4 of our deck has complete P&L breakout of -- on the first quarter of 2012 versus the first quarter of 2013. Slide 5 identifies Stoneridge's core sales decreases versus the prior year's first quarter which was primarily from the commercial vehicle business.

Slide 6 of our deck identifies the major bridge item differences between first quarter of 2013 and the first quarter of 2012 earnings per share. The quarters' difference is primarily due to lower volume, partially offset by cost reduction benefits.

Agriculture and other equipment sales decreased by approximately 6.9% to $45.8 million in the first quarter compared to the first quarter of the prior year, mostly due to reduced ag sales. Again, slide 5 provides the detail.

Sales in our passenger car and light truck category which are predominantly control device sales were $57.6 million in the first quarter compared to $55.1 million, a 4.7% increase over the first quarter of 2012 due primarily to new product sales from keyless entry, shift by wire and front axle disconnect products.

New and replacement business awards for Stoneridge's core business in the first quarter were $22 million, representing $18.2 million in new business awards and $3.8 million in replacement awards. Among the larger new business awards was a front axle disconnect actuator award for a large North American car customer and a wiring award from a newer North American commercial vehicle customer.

In addition in April we were awarded our first sensor award with a European account for the North American market. This is a significant achievement because it is one of our developing emissions technologies. In addition in April, we were notified of a large award for shift by wire which is an equally exciting development as it has global applications with a key automotive account. We will provide more information on these April awards in the second quarter call.

Minda Stoneridge, our unconsolidated JV in India, posted first-quarter sales of $8.6 million, a decrease of 10.1% versus the first quarter of last year. This sales decrease was driven primarily by a 9.3% 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 currency exchange, Minda's sales were down about 1.7% compared to the prior year and are being adversely affected by a weaker economic environment. Our share of Minda's net income from operations in the first quarter was a profit of $231,000 compared to a profit of $139,000 in the first quarter of 2012. Minda's improved profit performance was in part due to lower overhead and improved labor efficiency in the current quarter.

PST's first-quarter US dollar sales were $42.4 million based on an average exchange rate of [BRL1.99] to the US dollar.

First-quarter 2012 sales were $53.7 million based on an average exchange rate of BRL1.7 to the dollar or a devaluation from currency of about 12.4%. This represented a decrease in US revenue of $11.3 million or 21%, but in reais, it was a decrease of 10.1%.

The lower sales in the first quarter of 2013 was a result of decreases in audio sales in the mass retailer channel and window lift actuators in the OEM channels. PST's local currency sales were relatively flat over the last three quarters. In US dollars sales, first-quarter sales in 2013 were $42.4 million compared with $43.8 million in the third quarter of 2012 and $44.5 million in the fourth quarter of 2012. The third and fourth quarters of PST are historically higher than the first and second quarters so we believe there is some gradual improvement coming in the market.

PST's gross margins excluding $300,000 for purchase accounting was 42.5% in the first quarter of 2013 compared to 42.6% in the first quarter of 2012. Gross margin was maintained in the first quarter of 2013 despite lower sales due to the repositioning and elimination of low end audio lines and lower margin window lift products and benefited from the second-quarter cost reduction -- second quarter 2012 cost reduction initiatives.

Gross margin trends at PST have followed the improved sales mix and cost initiatives. PST's gross margins excluding purchase accounting have increased sequentially in each quarter from 40.1% in the second quarter of 2012 to 42.5% in the first quarter of 2013. PST's first-quarter operating income excluding purchase price accounting was $2.9 million and has also improved to 6.9% of sales compared to 6.5% of sales in the first quarter of 2012.

PST increased its operating margin by 4/10 of 1% despite a drop of $10.2 million in local currency sales. The improvement in operating income is driven by approximately $2.2 million in benefits from the cost reduction actions completed in 2013 as shown on -- 2012 as shown on our slide deck 20 of our package, and their ability to improve the mix with alarm systems and tracking devices in the aftermarket channel.

Summing it up from a markets perspective, the North American commercial vehicle and agricultural markets underperformed our expectations. Passenger car and European commercial markets met our expectations and PST slightly outperformed our expectations. On a consolidated basis, our sales has improved over the last three quarters and our gross margins and operating incomes have improved as well. Our cost savings completed in the second and third quarters of 2012 have benefited our profitability in the third and fourth quarters of last year and continued in the first quarter of this year.

As we begin the second quarter, we expect to see the markets gradually improve. We are positioned to benefit from improved market volumes and leverage of cost base we currently have. Even with the modest increase in volumes, we expect our profitability to improve solidly during 2013 due to our mix of products, cost initiatives, continued efficiency improvements and a stabilizing currency and commodity [markets].

As a result, we are reaffirming our annual guidance and see our EPS for 2013 in the range of $0.75 to $0.95 per share as originally published on February 7, 2013. With that I would like to turn the call over to George.

Thank you, John. As the markets have been improving over the last three quarters, we have also been able to benefit from the actions that we implemented during 2012 to improve our operations, reduce our costs, generate cash flows and reduce debt levels.

Our first-quarter performance is consistent with our expectations of improved profitability in the face of quarter-on-quarter sales production of the first quarter of 2013 compared to the first quarter of last year.

Our first-quarter improvement continues the trend of higher sales and gross margin and operating income margin improvement from the third and the fourth quarters of 2012 and from the low in the second quarter of last year.

As we did in 2012, we have maintained cash flow generation as one of our primary objectives for 2013. As indicated on slide 18, we improved the total debt to EBITDA ratio from 3.5 times at December 31, 2011 to 3.3 times at December 31, 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.

During the first quarter, PST received BRL25 million or approximately $12.3 million in low-cost incentive loans from the Brazilian government which carry an annual interest rate of 5.5% in local currency. We anticipated receiving the funds in the second quarter of 2013, but received the funds at the end of March. The proceeds from the incentive loans were used in April to repay $10 million of high interest US dollar loans which will mitigate foreign exchange mark to market risks. In addition, PST will play down an additional $3 million in loans as maturities come due in May in US dollar accounts payable in the second quarter to further mitigate foreign exchange risk.

The Brazilian government incentive funds which were received earlier than expected had the effect of temporarily increasing our debt to EBITDA to 3.6 times at the end of the first quarter. We still expect our debt to EBITDA to be in the range of 2 times -- 2.5 times by the end of this year as forecasted.

During 2002, we reduced debt by $65.7 million, our ABL remains undrawn since November 2012. PST reduced their debt by $29.7 million in 2012 and will continue to pay down their US dollar denominated debt in 2013 as discussed above. See slide 18 of our deck.

PST sales volume, mix of product sales, the benefits from the cost initiatives and debt reductions taken last year continue to be key factors in their profitability improvement. PST sales in the first quarter were slightly lower than the fourth quarter of 2012 by $2 million or 4.6%. In comparison to the first quarter of 2012, PST had a sales decline of $11.3 million or 21% due to the reduction of the consumer market and the devaluation of the Brazilian real.

Despite lower sales, PST was able to improve its operating margin excluding non-cash purchase price accounting to 6.9% which was slightly better than its profit margin of 6.5% in the first quarter of 2012 though in much lower sales.

PST recorded lower purchase price accounting in the first quarter of 2013 which is consistent with our expectations of lower expenses in 2013 as discussed in our last call. Finally the impact of PST's cost reduction initiatives implemented in the first and second quarter favorably affected operating income by approximately $2.5 million in the first quarter of 2013 compared to the first quarter of 2012. See slide 20 of our deck.

In our core business, we maintained a similar gross margin in the first quarter of 2013 compared to the first quarter of 2012. Lower direct material and a favorable mix in control devices offset an unfavorable mix in labor inefficiencies in our Wiring business segment. See slide 4 of the deck.

John and I shared with you today our management team's actions which address the overall lower production volumes from slowing markets we experienced from the first half to the second half of 2012. However the market has been improving in both the third and fourth quarters to the first quarter this year.

We expect our second-quarter 2013 sales levels volumes to be near or slightly better than our first-quarter level as Brazil's G&P is still running at less than 3% this year, softness in the European commercial markets and lower levels of commercial business in North America. From the market projections and improving sales trends over the last three quarters, we expect second-half sales to improve modestly above the first-half sales. Even with a flat or slightly improving revenue performance, we have been able to maintain our gross margins at both our Stoneridge-based business and at PST to ensure we will continue to deliver on profitability and cash flow targets.

In 2012 we have implemented specific cost reduction initiatives at PST, European Electronics and our Wiring business. We work 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 to net sales which resulted in improvement of raw material cost and net sales of approximately 2%, in the first 2% of sales in the first quarter of 2013 compared to the first quarter 2012.

As we shared with you today, the first quarter went according to our plan and we believe we have taken the actions necessary to position the Company well for the remainder of 2013. We still believe the market dynamics are stable and will grow 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 North American commercial fleet is running at 6.7 years of age with increasing maintenance cost and more fuel-efficient engines being offered that may lead 2013's Class A 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 in the second half of last year.

We believe the cost actions we have taken throughout 2012 will benefit our core business and PST will improve our operating margins as the year progresses. We have taken cost actions necessary in PST and in 2013 we expect PST sales to be slightly lower than 2012 levels, lower levels in the first half of 2013 and higher levels in the second half of 2013 compared to 2012.

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 and purchasing power last year.

And finally, the cost actions that we have taken at PST will improve our margins throughout this year compared to last year and will contribute to continued operating income improvement and cash generation at PST.

As a result of these actions we have taken, 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 the call to questions.

(Operator instructions).

Before we get started, the technical issue in getting our deck loaded on the website has been resolved. So our apologies on that delay. It is, it is posted.

Rhem Wood, BB&T Capital Markets.

Congratulations on a good quarter.

Thank you.

To start, how do you feel at this point about your visibility into Brazil? And can you talk a little bit about what extra expenses you are going to incur bringing these new products on and how maybe the margins from the new products will proceed?

The visibility to Brazil as you know is largely after-market and so it is subject as George said to what is going down in the Brazilian economy. We believe we have taken a conservative approach. We think the Brazilian economy is going to be under 2%. So I think our forecast going out are rather conservative in there and so I think that their performance has improved every quarter since the second quarter of last year. We expect that to continue to improve in the next couple of quarters.

Regarding new product launches, these are all factored into our plans as we go forward. So I don't think there's going to be any significant impact in terms of extra expenses that will hit our budgets.

One thing I would like to add to Brazil is that we have created a couple programs in Brazil to give better visibility because, as John said, it is a high percentages after-market in dealer business. We have started a program, we have 15 promoters around the country. They are meeting with 100 small dealers every week. So we are getting more direct feedback with our local competitive positioning and where they stand in the marketplace. And then we actively discuss with each one of our large dealers every week so they are getting a lot of direct feedback from our dealer channel and our after-market channel and the small dealers and I think we have a little better visibility than the market probably now than we did maybe six to 9 months ago. That's not saying if the GDP changes that won't change though for our consumer confidence and the sentiment, but what we've seen and I think we shared when you today is their sales have been improving over the last three quarters since the drop of the trough in what I would call in the second quarter of last year.

Okay, and you feel like inventory levels are at a good level right now?

We have actually commented, John had earlier in his speech we have actually raised our inventories because what we found is we reduced them at two different levels during the course of last year and our whole inventory increase in the first quarter was about $5 million for the whole Company. That was specifically for Brazil and that is to match our demand. We have a lot of product lines. We have a number of channels of distribution. So that increase was put in place to satisfy the demands we are seeing in the local market in Brazil.

Okay and on the [coal] business side it sounds like things are going pretty good there. Can you talk -- it sounds like you even won a new customer award. Can you talk a little bit about that and the Navistar business in particular?

Well, with the new customer award we will fully explain in the second quarter because we are going through it right now, but it is a significant -- there's two significant wins as I said. One is the [soot] sensor award and that is as we've talked in past calls, we think we've got a product that has some technical advantages to the marketplace, but until we can actually sell it, we are going to announce through the States so we have gotten our first customer award on that and that program will probably go -- start launching in 2015. So but it is exciting because, after that, we have many more opportunities beyond that.

The other one is a large award which goes global. And so, it will be a significant improvement and I think when we talk in our second quarter you'll see the size and magnitude of that award, which benefits us and it is based on one of our existing technologies that we are trying to drive into the -- that we are trying to offer to the market. So we are excited about that.

Regarding Navistar, there really isn't much new news we can add to that in terms of their performance in the market. They have their engines certified now and their volume will hopefully pick up later in the year versus what it is and then our plans, we've had a forecast for them to increase, but not at the same rate they have increased. And I think as the second quarter unfolds it will start to see -- maybe the market will come back a little bit and they will pick up some more share of that.

But I really don't have any great insight into their -- from their forecast as to what is quite on with them.

Okay. Great. And last one. Free cash flow you will start to generate a fair amount of that. Talk a little bit about your plans for debt paydown and would you consider an acquisition at this point?

Well, I think and we will be very active over the next three weeks and I think our message will be fairly consistent as we need to continue to pay down our dollar debt in Brazil and we shared with you today they already paid down about $10 million in April and we will do some more probably in the range of $5 million. From there it is continued investments in Asia and Brazil and then we have got some customers of choice that we are making investments and John talked a little bit about the platforms today and China, clearly, is starting to look better for us. So we are going to go.

And then, bolt-on acquisitions -- we are actively looking at a couple of things on a geographic basis that really fits either gaps we have in a market presence or customer of choice or technology and we are working on those. But as you know it is all about relationships and it takes time to unfold. But and we will be cautious with bolt-on acquisitions, but clearly that is in our portfolio this year and I think one of the things we will share in the upcoming [tricks] over the next three or four weeks is that our cash flow target will be in the range of 3.5% to 4.5% to sales.

So, very consistent with what we did. In fact we actually did better than that last year, but as you know we improved our inventories quite a bit and that had a significant impact on our overall free cash flow in 2012. This year will be driven primarily from profitability.

Great. Thanks for the time.

Justin Long, Stephens.

Good morning and congrats on the quarter. To start off, just based on the reiterated guidance for the full year, I know there were some puts and takes, but would you say overall the first quarter was roughly in line with your expectations just looking at it on a consolidated basis?

Yes, I think the first quarter came in right about where we expected it. As we try to explain some markets were a little bit better, some were a little bit worse, but overall it hit right about where we expected.

Okay. And you gave some good color in terms of your expectations for how the topline plays out the remainder of the year. But can you give any detail on the cadence of earnings you expect as the year plays out into 2Q and the back half of the year or at least what is baked into your guidance on that front?

Well, I think as a rough guideline is that clearly our revenue and just looking at our guidance it would say that we would build sales in the range of a little over $30 million over the course of the year which, being much more weighted to the second half than the first half. And the earnings distribution will tend to be about 40% in the first half, 60% in the second half. So I think that would give you a relative trend of where we are going.

But as you know we don't give specific guidance by quarter. But I think it is consistent with what John just said it was the first quarter was pretty much in plan as we looked at it. And we are trending well in the second quarter based on the guidelines I just gave you.

That's helpful. And it seems like you expect at least some type of pickup in the second half of this year. Is that based primarily on some of the conversations you've had recently with the customer base? Or is this more related to just the typical seasonality that you experienced?

It is really based on what we are -- the forecast that we are seeing from the general market forecasters and then some specific comments from customers. But when it gets out to the second half of the year, it's very hard for people to sit there and definitively say that they are going to see an increase and so we take that with a grain of salt, but we do believe that the market performance of the commercial vehicle market is going to improve. The degree of the improvement is what we are trying to be conservative on, but I think as long as Europe is running just exactly where we want it to where it runs and so if it improves we will get some benefit from that and I do think as George indicated in his comments that the age of the fleet in North America commercial vehicle has to sooner or later be replaced and I think, generally, people are expecting that to happen slowly over this year.

Right and I think on the last call you mentioned your assumptions for North American Class A production were about 240,000 to 250,000 units this year. Is that still the case?

Yes, that is still our assumption.

And I think my last question, we have seen copper prices pull back pretty substantially here recently. Could you talk about what impact that might have in terms of your margins and earnings or since you are pretty much hedged, I think it was about 96% hedged you said, will it just be a net neutral or some type of lag impact for you?

I would just look at that as more a net neutral because 96% of our customers we now have contracts and one of our key customers, they actually give us a forward forecast. We do a hedge based on the period and the quantity which they are looking at. So it is a straight pass-through. So we have done a lot to neutralize the volatility of copper whether it is rising substantially or falling.

So, I think the one that we track very closely that we didn't mention in here, but it is clearly an active one and that is the dollar has been pretty volatile. The euro has stayed fairly flat consistent with our forecast. It is running right around 1.31 today in the euro so and the [seek] is running close to that. The real has stayed pretty close to 2 to 1 but if you noticed the Mexico peso has strengthened fairly dramatically. We took 60% and hedged last -- this year but right now the Mexico peso's trading spot at about 12.08. So it has strengthened pretty significantly from the last three to four months.

So we are starting to look at that and how do we deal with that for 2014 because we do have a locked-in position for this year for about 60% of what we have. But we will have to deal with that because we have four plants in Mexico and we spend roughly about $60 million a year in Mexico, dollar equivalent, for direct labor and variable overhead. Those are disbursements in Mexico, but applied to US product sales.

So that's one exposure that we are watching and will have to figure how we deal with that through 2014.

That's helpful detail. I think that is all for me. I appreciate the time.

Jimmy Baker, B.Riley & Co.

Good morning, everyone. Nice quarter.

Thank you.

Appreciate the color thus far as it has actually answered quite a few of my questions. But did want to go back for a moment to the new business awards. I think, John, you touched on this, but just as a follow-up to what you secured in April, could you maybe give us any additional framework on either the magnitude or directionally how the margins of those new business wins compare to your corporate average?

Well, yes. Both of those awards probably will launch in 2015 as we go through the whole process. Particularly the soot sensor because there's got to be, it has got to be -- we have got to validate our production on it and then we have got to turn it over to the customer and they have got to validate it on their engines. So there is a little longer cycle in that so that will happen in 2015.

But as we look at that and so as we go through this there will be some tweaks. But we would not -- we would expect it hopefully on this new technology to have slightly higher margins on that as we bring that into the marketplace.

On the other one, that's going to be a significant dollar award. I think it is probably scheduled for late 2014. And that will be in the actuation product family that we have out of Control Devices.

So margins on that should be consistent with current actuation margins in that product family. So but it will, it is -- it is a significant award and will create a nice category for us in this actuation shift by wire category.

That's helpful. And just want to touch on the commercial vehicle market here that so far this earnings season and your commercial vehicle customers have talked about being much stronger and now accelerating North American truck orders obviously well above the rate that is being produced. You may have heard a couple of your peers comment that production might be running at an annualized rate of over 300,000 Class A trucks come Q4 up from I think more like 220,000 in here in Q1.

And I appreciate that that is more aggressive than your assumptions. But can you maybe just help us understand what kind of earnings leverage you would have during such an up cycle? What portion of the $10 million in structural cost reductions might see backend or maybe provide a target for incremental margins as we move through this cycle?

Well, first, I don't think we have heard a number that high and I think what we've found in our experience working with our commercial accounts we are much better to flex up the schedules as opposed to staffing for headcount and materials and then try to ramp that back down if they don't deliver that. So that would be the first way we would approach it.

But normally the way we would look at it is our marginal contribution on the wiring business is down around 20% on sales, $0.20 per $1 of sale and then our electronics business tends to run in that range, around $0.30. So I think we have sized our cost structure right, based on the volume we are looking at. We might have to flex some things on variable cost up, but those should be our relative marginal contribution. If those are the straight sales between our wiring business and our electronics and Control Device businesses.

Okay, great, and then just along those lines, I know you stated as part of your longer-term target you would like to be the 6% to 8% operating margin business. Clearly you've been making some pretty significant sequential progress towards that target over the last call it three quarters. When do you think you could realistically enter that 6% to 8% range? Do you think if current production forecasts hold that you could be exiting this year on that run rate?

I think that might be a little aggressive. I think we would be approaching that bottom end of that range sometime in 2014, depending on the mix of the products. You know, clearly Brazil is a key factor of that and markets have improved over the last three quarters. They are probably the largest question mark, because it is really hard to tell -- will that market continue as they are, will it come up? As it increases, it has the potential to increase fairly rapidly if our sales do develop. But if it stays fairly flat or goes down I think they have done a good job of balancing their cost structure.

So, these are directional targets we give and we think that would be more out there in 2014 as opposed to the tail end of this year.

Thanks a lot, George. Appreciate the time.

Brian Sponheimer, Gabelli & Co.

You have things really moving in the right direction here. You are doing a terrific job on the operations side and the only thing that sticks out now is that you have 9.5% debt that you can't call until next year.

What opportunities do you think makes this over the course of the next 12 months to accelerate that? We just saw with TOWR, a refinance that basically doubled the stock in three weeks and there's nothing that says that would not be similar if it took place with your Company. What are your thoughts about this?

Well, we have done a lot of work in this area. We are somewhat limited because of our four-year non call on the indentures. We would owe -- we would have to prepay the interest up through that cliff period which would be November 2014. We have looked at alternatives of rates and as you know we are trading at a premium of about [109] right now. So some of the alternatives could be we can buy down 10% of the debt. I guess it is a question though of what we think we need for growth and we are certainly looking at investments in the bolt-on acquisitions, already positioned and ramped some of the debt down in the short-term and then refinance a whole package in November of 2014.

So we have looked at some alternatives in our roadshow material that will be out in the market over the next three weeks. We clearly talk about refinancing in 2014; and that is a significant transaction for us because I think we can do an unsecured deal as long as the capital markets stay strong as they are today. And it is a question is -- of where you can take the rates down. But it clearly would be in a range of 150 basis points to 250 basis points.

So that's an attractive deal for us to do. I think it would be well received by the market and we are very conscious of that when we're working on it and thinking about it a lot. What we do in the short-term and up through November 2014.

Sounds like it could really turbocharge 2014, 2015 earnings for you. That's good.

Yes.

All right. Thank you.

Richard Hilgert, Morningstar.

Good morning. Wanted to ask about slide 16. There's a contribution of $0.03 from an Other category. I was wondering if you could give us a little color in there?

I don't know what that is off the top of my head. Richard, we can come back and give you an answer on that.

Okay. Other question. We have got in Europe the Euro 6 commercial vehicle standards for emissions. We have got some non- or some off-highway diesel emission standards this year and next year here in the US. Does your -- any of your electronics, the emissions control, those kinds of things, are you going to see some benefit from these regulations coming online over the next couple of years even though it's not all necessarily in the commercial vehicle market?

Yes. I think certainly in our temp sensored line, EGT, temperature sensing line we would see that maybe and then as we roll out our [slip] sensor that would definitely benefit from those. And then, there may be some other opportunities but I think that is the primary one. We look at the emissions segment that's what we primarily look at. Certainly on a pure basis, when they change the emission standards and one of the big questions is, does -- do we have a pre-buy in Europe because next year in January they have the new emissions standard and is there going to be a pre-buy in the fourth quarter as people move on that?

And we still don't have a good answer on that. I mean, talking to our customers they remain cautious about that. So over time, there will be some benefit from these emission changes. As you know, one of our key underpinnings that we try to look for is products that are regulated because then they have to be installed and so in our emissions segment that will be the one that benefits.

Great. And India, also. Are you expecting a pop there? Because you have got [Euro-5] coming on next year.

Yes. I don't have a good handle on whether we see any significant wins going on in the Indian market right now.

All right. Thank you.

(Operator instructions). Robert Kosowsky, Sidoti.

Good morning. I was wondering, I don't know if I missed it, but could you maybe talk about the sequential increase in SG&A and is this $48 million maybe pushing $50 million run rate sustainable?

The only thing that will vary from the level we are at right now would be incentive compensation. There was a significant drop-off last year because of performance and so it didn't get paid. So I think it could vary somewhere between $1 million and $3 million depending on performance this year. That would be the only factor outside of the inflation that you would see in SG&A.

Okay, that's helpful. Then, otherwise, given that we might see an increase in production rates as we go through this year, what are you doing to prepare for that in the wire harness operations in particular and how do you feel about your current capacity utilization now versus what you can do? Are you starting to add back employees? Are you going to go to temp, overtime? How are you going to manage it just to make sure that we do execute on this (multiple speakers)?

Well, again as we have looked at it in the past, if there is a sudden increase it just creates havoc in the manufacturing operations not only from the supply chain, but also bringing on people to have them trained. Our initial -- as we see volumes ramping up we would have to hire people because of the skill set. We need them in there to be trained for about three months before they reach our productivity levels. And so, when we see spikes in volume that causes us some problems. I think in the past from our wiring business, that's what we have seen.

We are doing a couple of initiatives in our wiring business to continue to improve the operational performance of that business because we are not satisfied with that. And there's a lot of work that is going on to continue to improve that business in terms of process improvements in -- primarily in the dye centers and the cutting centers of that business because that really is the front end of the process. But if there was a significant ramp up, we would start to work some overtime, but as you know in Mexico after a certain number of hours it gets difficult to get people to come in. So we would probably have to hire more people.

The other thing we are doing now which is currently underway is we are rebalancing our factories and we talked about that. With the Saltillo plant that we put up last year, had online two years ago we are rebalancing that to take some capacity all flowed from our other plants and put it in there. So we have a better mix of manufacturing capabilities and we don't tax any one plant. So as volume comes up, we'll probably put it more in the Saltillo operation.

Okay but from where the build plants look today you feel pretty confident you have a plant to be able to have the right labor force, the right locations in order to be able to execute in the back half of the year?

Well, yes, as long as they don't spike up then we should be in good shape. I mean we constantly are looking at that. We saw -- for instance, we saw in the first quarter here some specific product families have spiked up on some volume and that caused us some problems because when the plants planning to run at, let's say, a 5% increase rate and then all of a sudden it goes up to 25% it does cause you some problems. You have to get through the whole process of re-adjusting for that.

But we are trying to watch that very closely and I think the comment made earlier about North American commercial vehicle market being 300,000 units, we have not seen that forecast and in discussions with our customers, we have not seen them start to forecast that. So we took a note of that, and we are going to go back out to our planners and say, let's make sure in our sales organization let's make sure we are prepared for this. Because large spikes in volumes is again as I said are problematic for manufacturers where there's high labor content, and then problematic because you have to get the people in and train them and also problematic for most because the supply chain may not be able to respond. We have seen that before in the CD market when the supply chain could not respond back to some of the growth that was in the first quarter of 2012.

That's helpful. Otherwise what is --? Is there a amount -- I don't know if I missed it on the call, but the amount of business you are walking from this year and next year as you're getting some of these new products layered through? How are you looking at sunsetting some of the product lines you are on? What is the quantitative impact on that?

We -- you know, Rob, in our guidance we talk about the $174 million so there's no net new business we are walking away from it. In fact we have increases this year and over the four years and it's in cadence it will be in the deck that we are going to post. We will post that I think by Monday.

(technical difficulty) presentation. What is posted now is not going to change. So, yes, we don't see any de-content of product going on. We don't see there may be end of life stuff is factored into that net new business award so right now, we are pretty confident about that.

The other thing is we -- on the electronic side we had just had a review with them and there seemed to be a lot of opportunities coming forward although that has a longer development cycle as you know, but so I think that we have got ample opportunities to continue to drive our growth in our business.

I guess just to rephrase like how much business is end-of-life into this year versus say what it was last year? Kind of just lower margin products, I am just trying to get a sense about how product mix is going to get a nice lift over the next year or two.

I don't really think that there's -- I think when we look at some of our end of life programs, I'm not sure I've got a solid number for that. Because it doesn't really (multiple speakers) -- I don't think it is very significant for us particularly in this year versus last year. Now what as we did talk about in Brazil we took out some product lines, lower margin auto lines and that helped us improve our mix in some lower margin OEM lines down there so we are adjusting that. So we are constantly looking at how we can tweak our performance by looking at the low end lines. But those are conscious decisions by us to exit the certain categories.

On our side of the market in North America and in Europe, I don't think there's a significant amount.

In fact I am looking at where we are at, Rob, and it's between $15 million and $20 million presoak we don't have a lot that rolls off this year. We've got some more next year, but there is backfilling going on. There's a lot of that so you will see more runouts of product lines in 2014.

Okay. That's helpful. And, then finally, is there a minimum -- I know this might be a tough question to ask right now, but is there minimum size of a bond offering you could do? If you start the paybacks and then you turn around some cash it (multiple speakers).

We haven't looked at sizing because it really depends on what we think we're going to do in the acquisition size, but I think what I can give you is when John and I were on the road last year, the bond market clearly has changed somewhat and there were a couple of thresholds that were important out there in the market and one was to have EBITDA over $75 million, which I think we are clearly in that above that target now. And then the average size deal, at least to get it priced properly, was about $200 million.

So we will reassess that because if you remember from our discussion a year to two years ago when we did this, is that we were actually debating whether we would take the line down substantially, we came down $100 million, $125 million. We finally sized it at $175 million because we felt that was the right size for the acquisitions. But I think with the addition of Brazil and the things we are doing globally, we will probably revisit that and determine what the right number is. But I know from a pricing standpoint and this won't drive the whole decision is the $200 million seems to be the right size.

Now whether that fits with us and what we want to do with growth in acquisitions, that will become the other criteria that we will evaluate as we make that decision.

Okay. And I don't know if I missed it, did you mention what the tax rate should be for the year?

Yes, I did mention it but the tax rate will fluctuate between 14% and 17% this year. And it will depend on how our US income comes in but I think it will be in that range this year.

Cool. Thanks a lot. Good luck with the rest of the year.

I would now like to the call over to John Corey for closing remarks.

Thank you for joining us on the call. We are very encouraged by the sequential improvement we have seen over the last three quarters, both in revenue and our ability to leverage that down to the margin lines. As we have forecasted out in our earnings, we see continued improvement in both of those businesses, in all of our businesses. There are opportunities for us to continue working on improving our operational capabilities and our business is really spending to the trend. By that I mean we are looking at our cost management and our cost very effectively to where we see the volume increases. A gradual increase in the markets as we are projecting would be very beneficial and we will leverage that going forward and, again, I think that as we look at this as we've demonstrated over the last three quarters now, even in the low revenue environment we can generate the kind of -- we can generate profitability. And a lot of that comes from our mix of products so if you look at our markets, we are in the aftermarket, higher-margin, we are in the commercial vehicle market, we are in the automotive market, we're in the ag market so versus a pure play in any one of those markets you can look at our performance and over the cycle we should be very well positioned. So with that, I would like to thank you for joining us.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and good day.