Stoneridge Inc (SRI) 2013 Q3 法說會逐字稿

Good morning to you, ladies and gentlemen, and welcome to the third-quarter 2013 Stoneridge earnings conference call. (Operator Instructions). As a reminder, this call is being recorded today, Thursday, October 31, 2013. I would now like to turn the call over to Kenneth Kure, Corporate Treasurer and Director of Finance.

Good morning, everyone, and thank you for joining us on today's call. By now, you should have received our third-quarter earnings release. The release and accompanying presentation has been or will shortly be filed with the SEC and has been posted at our website at the 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 the statements are subjects to risks and uncertainties and actual results may differ materially. Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-K filed with the Securities and Exchange Commission under the heading forward-looking statements.

During today's call we will also be referring to certain non-GAAP financial measures. Please see the investor relations section of our website for 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, our growth strategies and business development, and his thoughts on future initiatives. George will discuss the financial and operational aspects to the third quarter in our outlook.

We prepared and published an earnings presentation to provide more detailed schedules to help you understand your understanding of our third-quarter results in trends for our continuing 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 are finished with formal remarks, we will then open up the call to questions. With that, like to turn the call over the John.

Thanks, Ken. Good morning, everyone. And thank you for joining us on the call today. We've seen continued improvement across most of our business segments over the last three quarters, and this quarter kept our momentum progressing. As we continue to improve operations, reduce costs, generate better cash flows, and reduce debt levels, we have been able to leverage this quarter-on-quarter uptick in activity with improved financial performance. Our third-quarter results remain consistent with the lower end of our expectations and the annual guidance that we previously discussed. We will go into more detail on this later in the call.

Consolidated revenue of $234 million, as seen on slide 4, increased by 6.5% from the third quarter of 2012 to the third quarter of 2013. This improvement was a result of new business sales for controlled devices in North America and commercial vehicle exports and product launches in Europe, despite the overall European industry volume weakness. PST sales improved 12.5% in local currency though the weaker real versus the dollar offset the increase on a US dollar basis. The real depreciated from 2.03 to 2.28, or 12.5% versus the dollar during the third quarter of 2013. Our market mix of automotive and ag in North America and aftermarket in Brazil helped us improve our sales performance despite flat commercial vehicle markets in Europe, continued delayed recovery in the commercial vehicle market, and customer share shifts in North America impacting volume expectations. Control Devices and Electronics continue to exceed our corporate growth targets as they did in the second quarter, as did PST. Wirings performance was impacted by continued weak market conditions and customer demand adjustments.

Our year-to-date operating margin nearly doubled to 4.6% compared to last year on slightly lower sales. Stoneridge, excluding PST, posted operating margins of 4.3% compared to 2.5% in the third quarter of 2012. This margin improvement also dropped to the bottom line as earnings per share increased from $0.15 per share in Q1 to $0.21 per share in Q2 and $0.19 per share in the third quarter of 2013, which was $0.17 per share higher than the third quarter of 2012. Offsetting some of the progress we have made is the underperformance of the wiring business as we have had to adjust production schedules for reduced North America market expectations and responses to customer share changes resulting in lower volume, which has resulted in operating inefficiencies and a lower recovery of overhead costs in our Mexican facilities.

In terms of the business growth, new and replacement business awards for Stoneridge excluding PST business in the third quarter were $25.4 million, representing $15.1 million in new business awards and $10.3 million in replacement awards. The cumulative nine-month total for Stoneridge excluding PST totals $115 million, of which $98.7 million are new business awards and $16.6 million are replacement awards. Some of the highlights of those awards in the third quarter show our technology progress, geographic breadth, and our ability to cross-sell our products on a global basis.

For example, we received a new business award for tachographs for a commercial vehicle application in Turkey from a large North American OEM. This is an example of our ability to cross-sell among our business units. In this case, our electronics business unit secured the win from a Control Device business customer. We also received a new award in emissions systems component, further extension of our emissions growth strategy. We will update our current five-year growth of $174 million in net new business, excluding PST in early 2014, which will address the years 2014 through 2018. Sales from new business awards so far this year indicate that we are maintaining the cadence that we have indicated when we first published our five-year look back in February.

Another key objective is the need to build more sustainable cost position in the culture of continuous improvement. Control Devices, Electronics, and PST have improved significantly and are performing well. However the Wiring business unit is underperforming due to declining production schedules in response to customer requirements. Originally, we thought we would see a slight improvement in the third quarter continuing into the fourth quarter. However that has not been the case and we have had to adjust our production schedules lower for continuing declining customer advance. A breakdown of our segment results level can be seen on slide 6 of earnings presentation while slides 7 and 8 also provide significant details around our year-over-year and sequential business progress by segment. Control Device revenue is mostly comprised of North American automotive and light truck business. However, they have future growth for admissions applications for the commercial market in Europe and Asia and actuation in North America and Asia. Control Device has 2013 year-over-year third quarter has the sales increase of 12.7% while compared to the second quarter of 2013 Control Devices sales decreased by 1.8% which is typical as a result of the summer shutdown period. Sales in our passenger and light truck category were 19.8% year-over-year increase due primarily to volume increases and new product sales. For Control Devices, global opportunities there being mandated with higher admission standards and fuel economy guidelines coupled with technological capabilities like soot sensing and shift by wire, new disciplines in the referenced in the second quarter call will benefit future performance.

The electronics segment contains most of our medium and heavy truck business and also has a strong global reach. The electronics group is also performing well in spite of Europe and North America's commercial markets and in line with our long-term organic growth goals. Year over year for the third quarter, the Electronics group reported a top-line sales increase of 18.6% which was achieved in a flat production environment due to product launches, which began in the second quarter and significant export increases to Brazil, with our largest customer in Europe. Compared to the second quarter, Electronics sales decreased 7.8% due to the normal shutdown -- summer holiday shutdowns in July and August. The electronics group has a great partnership approach with their global clients, which resulted in a deep knowledge of our customers. This team has developed some very strong engineering and software capabilities as well, which has expanded our content and developed larger platforms and content which should help us maintain solid growth for yields years to come.

This group oversees electronic applications in North America, Asia, and Europe, and we are seeing the benefits of leveraging our capabilities in Europe to support program awards into the North American and Asian markets.

The Wiring business is about 60% medium and heavy truck and 40% ag and predominantly serves the North American market. Wiring has for several quarters been impacted by lower overall market demand and share losses by one of our customers, which continued into the third quarter and is now forecasted to show lower volumes in the fourth quarter. In this quarter, the group faced continuing ongoing revenue challenges. It was down roughly 1.3% year over year with commercial vehicle sales volume been down 9.2% in the third quarter of 2013 compared to the third quarter of 2012. The year-on-year reduction was a result of lower sales to a large North American commercial vehicle customer. Agricultural equipment recovered some of their lower volume experienced in the first half of 2013 as sales increase by 5% in the third quarter compared to the third quarter of the prior year. During the third quarter, we had expected and planned for some moderate recovery in our sales to the North American commercial vehicle market based on customer forecast. These forecasts were reduced in the middle of the quarter. Because wiring is a labor-intensive business, ramping it up or down creates operating inefficiencies and labor imbalances due to production schedule variability. As a result the wiring business had a negative impact from labor mix and overhead cost in the third quarter of 2013, which negatively impacted our third-quarter by $0.13 per share as compared to the third quarter of 2012 as shown on slide 9. In addition, Wiring sales were $1 million lower in the third quarter of 2013 compared with the third quarter of 2012.

Because of wirings' significant exposure to the North American CV market, we are to some degree impacted due to the lower volume like commercial vehicle suppliers. As previously discussed, we have begun to move production among the wiring plants to better stabilize the demand patterns for each plant to minimize disruption of changes in customer forecast. With the actions taken and underway from completing the plant move from our BCS facility in Michigan to Portland, Indiana, in August and to rebalancing the capacity between our four wiring plants in North America we expect to see improvement in 2014 and an ability to leverage volume increases as they materialize.

PST sales in the third quarter of 2013 were 12.5% higher than the third quarter of 2012 on a local currency basis. On a US dollar basis, PST sales were flat compared to the third quarter of 2012 because of the devaluation of the Brazilian real compared to last year. PST's local currency sales also posted a third sequential sales increase. PST's revenue increases, product mix, costs initiatives, and debt reduction taken last year continue to be a key factors in their profitability improvement. The estimated EPS and impact is seen on slide 9 of our deck. PST continues to see very solid gross margins, which excluding $300,000 for purchase accounting were largely maintained at 40% of the third-quarter of 2013 compared to 41.2% in third quarter of 2012.

Margins were lower as the service business was impacted by general economic concerns by Brazilian, a partial reduction in service programs from a large insurance company, and increased audio volumes sold through mass merchandisers and OEM dealers, which carry a lower margin than the aftermarket products. Our Minda joint venture in India continues to deal with economic slowdown and significant devaluation of the currency. Minda sales decreased 16.5% versus third quarter of last year.

This sales decrease was driven primarily by a 12.7% reduction in the valuation of the Indian rupee compared to the US dollar and general weakening of the Indian economy. Excluding the effects of foreign currency exchange, Minda sales decreased by about 5.8% of the prior year and are being adversely affected by weaker economic environment in the region. Our share of Minda's net income from operations in the third quarter was a profit of $97,000 compared to a profit of $207,000 in the third quarter of 2012. In summary, our financial performance continue to improve in the third quarter compared to the third quarter of last year and consistent with the second quarter even though our sales declined in the third quarter compared to the second quarter.

Our objectives of top-line organic growth, and more sustainable cost position, and improving technology in our development of new products, and lastly our improvement balance sheet have kept the business largely on track. The fourth quarter remains challenging for the Wiring business for reasons previously discussed and PST due to economic and customer uncertainty. We expect to see continued benefits from the North American automotive in the Control Device business and improvements in the European OEM production environment benefiting electronics. Now, George will discuss further details on the quarter as well as our outlook.

Thank you, John. As a markets have been generally improving over the last five quarters, we have been able to benefit from the actions that we implemented during 2012 to improve our operations, reduce our costs, generate positive cash flows, and reduce our debt levels. Our third quarter 2013 performance, though significantly better than the third quarter of 2012, was consistent with our expectations of improved profitability for the quarter. Our sales for the third quarter increased by 6.5% compared to last year, which were mostly driven by Control Devices and Electronics. Our sales were down by 3.8% compared to the second quarter due to commercial volume in North America driven largely by a key commercial account and share market loss and PST due to currency devaluation of the be out real.

Our third-quarter improvement continues the trend showing quarter-on-quarter sales, gross margin, and operating margin improvement over the past four quarters. Revenues into third-quarter were $233.5 million, an increase of $14.2 million, or 6.5%, over the third quarter of last year, driven primarily by higher market activity in North America and new business sales in North America and Europe and stronger export sales from Europe to Brazil with our largest European customer.

Revenue in third-quarter of this year decreased by $9.3 million, or 3.8%, over the second quarter due to mostly seasonal summer shutdowns in North America and Europe and the decline in production increases forecast from a key customer account in North America. The trend of the market has been improving over the last five quarters, and from the improvements in our margins, we been able to leverage these revenue gains over the last three quarters. From our experience, our sales decline in the third quarter and the current production forecast in North America market would indicate continued weakness in the fourth quarter and PST's uncertainty in the consumer market. We also believe that with further operational improvements, especially in the Wiring business, as John discussed, and continued improvement our Control Device and Electronics businesses we can leverage our earnings further. We believe we are positioned well to improve gross and operating margins as a markets continue to recover.

Our earnings per share in the third quarter of 2013 was $0.19, compared to our third quarter of last year earnings per share of $0.02 and down slightly from our $0.21 per share recorded in the second quarter of this year. We posted operating margins on our Stoneridge business excluding PST of 4.3% compared to 2.5% with sales being higher by $15.1 million. For consolidated Stoneridge, including PST, our operating margin is continuing to aggressively improve from 3.9% in the fourth quarter of last year to 4.4% in the first quarter of this year to 4.9% in the second quarter of this year. Our operating margin dropped slightly in the third quarter of 2013 to 4.6% compared to previous quarters in 2013, due in part to lower sales volume and mix.

We are adjusting our production schedules in our Mexico plants for lower volume. Our EPS improved from $0.10 per share in the fourth quarter of last year to $0.15 per share in the first quarter of this year to $0.21 and the second quarter and now reporting $0.19 in the third quarter of this year, a slightly lower sales volume from the second quarter.

Operating margins excluding PST decreased slightly to 4.3% in third quarter of this year from 4.9% in the second quarter due mostly less sales of higher profit Control Device and Electronics products and higher direct material expenses in Wiring. PST's operating margins exclude purchase accounting was a 8.6% in the third quarter, which was about equal to the second quarter of 8.8%, which is mostly due to higher sales of audio which has slightly lower margins. Contributing to our performance were improved material costs as a percentage of sales benefiting the year-on-year earnings performance increase. Slide 12 of our deck shows the direct material impacts of these actions on Stoneridge excluding PST gross margins. The PST impact is due mainly to lower service sales and higher audio sales in the quarter.

In the third quarter of 2013, operating cash flow was an inflow of $19.2 million. Third-quarter 2013 cash flow was negatively impacted by increased inventory to support increasing sales levels mostly at PST. We plan to reduce inventory levels for both the wiring business and PST in the fourth quarter. Slide 4 of our deck has a complete P&L breakdown on third quarter this year versus third quarter of last year. Slide 7 identifies Stoneridge excluding PST's sales, which were 8.2% above the prior year's third-quarter primarily due to past car and light truck business.

Slide nine of our deck identifies the major bridge item differences between the third quarter of this year and the third quarter of last year earnings per share. The third quarter of 2013 compared to the third quarter of last year difference is primarily due to higher volume, lower SG&A costs, and cost reduction benefits, partially offset by Wiring inefficiencies.

We continue to have positive cash flows, one of our primary objectives for 2013. Cash generation has allowed us to reduce our enterprise risk and make great progress on our debt reduction goals as well. As indicated on slide 14, we improved total debt to EBITDA ratio from 3.5 times at December 31, 2011, to 2.9 times at December 31 of last year to 2.6 times at September 30 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 this year.

During 2012, we reduced debt by $65.7 million. Our ABL remains undrawn since November 2012. We continue to forecast 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, and the Brazilian real compared to the US dollar, we reported a $270,000 currency gain in the third quarter of this year, compared to an expense of $961,000 in third quarter of last year. The major contributor of last year's currency expense was the significant US dollar debt that existed at PST, and the US dollar debt has been reduced to $3.1 million as of September 30 of this year.

Today, John and I shared with you the financial and operating performance for Stoneridge in each one of our four business segments over the last five quarter. Overall, we are comfortable we have been able to create diversity with our core business segments that permit us to minimize the volatility in our markets, geographic regions, the market swings between our business segments while providing us the opportunity to continue to reach our financial objectives of top-line sales 6% to 8%; operating income in the range of a percent to 9%; and generate annual cash flow in the range of $30 million to $35 million.

We are encouraged that most of our business segments and markets are running well. The Control Device Electronics business units are performing well. Each one of these business units have been able to perform well about the market growth rates. Control Devices was up 12.7% in the third quarter of this year over the same period last year, which was on top of their sales increase in the second quarter of this year of 8.5% over the second quarter of last year. The growth is reflecting the business unit's capability to focus their technology and product offerings to meet market requirements, geographic reach, and ability to meet customer requirements or cross-sell the technology technologies to multiple customers.

Electronics has been able to grow significantly in the face of the commercial market being down in both European and North American markets. Electronics business unit sales were up 18.6% in the third quarter of this year compared to the third quarter of last year. This was driven by significant sales by our largest customer in Europe who is a major exporter to Brazil. And product launches have started in the second quarter this year. The Electronics team has been able to enhance their software engineering capabilities to build more integrated solutions for their global customers, such as the low-end instrumentation for the Asian market. They are working to build their successful product and technology platforms using their European capabilities, which will permit them to transfer their capabilities to the North American and Asian markets.

PST still has risk due to the uncertainty of the overall Brazilian economy and the significant evaluation of the Brazilian real over the last two years. In the first quarter of 2012, the real was at about $1.75 to the US dollar. Today it's about 2.2 to the US dollar, which represents a devaluation of nearly 20% during the two-year period. The market in Brazil has become more complex during the last five years. During this period, PST's marked channels have changed primarily from predominantly an aftermarket business. A set 85% PST's sales were through that channel. Today PST sales are 42.5% aftermarket, 17.8% with the OEM dealers, 16% mass retailers, 10% [would meet our] product tracking devices. We have a significant amount branch in Argentina representing 10% of our sales. This has led to more complexity, but it also offers PST many more opportunities to expand product offerings, new technologies, and the ability to enter adjacent markets.

A few examples, PST is now entering the cargo tracking market and home security ago. We have discovered that cargo tracking is a very technical sale driven by more driver management application, requires more benefits and features but once these capabilities are developed they represent long-term sales opportunities. Overall, PST's performance in the local market has improved in the last five quarters. PST's mix of products has improved with alarm systems and tracking devices returning to their historical share of PST's sales.

With the disruption in the market and the troubles of some of the Chinese competitors with imported product, we are experiencing a return of some of the volume of the audio business while margins are returning for total PST to more historical levels in the 40% to 43% range. We are forecasting that PST's growth will continue in the tracking device area, which will keep the gross and operating margins in the range of historical levels.

The Wiring business is one business segment that we continue to provide resources and enhance their processes and people to ensure our cost structure's in balance with the variability we are experiencing with our customer schedules. This is our one business that is labor-intensive and must have a robust supply chain process to make sure we can keep these in balance as our customer demands can change our production schedule significantly, which leads to cost inefficiency and excess inventories. This has been a challenge again this year as we continue continually experience significant variability from our customers demand schedules, and a few cases the customers schedules have been down this year to date and their fourth-quarter forecast continue to show declines in share of market.

We will continue to work to make this business successful as it has been over many years. And in summary, 2013 has not been as robust as was forecast early in the year; however, we been able to manage and perform well within the markets we participate. Our diversification has provided us opportunity to minimize the volatility that has been different in each one of our business segments. The passenger car market in North America, our electronics business in Europe, and PST and local currency have performed well in spite of a lower market in Europe. The commercial market in Europe has been down, but we have performed well and it appears we're starting to see some strengthening in the forecast late in the year. PST is trying to show more stability in the market but still face uphill challenges, as the overall GDP is growing around 2% and the consumer sentiment is somewhat pessimistic.

We believe that the wiring business can improve, but it will take some stability in our customer schedules especially from our key account and continue to lose share market share in the third quarter and continues to show lower share of market for the fourth quarter. We do believe the commercial market fundamentals are still favorable for volume increases in 2014. Regardless of the market changes, we have continued to manage those activities that we can control. We have continued to improve our operations, and our operations team has put in place standard metrics across all 19 facilities worldwide.

The specific objectives are cost management, quality, and delivery of service targets. Each one of our business segments have worked to improve our raw material costs to sales over the last eight quarters, and we have recognized the improvement. We've managed are controllable cost like SG&A and D&D to hold the line of cost in relation to our top-line sales. We continue to work on our direct labor costs and overhead costs in relation to sales as we try to react to the volatility we are experiencing in our customer demand schedules especially in our Wiring business.

We believe we have positioned our four business as well to finish this year and be at the low end of our annual guidance, but just as important to deliver to continue to deliver improving operating and financial performance for 2014. We will provide our guidance in 2014 and net new business estimates sometime in February of next year. We will now open the call for questions.

Thank you. Ladies and gentlemen your Q&A session will now begin. (Operator Instructions) Jimmy Baker, Riley & Company

Hi. Good morning, and thanks for taking my questions. I was just hoping that we can start with a couple of questions on the cost side. Could you maybe to speak to the sequential gross margin trend at the core business. Is the compression there all Wiring related? And then just talk about the sequential compression in gross margin at PST as well.

Yes, in the core business it is the Wiring business. The margins are where we want them to be for both Electronics and Control Device, and they have improved. And so, they are maintaining what our targets are for those businesses. So, it really is an issue with Wiring. On the PST business, the margins of really is a mixed shift if we look at the higher-end products, higher-margin products like the alarm systems and like tracking systems versus, I'll call, mid-margin products of audio. So as we see more audio sales, you are going to see a pressure on that. And in this quarter, what we have seen because of the Brazilian economic uncertainty, we've seen some impacts to our service business which is very high margin. And you might recall that business is where we sell an alarm system and the person wants to have the ability to track their car -- sorry a tracking system. They want the ability to track their car. We provide that service and collect the fee for that. As we've lost some business in that market, primarily due to insurance company reducing their exposure to that market, those margins have moved down a little bit.

Okay. That's helpful. And you have made a lot of progress in your consolidated business. Really a ton of progress but Wiring obviously does remain a challenge, and I understand you expect that to improve in 2014. Can you just speak to what gives you conviction that 2014 will be different there. It seems like the segment has been a focus of attempted improvement for couple of years now, but just by its nature or customer concentration, it seems challenging to battle the volatile nature of that business.

The issue for their really for us in the wiring business, as we've said, is we've seen share shifts in the major North American manufacturers, and those share shifts have impacted us to a large degree. We think that those share shifts are over with now and that there will sort of be no further downward decline, and we expect that will see that with modest market improvement next year but perhaps maybe some reversal of that share loss of some customers that that will improve for us. And then also, our latest look from the ag markets says that that should be within our range of forecast, which is again 40% of our business and you know third quarter was up 5% so we're starting to hopefully see further improvement there.

Okay. Thanks, John. Last one for me, I'll pass it off. I'm just hoping you can help us understand how you're planning for Q4 on a sequential basis. I realize that is PST's seasonally strongest quarter. Can you just speak to the magnitude of the expected seasonal uptick there. And then, what are you planning for in terms of volume at your commercial vehicle and ag customers sequentially in Q4 versus Q3?

Well, on PST, while that is the strongest, fourth quarter, as you indicated, we really look at and have to monitor how the distributors are buying inventory. And at this stage, the distributors appear to be fairly well-stocked. What we do know is where having problems with one large distributor in their order pattern because they've put in a new system and that system is not performing for them. And they've lost control of their inventories and order patterns. That can move the volume quite significantly as they either drop orders or add orders.

We are cautious about Brazil because of really the economic uncertainty of what's going on in that marketplace. We had what I'll call an acceptable Father's Day buy-in, so we will see as we go forward. We do expect some good audio sales out of that. We expect to see increases in our audio sales. And the question for us will really been how the alarm sales perform, and I don't have a real good answer on that because of really can't predict the demand patterns of that, other than knowing that our distributors have bought their normal requirements. So, we're not seeing any increase in those requirements or any decrease in those requirements right now.

The other part was the commercial vehicle market. In this marketplace, I think the commercial vehicle market in Europe it's going to be some pre-buy there in Europe. There is going to be a modest pre-buy in Europe for commercial vehicles. That will give us some benefit. In the North American market, the commercial vehicle market is really relatively flat. We don't see any real growth into that market in the fourth quarter. It really depends on if customers pick up the share that they've lost. We are concerned about that because as we said in the third quarter we have to provide the capability to ship product to the customer. You can't take that out quickly, so the trends have not been favorable in that marketplace. And so, there's going to be a challenge for us in the fourth quarter there in the wiring business.

Jimmy, our current forecast is showing that the North American commercial market is relatively flat in the fourth quarter compared to the third quarter. I think the forecast we're all starting to see now, though, is there forecasting in uplift in 2014 especially in the first quarter. So, we need to be somewhat cautious about that because that's when you get these imbalances of labor cost and inventory positions. So we're currently going through that and really evaluating a position right now.

Okay. Thanks a lot, George. Thanks for the time, John.

Robert Kosowsky, Sidoti.

Just building on the Wiring business just to make sure I've got a few things clear, given that North American truck will probably be flat into 4Q, do we assume that Wiring will be plenty flattish from a revenue standpoint and we shouldn't see much more degradation on the operating loss side?

Again, I hate to give you that indication because as a look at what happened in the third quarter where we expected to see some increases and then saw the schedules cut in the middle of the third quarter, it really depends on what manufacturers are going to do to their production schedules. They could be adjusted relatively quickly as they were in the third quarter -- catching us to having to adjust. While the market looks flat and if everybody meets their expectations, then we should probably follow those trends. But again I would put a high degree of caution around the change in share and the change in production schedules.

Okay. And as far as -- go ahead.

Rob we do see that wiring will be a little bit under that same issue, that it will be flat or maybe even slightly down in the fourth quarter with the demand schedules we're seeing right now. But the other businesses look like they will continue as they did in the second and third quarter.

Okay. And then also within the Wiring business, how do you feel about the actual operations of the business? I understand volume is like a major issue, but as far as where to be stand on getting approval to make product in each of the different plants. And then, in addition are you keeping extra labor right now? Just because if you do have that 2014 pickup you don't want to be caught like you were back in 2011 when you didn't have the right labor staffing.

Yes, that's a very good question. We've largely complete -- we are in the process of moving product to the various plants. That will continue through the first quarter of 2014. We are getting approval from the customer to do that. We're rebalancing that. So that's going on. That process is moving well. In addition, we're changing -- we've modified some of our manufacturing practices which the been implemented on how we placed demand on the floor and so that -- particularly in one plant -- so that's going to help that. And then as far as labor, yes, that is real challenges. We look at the forward forecast for 2014, as George indicated, we're seeing some upturns in those forecasts. If those forecasts materialize, then we have to be prepared to produce the product. Our challenge right now is to go back our customer base and try to validate with them the reasoning behind their uptick in their forecast for 2014. In addition, one of the things we will do in the fourth quarter, as we've said all along, because the peak season in ag is really the first quarter, we will be building some inventory over the fourth quarter for that market. So that should help minimize that, but, yes, we don't expect to see a similar result as we have this year in the first quarter.

Okay. And then just building on the ag, how to set how does that look into next year? Do think that's going to be kind of a growth market for you for at least the preseason sales?

I wouldn't say it's a growth market. I'd say it's consistent with the forecast. We don't see any decline in the forecast. Some people were concerned about that. I said that we're looking at -- we will have another meeting with our largest customer here in December. And we'll get up real good outlook as to what goes on in their first quarter but right now we're not seeing any softness in their schedules.

Okay. Two other questions. One is on the direct material that it's definitely been trending down over the last year, picked up a little bit from the first half, and I was wondering if you could explain what that was. And then also more broadly with the improvements we've seen year over year, could you maybe tinkle out pricing declines versus just your own material productivity improvements?

Well, I think if you go back a couple of years, you look at the Control Device business segment, we talked about it that we were impacted by things like rare earth magnets where there was significant price increases. And we did a lot of work over the last two years to one, find new sources of material, and two, to redesign the product around that. So, that's really one of the things that's benefiting the material line on that aspect. In addition, we're doing a lot of redesign to use alternative materials. And then if you look at the Electronics business, as electronics components age they have a natural degradation of their cost. So, the longer a component has been in the market, the lower the cost becomes until its end of life and when you have last time buy. So that also benefits us. And then I think from -- on the Wiring business, I think we've seen stability on the copper basis, so that's kind of where we see everything right now. Yes, and the uptick in the third quarter was really mixed more than anything, Rob, in the Wiring business.

Okay. And is there any way to kind of frame how much was just -- do you have the statistics for just raw material productivity versus kind of general price declines for that? Or maybe just bucket which is a bigger impact to the year over year declines?

We track and we have 11 commodities. We work worldwide and we typically negotiate our contracts in the fourth quarter, which were doing right now for the following year. Those plans are plenty well in place and they're very consistent, so anything that you're seeing in movement in the raw material costs of sales is being driven more by mix as opposed to specific actions or increases or decreases in raw material costs.

Okay. That's helpful. And then finally, SG&A looked like it came in pretty, was much lower than at least what I was modeling. And I was wondering if this $42 million, $43 million is sustainable. Is there anything that made this an anomaly or how should we look at that line item going forward?

I think the biggest reflection you're seeing is, as you can imagine, was some of where our earnings performance, the biggest modification went in there would be sort of our annual incentive compensation. That will vary based on how we're performing. So right now that change -- what I would continue to model is exactly what you were looking at in the first half on an ongoing basis for 2014.

John Corey And I would just say just add on the George. We have -- when we set our incentive compensation, they were at high targets, and so there is probably a stretch portion of that, so if we don't achieve that then it rolls back in.

Okay. So this quarter was maybe a little bit abnormally low but the first half of the year run rates are kind of (multiple speakers)

I think we been managing our SG&A fairly consistent.

Okay. Cool. Thank you very much.

Brett Hoselton, KeyBanc.

Hello everyone, this is actually Irina Hodakovsky on for Brett. How are you guys doing?

Hi, Irina.

Irina, how are you?

I'm doing well. Thank you. Just a couple of questions for you. You mentioned that a North American customer reduced their production forecast. Can you speak to the level of the changes they made to their schedule?

I do not have the specifics of the reduction. George, do you?

Irina, I guess to give you sort of a view, because is happening both in the medium truck and heavy-duty. So, if you look at our forecast for the year, heavy truck Class 8 is down roughly about 10.5%. As you look at the share shift, our one key customer is down almost 19%. So there's an impact there and there's a forecast that would pick up the third and fourth quarter that is not materialized. So, it is not so much that the volume is down. It's the anticipated forecast of increased demand that is coming in the third and fourth quarter, but as the share market didn't materialize, both in Class 8 and then medium truck is the same. As you know the medium truck is up this year 7.5%, but our key customer is down almost 6%. So that has created a swing where were building and planning based on forecasts in the third and fourth quarter. The volume is fairly consistent, but it's but we had to do to prepare for production and inventory positions to support that. So, as those schedules got adjusted in the third quarter, we're seeing the same trend in the fourth quarter. But as I think as John and I shared a little bit earlier, we're seeing fairly significant increases in early 2014. So that's what we're trying to measure and sensitize right now is how does that materialize in this quarter to quarter, because when you start running that through the four wiring plants it becomes rather complex in terms of how you man them, both direct and indirect labor and also your inventory positions to support that demand.

The following question then is with the Wiring operation, which seems like some of the issues may be forthcoming in the fourth quarter and it could be the volume of these could be weaker in the fourth quarter than it was in the third or at the very least the same. And then with PST and uncertainty there and the margins that that business puts out, your full-year guidance was maintained. Can you speak to whether the positives that keep your confidence going that those margin objectives will be met?

Yes, I think when you look at the North American automotive market -- that's where Control Device participates, we had a very strong quarter in the third quarter there and we expect to see that trend continue. The only thing that would impact that would be shut down schedules for the holidays, but I think the right now we're forecasting to see continued strength in the North American automotive market and the Control Device business unit is performing very well. In addition our European Electronics business for the OEM market is performing well as we said because of product launches, and we are seeing some pre-buy I for the admission standard. Now the degree of what that is still -- we're still watching that, but we are going to have some experience of pre-buy in the fourth quarter for that. So that gives us some confidence there. The one challenge is what happens in both American electronics because we've got a large customer there that's, again, not performing as we want. So that gives us some confidence. And then offset on the Wiring business, we continue to look at managing the cost structure of the Wiring business, and we are on a plan to continue to take out costs out of that Wiring business. I guess real challenge for us there is how much cost can get out versus looking at the forward demand in the first quarter as George said. And just by way of example, because it's a labor-intensive business it usually takes me -- takes us about I would say two months to get a person up to speed where they're operating at efficiency. So, the challenge becomes then if you're going to have an increase in the first quarter, do you take labor out in the fourth quarter only to reintroduce labor in the first quarter at a less efficient rate. That's that variability that were dealing with. But I think to go back -- looking at right now the forecast for Brazil, looking at the forecast for Control Devices, looking at the forecast for Electronics, those two, Electronics and Control Devices, look very good. Brazil, as we said, it is an aftermarket business, and so it could shift around. It could move aggressively around Christmas holidays, but we have not seen anything from the distribution base that would indicate there's a significant problem there. We will track that and monitor it, but that really happens during this month of October as they load up their products October, November. And then Wiring is really the how fast the customer share shift returns.

All right. Thank you very much guys.

Justin Long, Stephens Inc.

Hi guys, this is actually Brian Colley filling in for Justin today. You guys had another strong quarter. My first question is on Europe. It sounds like Europe is getting a little bit better. I was wondering if you could provide an update on the percent of operating income coming from Europe right now and kind of where you think that percentage trends over the course of the next several years.

Brian, we're going to be disclosing our Q here. I think we will file it tomorrow, and I think in there you will be able to see the different margins in each one of the segments.

Okay.

But it's performing very well like it did in the first and second quarter, even in a down market, as John alluded to the fact that we're starting to see some of the schedules backfill late in the year and even some potential pre-buy. So, Europe we feel pretty comfortable with where they're at and the things that they're doing.

Okay. Great. Thanks. Secondly, if I think about the capital allocation going forward it seems like the priority is in acquisition. Could you just comment on the activity you're seeing in the M&A market and the likelihood that we see something in the next year?

Well we have a process under way where we are doing several different alternatives. We don't really want to get into a bid process because we don't think we win there. The last couple of times we been through those bid processes, we couldn't justify the valuation that maybe an investment firm could. We're reviewing a lot of companies now. We've got a process. I would expect that we would probably be able to conduct a transaction sometime next year that would support our Control Device business as we look at that. All the I can say is there is an active process on but were being disciplined about it, we don't want to pay too much. We want to try to get an accretive business onto the books.

Well that's all for me. Thanks for the time.

Rhem Wood.

Hey, good afternoon guys. Thanks for taking my question. A lot of mine have been answered, but grow quickly can you talk about the Brazilian real. Is come down from its high point, but still kind of above your 2.05 number in your plan. Do you have any thoughts on where that will go? Second part, if you give 2014 guidance, when will that be again?

Last year, Rhem, we did it around the second week of February, and I think it will be in that same range somewhere, probably second week. We typically don't close until the end of February but I think most companies are out but some kind of guidance late January early February, so will probably follow up with the same kind of thing, that we will do something around that second week of February. The real, it's clear that it's been influenced along with the Indian rupee by the US economic policy that's being followed. So both of those have revalued over the last month or so. I think how we view it, and I think there's a long-term consensus -- John and I were just in Brazil a couple weeks ago -- the feeling is that the real will continue to devalue over the next couple of years. In fact they have a going to around 2.35 over the next two years.

I think the most important thing for us is two things. One, is that be import a lot of dollar components. When we talk about a 20% devaluation, ultimately that translates into higher cost in the local markets. So, we have to ultimately raise prices, and when it happens in the short term, it is very hard to recover prices in a 30-, 60-day period. But when it happened in 2012, it took us about five months to really get prices worked through because of the inventory positions the competitors were sitting on. So that will be our primary goal as then when we do have disruption in the currencies can we recovery in a fairly short period of time to recover that.

And then the second thing that we've done is -- and this not only Brazil, but it's worldwide -- if you see our results and why we highlighted it, where we used to have currency disruptions back in the second quarter of 2012, which cost us pretty significantly, I think we have worked hard to balance our currency positions in Europe. In Mexico, we still hedge because that is sort of like a single cost transaction for it. But in Brazil we balance that; we have pay down all the dollar debt other than $3 million. We actually had a slight gain in the third quarter even though the currency moved fairly significantly.

So, the thing that it will influence is how you convert your income statements. So if the currency devalues by 8%, then will have 8% lower sales, lower operating earnings, and everything else. And if it revalues by 8% or above by 8%. So I think that's how we view it now, and I think we've mitigated our risk that we see in the currencies. Mexico, we have to say very close to that because this you know we spent about $60 million a year equivalent in Mexico pesos because we have produced products and sold primarily for the US market. In that light, we always have to keep a constantly keep an eye on the peso and where it's at, because it has a direct impact on our operating costs and how we convert for local currency overheads and direct labor.

Okay, thanks. That was helpful. And then last one -- can you just talk about your lean initiatives or kind of where that stands, how many facilities you have left to do? And maybe quantify what kind of impact is left in running continuous improvement into the facilities.

Yes, it's always an ongoing process. It's a continuous journey that we go to improve it. We have that process underway and all our facilities and so -- our emphasis has been on the Wiring business because that would benefit the most because of its high labor content as we improve and lean out those efficiencies. So we have some target set for them. I think as we looked at an operating, George, what was it 3%?

3.5%, we've set a goal worldwide on what we call the controllable cost. That would exclude depreciation in property taxes, which are somewhat fixed. But everything else we have that metric out there, and it's a little more difficult as you can imagine in the wiring business because it varies so much by the schedules that we have. The other businesses are very well on track for that and every other plant has those metrics in place.

And as part of that, while we don't qualify it as lean, part of our cost management structure, you know, we have moved some product as we talked about. We were moving some -- transferring some product out of our US facilities down to out Mexican facilities in the Control Device segment, and that program is underway and should be completed, most of the completed by the fourth quarter of this year and then probably one line going into the first quarter of next year. So that's another avenue that were going down. It is not traditional lean, but it is reducing that cost structure.

Great. Thanks. Keep up the great work.

Robert Kosowsky.

Just one must question last question. Would you expect fourth-quarter to be a big cash flow from operations quarter?

It will be a good quarter, Rob, because typically our sales go down in November and December. That generally releases a lot in receivables, and we are working on reducing our inventories in range of about $5 million to $8 million. We would expect to see a good operating cash flow in the fourth quarter.

Okay. So $5 million to $8 million potentially sequential of inventory draw down.

Right.

Thank you very much.

You're welcome.

Thank you. Now I'd like to turn the call back over the management for any final comment. Thank you.

Well, thanks for joining us on today's call. I realize for all a little uncertain about the fourth quarter, but I point out these facts as looking at -- going beyond the fourth quarter and looking into 2014. Even if the commercial vehicle market in Europe doesn't improve, we've proven this year in our Electronic segment in the OEM side of the business that we can operate in this reduced environment and operate at good margins, so that's a very positive factor for us as we look at 2014. If the commercial vehicle market improves in Europe, we will get some benefit of that.

As we look at the North American automotive market, the projections for 2014 are continued growth in that market, and of course our Control Device business unit has performed very well this year so far and should continue to do so. And it should bode favorably for 2014 also. As we look at the Wiring business, I would say that we've seen a customer lose significant share. That looks like it's at the bottom and it's turning around. So if nothing else happens on the growth side of that business in terms of the market, we should see some benefit from that. So, I think there are a lot of favorable trends going on for us in our business we look forward, and we're trying to navigate through these quarters. But overall, the direction I think consistently is a very positive one for 2014. So I'd like again to thank you for joining us on today's call.

Thank you very much, ladies and gentlemen. That now concludes your conference call for today. You may now disconnect. Thank you.