Stoneridge Inc (SRI) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter Stoneridge earnings conference call. My name is Philip, and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Ken Kure, Corporate Treasurer and Director of Finance. Please proceed, sir.

Good morning, everyone, and thank you for joining us on today's call. By now you should have received our second-quarter earnings release. The release and the 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 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 SEC 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 highlights and our growth strategies, business development, and his thoughts on future initiatives. George will discuss the financial and operational aspects of the second quarter and our outlook.

We have prepared and published an earnings presentation to provide more detailed schedules to help your understanding of our second-quarter results and trends for our 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 the call for questions. With that, I will turn the call over to John.

Thanks, Ken. Good morning, everyone, and thank you for joining us on the call today. We've seen some solid improvement across many of our core businesses over the last three quarters, and this quarter kept our momentum progressing. As a result of our initiatives to improve operations, reduce costs, generate better cash flows, and reduce debt levels, we been able to leverage this uptick in activity with improved financial performance.

Our second-quarter results remain consistent with our expectations and annual guidance that we have previously provided. Specifically, on Slide 4 you can see that consolidated revenues increased 3.6% year over year to $243 million, driven primarily by higher market activity in North America and improved PST sales. Sequentially, revenue was also up 3% over the first quarter.

Our diversified market portfolio mix of automotive, agricultural, and aftermarket in Brazil helped us offset the full impact of the commercial vehicle markets in North America and Europe, which are still down compared to the prior year, though they are making modest sequential improvements. We have made a conscious effort to increase the diversity of our business, which has helped us to deliver more stable financial results and is opening up new opportunities to leverage our customer relationships.

Operating margins have progressively improved over the last 3 quarters, going from 3.9% in the fourth quarter of last year, to 4.4% in the first quarter, to 4.9% in this quarter. We have posted operating margins in our core business of 4.9% compared to 3.4% in the applicable quarter of 2012.

As we continue our Lean implementation, we expect to continue gross and operating margin improvement. This consistent improvement has also dropped to the bottom line, as earnings per share have progressed from $0.10 per share in the fourth quarter of last year to $0.15 per share in the first quarter and came in at $0.21 per share in the second quarter of 2013.

Over the last year we have been talking about a series of long-term strategic goals that guide our Company, and I'd like to present a quick reminder of those goals before I get into more detail along with our business segments. Please see Slide 5 for a visual representation of these goals.

The first goal is to invest in new products and platforms such that we can achieve the long-term 6% to 8% per year top-line organic growth position in the future. Second, we are focusing on building a more sustainable cost position across all our businesses, with a strong focus on continuous improvement.

Third, we continue to create an even stronger set of technological advantages that will help us in our development of new products and keep existing products competitive. And lastly, we want to continue to improve our balance sheet and better position the Company for the future so that we can invest opportunistically and better manage the cyclical nature of the business.

I will walk through in a little more detail now, starting with our growth goals. Moving our growth rates from the current consolidated low single digits up to the mid single-digit range will take some time. However, it's worth noting that many of our core businesses, like Control Devices and Electronics, are already operating at these levels today. Part of our growth strategy was to develop, focus, and support global customers who are viewed as technology leaders and who are growing in all regions of the world.

In terms of new product wins, our wins in the second quarter reflect our growth initiatives. New and replacement business awards for Stoneridge's core business in the second quarter were $67.4 million, representing $64.8 million in new business awards and $2.6 million in replacement awards. Among the larger new business awards was a shift-by-wire award for a large North American passenger customer that we mentioned on our first quarter call.

In addition, we received a wire and instrumentation award for a North American commercial vehicle customer. In April we were awarded our first sensor award with the European account for the North American market, which is a significant achievement, because it is one of our developing emissions technologies.

We are also working on additional new platforms for keyless entry and shift-by-wire. These new awards show our business teams are executing our strategy and continue to be focused on increasing the diversity and reach of our products. As we normally do, we will update our current four-year growth of $174 million of net new business for our core segments in early 2014.

One of the key objectives was the need to build a more sustainable cost position and a culture of continuous improvement. George will walk through a full review of the initiatives we put in place over the last year, but our results show that our commitment to continuous improvement and cost discipline are beginning to have a sustainable impact on our business.

Rick Adante, who heads up our operations, and his team have been focused on better ways to leverage our global footprint and are making sure we have the right structure, people, tools, and processes across the organization to succeed. However, we know we have more work to do, especially in our Wiring segment; and I will share with you and update on the Wiring group in a few minutes.

Now I'd like to spend a little time on the technological advantages that we are building across the Company. As an example of this is our recent soot sensor award. In this instance we were able to win business based on a simpler, less expensive, and better-performing sensor than what was currently being offered in the market. In addition, our product also features an integrated diagnostic, which identifies operational problems with the sensor and helps prolong the life of the emissions system. This was an extension of our emissions strategy, where we have the expertise and focus on design and development efforts on bringing a superior product to market.

Lastly, we have remained steadfast in our commitment to improve our balance sheet over the last year. George will walk through more of the details, but we have maintained cash flow generation as one of the primary objectives for 2013. The first half of the year has seen the pace of cash flow generation decline from late 2012 -- strong results due to increased inventory to support increasing sales levels, but we expect to see free cash flow from here as the year progresses.

Strong cash generation has allowed us to reduce our enterprise risk and make great progress on our debt reduction goals as well. George will provide a summary of our debt reduction metrics. However, we expect by the end of this year that we will be able to achieve 2 to 2.5 times leverage as we head into 2014. See Slide 14 for the details.

Reviewing our segments at a high level, you can see the breakdown of revenue in each of our segments on Slide 6 of our earnings presentation. Slides 7 and 8 also provide significant detail around our year-over-year and sequential business progress by segment.

First, Control Devices. As a reminder, the large majority of revenue in this segment is composed of our automotive and light truck businesses; and geographically, we have a strong customer presence in North America. Year over year we saw a top-line increase of roughly 8.5%. And sequentially, Control Devices increased 3.5% over the first quarter.

Sales in our passenger car and light truck category really drove these results, as they recorded a 10.5% year-over-year increase due primarily to new product sales. The Control Devices team remains intently focused on leveraging all global changes that are coming with the higher emissions standard and fuel economy guidelines. The driving force in this segment remains our technological capabilities, like the soot sensor and Shift-by-Wire new business wins I referenced earlier.

The Electronics segment contains most of our medium and heavy truck business and has a strong global reach. Like our Control Devices group, this segment is also performing at a high level and in line with our long-term organic growth goals. Year over year, the Electronics group witnessed a top-line increase of 17.3%.

Sequentially, they also performed well, with sales increasing 9.4% over the first quarter. The Electronics group really has a great partnership approach with their global clients and a deep, intimate knowledge of their customers. The team has developed some very strong engineering software capabilities as well, which will help us maintain solid growth for years to come.

Let's move into the Wiring segment, and I'm going to take a little extra time here today to talk about the work we need to do to bring this group more in line with the performance of our other segments and our expectations.

Wiring is about 60% medium and heavy truck and 40% Ag, and predominately in the North American market. Wiring has for several quarters been impacted by lower overall market demand and share loss by one of our customers.

In this quarter the group faced continuing ongoing revenue challenges, as it was down roughly 15% year over year. Agricultural equipment sales also decreased by approximately 15.5% in the second quarter compared to the second quarter of the prior year.

With significantly lower volume, we have taken a number of steps to improve our cost structure, increase efficiencies, and realign the business. The Wiring business fundamentals and performance are based on operating excellence that drives consistent productivity and efficiency. Unlike PST, Electronics, and Control Devices, which are based on technologies and product innovation to address geographic opportunities for our global customers, the Wiring segment has struggled over the past several quarters as we adjust to the volume demands and realign our production and plant mix to better match our customer realities.

We continue to work to position the Wiring business so that we can better serve our markets and customers globally. We have installed capacity at our low-cost facility in [Talanesonia] that services a global Ag customer for part of their European requirements.

We've installed capacity in Suzhou, China, that is serving our PST joint venture with competitive wiring harnesses for the Brazilian market, but is positioned to serve the local China market as well. Both of these expansions are in the early stages of business wins. We are beginning to produce wiring harnesses in North American facilities to service an Ag customer in the Indian market. We have been building a global manufacturing network to service key markets beyond the North American market.

At the same time, we have continued to adjust to the volume realities of market and customers. Some examples are that we are closing our Walled Lake Wiring facility, which will be consolidated into our Portland, Indiana, facility, saving about $1 million on an annual basis. This move will be completed by August 1 and has been contemplated in our guidance.

As you remember, we added a new facility in Saltillo in the fourth quarter of 2012 to provide capacity to meet a significant demand uplift from one of our commercial customer's requirements. This created additional overhead, with investment in both overhead costs and capital. As the volume didn't materialize, we needed to address this capacity versus the cost of our Saltillo plant. We are qualifying plenty of products from other customers to be able to produce products in are three wiring plants in Mexico to better balance our production forecast.

Currently we are moving products to the Saltillo facility in the third and fourth quarter of this year to balance the capacity level to improve the efficiency and cost level for the Saltillo facility. This process was started in the second quarter.

During the first and second quarters of this year we have improved the operating performance of our Chihuahua, Saltillo, and Portland facilities. We still have more work to do to improve the performance of our Monclova facility, that is running with excess labor, overtime, and premium freight. The primary driver of the performance was demand fluctuation, capacity increases, and launches of new business.

In addition to the points above impacting the Wiring business, we have seen recent reductions in our defense orders, which are higher-margin products, in the May and June timeframe, which affected our mix in the second quarter. The Wiring business had a negative impact from labor, mix, and premium freight in the second quarter of 2013 of $0.11 per share as compared to the second quarter of 2012. In addition, Wiring sales were $12.7 million lower than the prior year, but the decreases were offset by sales increases in other core businesses.

Because of Wiring's significant exposure to the North American commercial vehicle market, we are to some degree impacted due to the lower volume, like other commercial vehicle suppliers. However, we have opportunities to improve the operating performance and are working through the plant realignments and right-sizing the operations. With the actions taken and underway, from completing the plant move in August to rebalancing the capacity between the 4 Wiring plants in North America, we should see improvements in the future as they leverage volume increases as they materialize.

Moving on to PST, which, as most of you know, is our aftermarket in Brazil; PST sales in the second quarter were roughly 10% higher than the first quarter of 2013. In comparison to the second quarter of 2012, PST had a sales increase that exceeded 21% due to strong audio sales in their mass retail channel, car alarms, and the aftermarket and OEM channels. In local currency terms, PST's sales increased 14% versus the first quarter. PST's sales volume, mix, the benefits from cost initiatives, and debt reduction taken last year continue to be key factors in their profitability improvement.

PST continues to see very solid gross margins, which excluding $300,000 for purchase accounting, were 42.5% in the second quarter of 2013 compared to 40% in the second quarter of 2012. Gross margin was maintained in the second quarter of 2013, due in part to the higher sales of audio and car alarms.

Lastly, I will quickly touch on our unconsolidated JV in India, Minda Stoneridge. Minda sales decreased a little under 15% versus the second quarter of last year. The sales decrease was driven primarily by a 4.1% reduction in the valuation of the India rupee compared to the US dollar and a general weakening of the Indian economy.

Excluding the effects of foreign exchange, Minda sales were down about 12.5% compared to the prior year and are being adversely affected by the weaker economic environment in the region. Our share of Minda's net income from operations in the second quarter was a profit of $82,000 compared to a profit of $91,000 in the second quarter of 2012.

In summary, our financial performance continued to improve in the second quarter, and we remain committed to delivering long-term value to our shareholders. The keys to this are the four goals that we discussed earlier of 6% to 8% top-line organic growth; and more sustainable cost position; improving technology in our development of new products; and our improved balance sheet, so that we can invest opportunistically and better manage the cyclical nature of the business. We are on track with our goals and continue to update our progress over the year.

Now George will discuss the further details on the quarter, as well as the outlook.

Thank you, John. As the markets have been improving over the last 3 quarters, we been able to benefit from the actions that we implemented during 2002 to improve our operations, reduce our costs, generate cash flows, and reduce debt levels. Our second-quarter performance is consistent with our expectations of improved profitability. Our second-quarter improvement continues the trend of higher sales and gross margin and operating margin improvement from the third and fourth quarters of last year, which continued in the first and second quarters of this year from the low point in the second quarter of 2012.

As John indicated, revenues in the second quarter were $242.8 million, an increase of $8.5 million or 3.6% over the second quarter of last year, driven primarily by higher market activity in North America and improved PST sales. Revenue continued to improve in the second quarter of 2013 by $7.1 million or 3% over the first quarter of 2013, and $20.1 million or 9% over the fourth quarter of last year. The trend of the market has been improving over the last 3 quarters, and from the improvements in our margins, we have been able to leverage these revenue gains over the last 3 quarters.

We also believe that with further operational improvement, especially in our Wiring business, as John discussed, we can leverage our earnings further. We think we are positioned to improve gross 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.

Our earnings per share in the second quarter of 2013 was $0.21 per share compared to our second quarter 2012 loss per share of $0.13. We posted operating margins in our core business of 4.9% compared to 3.4%, with sales being slightly higher by $300,000.

For consolidated Stoneridge, including PST, our operating margin has continued to progressively improve, from 3.9% in Q4 of last year and 4.4% in the first quarter of 2013 to 4.9% in the second quarter of this year. Our EPS improved from $0.10 in the fourth quarter of last year, to $0.15 in the first quarter of this year, to now $0.21 in the second quarter of this year.

Operating margins excluding PST improved slightly in the second quarter of 2013 versus the first quarter of 2013, rising to 4.9% from 4.8%. PST's operating margins, excluding purchase accounting of 8.8% in the second quarter, increased from the first quarter of 6.9% on higher sales, which is due in part to seasonality and mix. Historically, the sales progression of PST is weakest in the first quarter, growing each quarter to being 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 decline of the commercial vehicle volumes in North America and Europe compared to last year, though volume has improved sequentially. This market mix, combined with the cost reductions in 2012, has benefited our results. Improved material costs as a percentage of sales also continue to improve.

Slide 12 of our deck shows the direct material impacts of these actions on Stoneridge core gross margins. And the PST impact is due mainly to the mix of products.

In the second quarter operating cash flow was an inflow of $3.9 million, compared to $9.5 million inflow in the second quarter of last year. Falling sales in the second quarter of last year and the corresponding decrease in accounts receivable drove the better cash flow performance last year.

Second-quarter 2013 cash flow was also affected by increased inventory to support increasing sales levels, mostly at PST. Slide 4 of our deck has a complete P&L breakout on the second quarter of last year versus the second quarter of this year. Slide 7 identifies Stoneridge core sales' 3.6% increase versus the prior year's second quarter, which was primarily from the past car and light truck business.

Slide 9 of our deck identifies as the major bridge item differences between the second quarter of 2013 versus the second quarter of 2012 earnings per share. The quarter-on-quarter difference is primarily due to higher volume, lower SG&A costs, and cost reduction benefits, partially offset by Wiring inefficiencies that John described.

We continue to have a positive cash flow as one of our primary objectives for 2013, and as indicated on Slide 14, we improved the total debt-to-EBITDA ratio from 3.5 times at December 31, 2011; to 2.9 at December 31, 2012; to 2.7 times at June 30 of this year. With our 2013 guidance we expect our debt-to-EBITDA to be in the range of 2 to 2.5 times by the end of the year.

During 2012 we reduced debt by $65.7 million. Our ABL remains undrawn since November of last year. We continue to forecast that we will reduce our net debt by approximately $25 million by December 31 of this year.

In addition to our net debt reduction, we have been able to better balance our currency exposures. Even though we continue to experience volatility in the Mexico peso, euro, and Swedish krona compared to the US dollar, our currency exposure expense was $500,000 in the second quarter of this year, compared to an expense of $2.7 million in the second quarter of last year.

The major contributor of last year's currency expense was the significant US dollar debt that existed at PST. However, the US dollar debt has been reduced to $3 million as of June 30 of this year.

John and I shared with you today our management team's actions, which address the overall lower production volumes from slowing markets that we experienced from the first half of 2012 to the second half of 2012. Since that time the markets have been improving in both the third and the fourth quarters last year to the first and second quarters of 2013, even though they have not rebounded in North American commercial and Ag business.

We expect our third-quarter 2013 sales level to be near or slightly better than our second-quarter level. Brazil's economy has improved over the last 4 quarters, but recent events driven from the political and economic situation have started to show some uncertainty in the Brazilian market. We experienced a softer July than expected, but we'll continue to monitor the situation and resulting volumes.

European commercial vehicle markets are expected to improve in the second half, helped in part by higher Euro 5 sales prior to the change to Euro 6 in 2014 and higher export sales.

As a long-term trend, the impact of emissions legislation should benefit not only our Control Devices business, but also our Wiring business, through added content for more sophisticated engines. The commercial business in North America and Europe, though lower in the second quarter of last year, continues the trend of sequential quarterly improvement.

In addition, North American passenger car market continued its trend of year-on-year and sequential improvement, helped by both higher industry volumes and share gains by the traditional Big Three. And from the market projection of improving sales trends over the last 3 quarters, we continue to expect second-half sales to improve modestly above our first-half sales.

Even with a flatter, slightly improving revenue performance, we been able to maintain our gross margins at both our Stoneridge base business and at PST to ensure we will continue to deliver our profitability and cash flow targets. In 2012 we implemented specific cost reduction initiatives at PST, European Electronics, and our Wiring business.

We've worked diligently since the fourth quarter of 2011 to redesign our products; raise prices to cover commodity costs increases; work with suppliers to drive down raw material costs as a percent of sales, which resulted in improvement of raw material costs to net sales of approximately 3.4% in the second quarter of 2013 compared to the second quarter of last year.

As we shared with you today, the second quarter went mostly according to our plan, and we believe we have taken the actions necessary to position the Company well for the remainder of this year. 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 the North American commercial fleet is still running at 6.7 years of age, with increasing maintenance costs and more fuel-efficient engines being offered that may lead 2013's class VIII market to run in the range of 240,000 to 250,000 units.

Our core business sales in the first half of 2013 were lower than the first half of 2012, and we expect our second-half sales to be higher than 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 the necessary cost actions in PST. PST sales were lower than 2012 levels in the first half of 2013 and higher levels in the second half of 2013 compared to 2012.

Though the Brazilian government originally forecasted GDP growth in the range of 4% for this year, we have taken a more modest view and have planned a 2% GDP growth rate in 2013 after experiencing lower consumer demand and purchasing power last year. And finally, the cost actions 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.

The key question that remains about Brazil is whether uncertainty in the market caused by the Brazilian's pushback on the recent political and economic events will further hurt the economy. As a result of the actions we have taken, we continue to have confidence that we can deliver our 2013 guidance in both sales and profitability first released in February of this year, which featured an EPS of $0.75 to $0.95 per share.

We will now open up the call to questions.

(Operator Instructions). Justin Long, Stephens.

This is actually Brian Colley filling in for Justin this morning. Congrats on a great quarter.

So to start off, you've given the three-year goal of 6% to 8% top-line growth. And I was wondering how much of that you already had booked in your net new business, including the new contracts you have won this year?

Well, as you know, Brian, is that typically our booked contracts tend to run out anywhere from 3 years to 8 years. So in the coming year, generally, it is booked in the 90% to 95% level for 2014, with drop in the range of about 88.5% in the second year, and being about 70% to 75% in the third year. So over the next 3 years our booked business is pretty firm in our projections.

Great. And to follow up, so normally you see a seasonal trend in PST where there is sequential improvement in each quarter throughout the year. Is that what you are assuming for the second half of 2013? And how much visibility do you have in that business for the next 5 months?

Yes, we have said this before, that we are assuming that trend continues for a variety of reasons. One, they have their holidays -- like Father's Day comes in the second half, third quarter; and then they have, of course, the Christmas holidays, and it is their Summer and our Winter. So that is the tendency of why they see sequential improvement.

What we can't read and what we can't gauge is, as George has indicated, was -- is there going to be uncertainty in the markets, with the political and economic unrest that recently has witnessed itself? We have seen some lower sales in the July month, but that's really distributors kind of adjusting the inventories right now, as we look at it.

But in terms of forward forecast, it really is something that we have to just keep our eye on. I can't -- we can't say that the aftermarket business is going to react in one way or another. We're just watching what goes on.

Now, in the most recent discussions we had with our team down there, they still feel confident that they can deliver on their results. But again, a caveat -- as you saw, the disruptions that happened in Brazil could be the wildcard factor in this.

Right. That's helpful, thanks. And lastly, so the balance sheet has improved a lot over the past year, and it seems like you are in a much better place to look at some acquisitions. Could you just comment on the activity you're seeing in the M&A market and the likelihood we see something in the next year?

Well, as you know, there's been a lot of activity in M&A, at least; but I think one of the things that we're seeing is there's still a level of expectation between debt valuations versus equity valuations. In fact, the spread has never been as large as they are today.

We've initiated a process in the Company, and we've engaged in it for probably over 6 months to 10 months, is that we've gone a little different approach. We are building an acquisition strategy inherently and internal with our business groups, especially focusing on Control Devices and PST right now.

We're using a buy-side activity to really look at what I call non-bid auction kind of relationships with potential acquisition candidates. We have identified some candidates, but it's like any process; it's built on relationships, and the ability or the timing in terms of when people may want to sell their businesses. And then it ultimately comes down to the proper valuation for both us and the potential sellers.

So we are clearly engaged in that process now. We're looking at opportunities to take alarm systems into the Asia markets to see if it fits there. We're doing a study now on that.

And as I said, we're focusing heavily in the Control Devices side, especially in the sensing business. So I think you will continue to see us active. But I think it will be in a different form, as we're trying to create a marriage of businesses that need capital to grow, but they also fit in our niche requirements in either technology, our a customer, or a geographic need that we have.

Great. That detail helps a lot. That's all I've got. Thanks, guys.

Thanks, Brian.

Irina Hodakovsky, KeyBanc.

Congratulations on a good quarter.

Thank you.

I wanted to ask you, you previously provided us with underlying production assumptions for the markets where you operate, and I was wondering if you can tell us a little bit about what your expectations are, if you have changed those going into the second half for the Brazilian outlook? I'm under the same assumption as that you are speaking of, that the market there is a little bit more uncertain than it was before. Are you taking down your expectations at all?

Well, the Brazilian market is really -- is a large part aftermarket business. So for that business, we really don't have any projections, because the aftermarket business is kind of consumer demand.

On the OE side of the business and the OES side of the business, no, we're not taking down our forecast. We haven't seen anything that would indicate those are dropping. As a matter fact, even when we look at stuff from Europe and the export sales, they are still looking at the Brazilian market as being a good market. So from that perspective we are seeing satisfactory progress.

In terms of the commercial vehicle market in North America, we're still maintaining in the range, but we expected to see some improvement in the second half. That still hasn't materialized, so we're still in the range. But we're also seeing share shifts among the customers, which is -- we've already been impacted by that. I don't think we will be impacted any further on that.

And then in Europe, as George said, we're starting to see some improvement in that business -- particularly in that we expect to see it in the fourth quarter as we have potentially pre-buy for the emissions standard going forward. And also, their export markets seem to be strengthening. North American automotive, again, is pretty much consistent with our prior projections.

And Irina, I think just a trend in Brazil is that typically they have a much bigger percentage increase in the third and fourth quarter. We have not built that into our guidance of over the course of the year. Our increases in Brazil were really forecast in the mid single-digit level, and we have stayed with that. That is the forecast.

We are little uncertain, as I mentioned in our talk today, is that we've seen a little softening in July. We don't know what that means in terms of a trend. But clearly, there are some changes going. But we have been pleased with the progress, as you know, from where we were in the trough in Brazil way back in the second quarter.

We've seen nice sequential improvements in the third, fourth, first, and second quarters. So that part of the market has stabilized. Our mix has gotten better. We don't see anything yet that says it's going to be a significant change from what we have experienced over the last 4 quarters.

Thank you. On the North American class 8, you just mentioned you are not seeing an uptick that was anticipated. I'm hearing from some of the suppliers who suggested that OEMs are reducing production days here through July, and they're expecting an actual sequential pullback in production in the third quarter before a pickup in the fourth quarter. Anything that you're seeing of that sort going on with your customers?

Well, we tend to discount our customer forecast, because we been burned by that, particularly in our largest customers in the CD side. So I would say we haven't seen that yet.

What we have been looking for is to see the strengthening of demand, and we haven't seen that. It continues in our third quarter to run about at the same rate we saw in the first half of the year. So there's been nothing I've seen or we've seen yet that would indicate that we're seeing that event.

And if I can just talk a little bit about your costs on Slide 9, the EPS bridge there. In the direct material costs, these were a tailwind in the quarter. How much of that improvement was driven by commodity-based material pricing? That could be variable. And what are your planning assumptions with respect to that into the second half?

Well, clearly, copper has continued at a lower level. It's been running, as you know, in the range of about $3.10 to $3.30. That has been pretty stable; it hasn't really changed a lot.

I think in terms of the other things, the rest of the commodities have not had a large influence over us. And as we shared with you today, we've made a lot of push over the last, really, 2 years on doing better designs, and even with our existing products as opposed to even our --.

So we have driven a significant improvement in our raw material costs. And I think we see that continuing. We may see some shift in business, especially in the truck volume. We've seen some uptick in raw material, but it's really in relation to the mix of the business with customers.

And as we shared with you today, PST's will vary based on what products they are selling, because there is different raw material content. But it will swing, probably, 3% to 4% to net sales, whether they are selling tracking devices or alarm systems versus audio.

I think on the other side of the question is currencies. They've had some influence. The real is trading much higher than I think any of us expected. It was supposed to be in the range of 2.05 to 2.13. It is trading at 2.27 to 2.30 right now, so that is clearly has an impact in our local Brazilian operation. It is not what I call significant, but we do import about $3 million a month in terms of dollar components. So that could potentially have an impact somewhere between $150,000 to $200,000 a month.

So that could influence the raw material costs. And it's a question -- can we get pricing relief? And we know that price has gotten a little sticky in Brazil, with the overall demand and the market situation.

But I think for the most part, we have been able to manage our currency exposure and the impact that's coming through materials. But I think we're clearly enjoying the benefit of the work we've done over the last 2 years in raw materials. And we've seen a significant improvement. And there shouldn't -- we don't see anything on the horizon that would change substantially from where we are at.

Plus, as you might recall, on the copper side, which is our largest commodity, we have exposure -- our largest commodity exposure. We have put in place agreements with our customers where we have pass-throughs both going up and down in a certain delay window. But those cushion the blow of going up, and they help the customers when it goes down. But it's a better environment for us as a supplier.

And it looks like comms second half remain at this level into third quarter, and probably even farther into the fourth quarter. I just look at it --

Yes, I would expect that that is what we would continue to see. Copper has been staying -- it has gradually -- if you looked at it over -- it is gradually moving down. It sets a band. It was about $3.24, and now it looks like it's moved down in that band, as George said, around the $3.10 to $3.15 range, and it might even go lower.

And then two last questions, one on the SG&A drop. It looks like $0.04 of that was PST, probably volume driven; and the $0.08 in the core operations. What type of cost reductions? Can you provide examples, please? Are they recurring?

Well, if you remember last year, we took significant cost out of our Wiring business in the overhead structure there. And that cost has remained out of that business. And PST did the same thing, taking -- started taking significant cost out of their business. So we're not rebuilding those costs in those businesses.

The only thing -- lift that I think will see, Irina, is that last year we paid no incentive to our either profit-sharing with our people or down to the leadership team. So we could potentially see an uptick based on our performance in that line. But that's the only item you would see some lift different than inflation.

And then the very last question is on the new business awards, can you provide us -- is this net of lost business? And the cadence of that -- when is that coming on board? Is its first-half loaded? Second-half loaded? Is it 2014 and 2015? Just a little bit more so we know how to forecast this?

I think of the new business award we reported here, look at it more towards 2015, just because of -- we are in the stages of -- bulk of that in the stages of design phase and approval phase. We will start PPAPing that product in 2014, but major shipments will start in probably 2015.

And this is net of lost business?

Yes, that is net.

Okay, that concludes my questions. Thank you very much for the time. Congratulations, again.

Thanks.

Robert Kosowsky, Sidoti.

One quick housekeeping question before I get going. What was the constant currency revenue in Brazil? How many reais did you do?

That's a good question. I think the average rate that we had for the quarter is roughly right around 213 to 215. As you know, it is trading at much lower, weaker than that, but we will get you the actual rate, but I think --

I think 6.6 was the local currency. 96.6.

96.6?

Yes.

Okay, then. Obviously, that's good growth versus last year, which is a really weak quarter in Brazil. I know you mentioned that there is some uncertainty going into next year, and I'm wondering -- or going into the second half of this year. And I'm wondering how we think about the margin profile changing?

I know you have about $180 million revenue, 5% operating margin. How do you think about decremental margins? Maybe constant currency is a better way of looking at it. If you were to get to a 5% or 10% sales decline, just because of something bad happening in Brazil? And conversely, how do you think about incremental margins on the upside?

We still look at incremental margins run in that range of probably 40% to 45%. Our margins haven't changed a lot. The currency impact, as I mentioned, if we can get price lift, has an impact of about $150,000 a month.

So that's a question. And we've seen that there is a little stickiness in price right now in Brazil. So that will be something we will have to work through, but as you remember, last year when we went through the same situation for the second quarter, it took about 5 months to get pricing relief in there. And I would venture a guess that it will take the same length of process -- probably 3 or 4 months to work through the market.

There's a couple of advantages and there's a couple of disadvantages. What's happened in the past is that there was difficulty in the audio side of the business. And we had one major competitor, which is a Chinese importer, went bankrupt. So he came out of the market. Those are the positives.

The negative is there's a lot of people now entering who was out of the market before, like a Pioneer and some others, that are starting to backfill that gap from when the two key players exited that side of the market. So you should never rely that you get all the benefit.

I think the competitive positioning is such that other people have started to fill that void. But right now I don't think we see a big change in margins. In fact, if you look at our growth profile in PST, a lot of the growth is coming from the service side of the business for the future. So it tends to drive our higher margins, anyway. So our mix of our new growth is really going to be coming from higher-margin products.

Yes. The team down there is implementing a new program to improve our service-side revenue. Part of that revenue is really the turnover that you have in the program, the churn, so to speak. And our service business is just replacing the churn that we experienced. So we are putting in a new program to improve the retention rate, and therefore improve the profitability of that business. And that program is rolling out now and will continue throughout the balance of the year.

Okay. And along those lines, how much is service as a portion of the revenue? And should we just view this as a nice recurring revenue base of PST?

Well, it's about -- I was going to say BRL70 million now, I think. And if you look at it over time, that side of the business should grow as we launch the cargo tracker and as though home alarm rolls out.

But I would say that on those two particular programs, we are taking longer in the rollout. One, on the cargo tracker, because people are testing -- the fleets are testing that product. And it's just like a validation test. They take it for several months and test it out and see what it is.

We just, for instance, recently signed an agreement with a large beverage distributor down there to test the product on about 250 of their fleet. And so that's a positive sign as we continue to do that.

The home alarm market, again, will take a little bit longer than we had originally forecasted. So we're looking at more out of this year and into next year. But those products, as they go out, should drive service revenue up further.

Okay. And then shifting gears on the Wiring business, what do you think the margin profile can look like in, say, like a three or five-year time horizon? I know you mentioned about $1 million of just lower rooftop expenses, but what margin profile do you see as a goal down the road? And is this a critical piece to get to that 7%, 8% 9% operating margin you -- out there?

Our objective for the Wiring business was to have it range between 4% and 6%. That is how we see it as we look at the mix of the product. And we continue to look at that and how we're going to get that business.

Part of the big problem here is that we have talked about is, one of the issues with the markets is you have to have capacity and you have to be ready for the requirements of your customers. And if they don't materialize, the capacity stays in place. And so we are constantly in a rebalancing act, trying to adjust that. And we were hammered a little bit more than most with the lower demand of the commercial vehicle market, because of the implications of share loss that we had. So we have spent some time with that.

Now, as we look at our forward business models for Wiring, you will see continued diversity in our Wiring product mix, which will help stabilize the business. Then as you look at it from the plant perspective, again, what you find is if a customer -- on any plant, if a customer has a sudden increase or a sudden decrease in volume, it really tears apart the plant.

So what we're doing in this part of the structure is rebalancing our plants so plants can produce product. So if I have a big demand increase from one customer, rather than putting all that burden in one plant, I will be able to spread it out amongst a couple of plants, and therefore minimize the impact I might have. So that's a process that is underway now.

So we fully expect that we will be able to get that business in the 4% to 6% range. And with, one, the improvements in the operations, which will give us a large lift; and then also the diversification of the customer awards.

And to that end of just moving business around, are you seeing better turnover trends in some of your Mexican plants? Because I know that's a major ingredient being able to service the customer when the demand comes back.

We have, in some cases, in one particular plant, the plant giving us a problem, we saw a large turnover, particularly of staff. So that's being addressed. And we're addressing it, because as you know, we have revamped what we're doing in the Wiring business. We've created a Center of Excellence, where we are staffing that Center of Excellence with the very talented, call it best and the brightest. And they help drive the processes, not only for the wiring business, but for other businesses. So they will be able to step in if we start to lose talent at these other places.

In addition to that, we have now a comprehensive training program that's going on. Starting on the floor side, we bring people in; and before, we used to say we'd have a turnover rate -- people would come in; we'd have probably 60% to 70% that would fail the system, so to speak. Now we have dropped that down to 40%. So we don't even bother getting them into the process of training until we have vetted them properly.

So there's a lot of initiatives that are going on in that regard. Our actual turnover rate for the last two years has improved, but it's not where it needs to be. And there's going to be a lot of attention placed on that.

And one of the key things, Rob, that we're working on is -- one of the challenges is when you go up and down in your production forecast every month, and that is really being driven more by customer demands, is that it adds uncertainty to our workforce, because you need them; you don't need them the following month.

So what our operations team has really started to focus on is how do we balance our production across all four entities that we have? It gives us more flexibility if you have a more stable workforce at every one of the plants.

And as you know, one of the keys that we had is when we opened a new plant, it started in 2011 with Saltillo, and that plant was really dedicated to some specific products for a customer. We've now changed that, where we're adding new customers into that plant. It helps us rebalance the other two wiring plants in Mexico.

And as a result of that, I think it starts to diminish some of that volatility in that demand production forecast, which is another key issue for our employees. Because they want more stability and guarantee that once the hire in, that they've got a long-term trend with the Company as opposed to I'm there for 6 months and I get laid off, or 2 months. So that's a very important piece of what we're doing.

So is the goal to have all of your wiring contracts approved to be made at all the different wiring locations, and that way you can shift it around as needed?

Yes, at least -- I would say at least 2 out of the 3 Mexican operations, we would want to have at least that capability, particularly, as George says, to balance up demand for retention of employment. But also, when there's a spike going up, that we can respond to that spike without having to incur excessive overtime, premium freight, and the other things that normally occur on that.

So there are a variety of initiatives beyond just the approval of plants. It's also standardization of certain processes, from board building, to dies, to other things, so you can move product around pretty quickly, and all the supporting requirements with it. And those are all underway now.

Okay, and then one last question. What do you think about the Ag market going into next year? Do you have any early commentary from Deere? And I know you usually start to build second half of the year, and I'm wondering if you have any thoughts on what that's going to look like.

We are starting to build. We will start that build in the next month or so, start to build for the Deere market. I would just refer you to Deere's comments. We're not seeing it.

We're seeing a stable demand forecast from Deere going forward, but I would look to them as they see their markets. But we see that stable demand, and we're building for it.

All right, thank you very much, and good luck.

Thanks, Rob.

(Operator Instructions). Jimmy Baker, B. Riley & Co.

Most of my questions have been answered. I just had a couple follow-ups or points of clarification. So first, on the underlying assumptions in the North American commercial vehicle market, I think you mentioned earlier that you are seeing Q3 in line with first half, but then separately I think you also mentioned that your guidance assumes a second-half uptick.

So can you just clarify that? And maybe quantify the order of magnitude of an uptick that you seem to be baking in for Q4?

Well, Jimmy, I think, to look at the different comments that John and I made, is we are still looking at the year to come in between somewhere between 250 to 260. That clearly would indicate that we have an uptick forecast for the third and fourth quarter. We still believe that. We are seeing the market share -- John mentioned the market share shift of customers.

I think the comment that we made that may have -- is that we haven't seen the uptick so far in the month of July. July was fairly consistent with the second quarter and the first quarter, which was more -- at the level of the third and fourth quarter of last year. So we've heard different versions. Some people believe now that it will be a little flatter in the third quarter, and the uptick will come in the fourth quarter.

So we still have in our guidance that we think we will run in the year the 250 to 260, which would allude to an increase in the second half. I think the comment that we specifically made -- we have not seen that so far in the month of July.

Okay, that's helpful. And then just a follow-up on the gross margin guidance. So if I look at the full year of 25.5% to 27%, you have been below that both quarters thus far -- I think maybe 65 bps below in the front half relative to the low end of the range of that guidance.

So is the underlying assumption that should drive us back into that range for the full year simply stronger second-half volume and fixed cost leverage? Or can you walk me to why we should be assuming such an uptick in gross margins? Is it mix from PST? Or how are we getting there?

I guess, Jimmy, the way to answer, we will not get up in the top end of the range, or even the mid-level. If we get there, it will be on the bottom end of that range. Because 25% to 27% is really more a longer-term target. I believe that is achievable out in 2014. We will see better sales volume in the second half that will leverage off of that that will start to drive margins closer to the bottom end of that range in the second half.

And then as we finish -- as we continue these Wiring improvements, that will add significantly to that.

Okay, excellent. That's all I had. Thanks a lot for the time.

You're welcome.

(Operator Instructions). Tony Venturino, Federated Investors.

Actually, I was going to ask that gross margin question, so maybe additionally to that, you have in the deck that your assumption is a 2.05 BRL, but it is 2.29 or thereabouts today. So that's going to further impact you and be a headwind to get to that low. And I was wondering if you could maybe quantify that and how that would impact in the second half.

Well, you know our --

I think I hear you say something before, but just get a more clarity on that.

Clearly, I think, from a cost perspective it appears it will increase our cost potentially up to about $150,000 a month. And that will be a question of how we will recover that cost. If the rate continues as it is, at the 2.27 -- in fact, there is a lot of speculation. John and I were down in Brazil recently, and a lot of the Central Bank commentary was that they thought they could manage it to 2.05 to 2.13 for the rest of the year. Well, that clearly didn't work; it jumped within 3 or 4 weeks to 2.27, and it's been bouncing between 2.27 and 2.30.

That clearly will have some impact on our translated sales and dollar gross margin operating income. But I think the positive there is we have very little dollar exposure. So we won't have currency impact, but we will have lower translated operating performance. And then potentially the imported dollar cost we have will cause that $150,000 a month. And it's our question -- can we recover that in the market? So that will have some impact on Brazil in the second half.

Okay. And then the only other question I had that didn't get asked was on your debt, your bond issue, doing the rough numbers, it still seems like it is probably not economical for you to take that out, but how important is that to you? And where is that in your priority to refinance that?

It is a high priority. Ken and I, we work with it almost every month. We look at current trends of rates, and I think when the Fed came out and announced that QE3 was coming off, the first concerns of all of us is that means rates will go up. I think as they have come back out and reiterated that policy, that they are not pulling back QE3, I think interest rates have improved fairly well and been more stabilized. We think rates will be fairly consistent between now and when we have the ability to refinance November 2014.

But if we find a window of opportunity, because every month, as you know, with the note call for -- there is a prepayment. We have to pay all the interest up through the call date, which is November 2014. As those dates move forward, then it gives us the ability that the cost is cheaper versus the interest rate we could borrow at.

So we will revisit that subject every 30 days. We continually look at it, and if there's an opportunity earlier than November 2014, I think we will do that, because I think we believe that interest rates will go -- our full maturity of our indenture goes to 2017. There's going to be a window there that rates will start to move. We think that could be 2015 and 2016.

So it is our advantage to go ahead and refinance that debt and push it out to longer-term maturities. The market is open for about 7 to 10 years. Also, most of the deals are getting done unsecured. So we have an interest in getting an unsecured deal done. We want to push the maturities out and position us so that we have longer-term money available at lower rates.

Would you entertain the idea of increasing the balance and taking out some of your bank debt, or do you like having that flexibility in the pre-payable debt?

Well, I think that's a trade-off decision we have, because availability is always a question. We have the ability -- we can retire 10% of our current debt as it stands today with a call of 103. That would say -- financially, that could make some sense to do it, but it also reduces the liquidity and availability that you have.

So there's a number of decisions that we will make with that, because we talked a little bit about acquisitions before. So that will come into play in terms of do you want to take out 10% of your bonds, or do you want to come under the existing structure? I guess the existing structure for us doesn't make a lot of sense, because it is a secured deal, and we prefer to have an unsecured deal. We're over-collateralized today, and we'd like to lock in the cheaper rates at a longer term.

Yes, the question I was asking is because some of your high-yield peers have done similar activity, but you are a little farther out than they were. So it's probably getting close, though, for you guys in the next couple of quarters.

We've been watching all the deals getting done. And so it is a high item on our list to get done between now and November 2014.

Okay, great. Thanks for the color. Appreciate it.

Ladies and gentlemen, this will conclude the question-and-answer portion on today's conference. I would now like to turn the call over to John Corey for closing remarks.

Well, thank you for joining us on the call. We're pleased with our second-quarter results. We have been -- I think, as you have been on past calls with us, we've always been, I would say, cautiously optimistic about what's going on in the markets and the business. And while we haven't changed that trend now, there will be a time not too far in the distant future where we become more than cautiously optimistic. We will become optimistic. Because I think we can see the trends of the commercial vehicle market. That market has to recover. Whether it's late this year or next year, it will come back. And then we know the North American automotive market is performing well. We are performing well in that market.

And then if we look at Brazil, that would be the only other thing on the horizon that we would look at and say, as we see that get stabilized, we will have a better look at that. So while we still remain cautiously optimistic, I would think that as we continue to make progress, we will be changing that to optimistic as we see the markets recover.

So again, thank you for joining us on today's call.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, and you may now disconnect. Have a wonderful day.