Stoneridge Inc (SRI) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2014 Stoneridge earnings conference call. My name is Denise, and I will be the operator for today. At this time all participants are in listen-only mode. Later we will conduct an question-and-answer session. (Operator Instructions)

I will now turn the conference over to Mr. Ken Kure, Corporate Treasurer and Director of Finance. Please proceed.

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 or will shortly be filed with the SEC and has been posted on our website at www.stoneridge.com. Joining me on today's call are John Corey, our President and Chief Executive Officer; and George Strickler, our Chief Financial Officer.

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

During today's call we will also be referring to certain non-GAAP financial measures. Please see the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. Now that the wiring business has been sold, our financial reporting starting in the second quarter for control devices, electronics and PST will be reported as continuing operations, and wiring results will be reported as a single line called discontinued operations. Our forward projections from this point will be for our remaining segments only, as our historical results, including the wiring business, are not relevant to our future performance.

John will begin the call with an update on significant events for the quarter, current market conditions, operating performance in the second quarter, our growth strategies and business development. George will discuss the financial and operational aspects of the second quarter in more detail and the repositioning of the Company from closing the wiring transactions and our thoughts on market value.

We have also prepared and published an earnings presentation to provide a more detailed schedule to help your understanding of our second-quarter results, trends for our continuing improvement, and update you on key initiatives to improve financial performance. A copy of these items can also be found on our website at www.stoneridge.com in the Investor Relations section. After John and George have finished their formal remarks, we will then open up the call for questions.

With that, I will turn to call over to John.

Good morning. The sale of the wiring business begins our repositioning of the Company for a more consistent and sustainable financial and operational performance. Our second quarter has, and our third and fourth quarter may include, unusual impacts from the sale of the wiring business; recognition of the non-cash goodwill impairment in PST; and refinancing to establish a new capital structure to deleverage the Company and to lower our overall debt at a much lower interest rate.

We announced the sale of the wiring business on May 26, 2014, and completed the sale on August 1. As we shared with you in our last investor presentation of May 28, we made the decision to divest the wiring business based on a strategic review of our future competitiveness. We recognized competitors were becoming larger through acquisitions and were becoming more vertically integrated, reducing raw material costs and leveraging labor and overhead.

In our view, to effectively continue to compete would have required significant incremental investment. Wiring is more of a commodity product, so technological or engineering innovation offered limited differentiation possibilities. The combination of Stoneridge wiring business with Motherson's wiring business creates the size, scale, and vertical integration which will be competitive in the markets.

Included in the transaction are six manufacturing facilities located in Portland, Indiana; Chihuahua, Saltillo, and Monclova -- all locations in Mexico; as well as our engineering and administrative center located in Warren, Ohio. The transaction involved about 4,700 employees.

Net cash proceeds for the transaction were $71.4 million.

With the sale completed, we have three business segments which are technology driven with global applications and offer greater opportunities to provide higher value to our shareholders. Proceeds from the sale will be used to deleverage the Company at a significantly lower interest expense -- and George will cover this in more detail in his comments.

Reviewing the business performance in the second quarter, control devices and electronics continued to perform well as the market trends improved as expected. PST's performance was negatively impacted by the Brazilian economy, as GNP growth was less than 2% in the second quarter. Brazil's inflation rate has increased to 6.4%, while interest rates have risen to 11%.

In response to this weaker economic environment, PST has taken significant actions to address this. Stoneridge's consolidated revenues in the second quarter were $162.1 million, which was a decrease of $7.7 million or 4.6% over the second quarter of 2013. Sales increased at control devices by $2 million or 2.7%, and electronics by $4 million or 8.4%.

Revenues in our passenger car and light truck category, which are predominantly control devices sales, were $60.2 million in the second quarter, a 4.7% increase from the second quarter of 2013 of sales of $57.5 million on higher volumes of existing products.

Sales in our commercial vehicle category, which are predominantly electronics sales, were $61.1 million in the second quarter compared to $57.4 million, a 6.4% increase over the second quarter, primarily due to higher volume sales of instrumentation products in Europe. Slide 4 provides the detail.

PST sales declined by $13.8 million or 29.5%, with currency devaluation being $2.5 million of the reported $13.8 million revenue decline compared to the prior-year second quarter. PST experienced lower demand across most of its product lines, reflecting the economy's impact on consumer behavior; and, to some degree, a shift in purchases by the mass merchandiser from audio to television sets related to the World Cup.

The Brazilian management team has taken aggressive actions to reduce direct labor and SG&A. In April they took a charge of $400,000 for restructuring. PST will benefit from this in 2014 by $4.6 million and in 2015 by $7 million.

In July PST reduced an additional 140 people in staff and management's positions to continue to reduce their cost structure. A charge of $900,000 will be taken in the third quarter but will benefit the P&L by $1.4 million in 2014, with an annual benefit of $3.9 million in 2015. Slide 14 contains the details. If we were to add the first- and second-quarter actions, we will see a $10.9 million benefit in 2015.

PST's gross margins, excluding $300,000 for purchase accounting, was 37.1% in the second quarter of 2014 compared to 42.5% in the second quarter of 2013. This decrease was due to lower volume, driven by lower car and motorcycle alarms, which traditionally have higher margins; and audio sales were also lower than the prior year.

Excluding purchase price accounting, PST had an operating loss of $1.2 million or a negative 3.6% of sales compared to a positive 8.8% in the second quarter of 2013. In a difficult economic environment PST management continues to lower their cost structure and improve their product offering.

First, the newly designed audio line. We'll begin reducing costs by $9 million to $10 million, which will be improving margins in 2015. Second, actions to reduce costs in April and July of 2014 will benefit 2015 by $10.9 million.

Third, their track and trace line should benefit from the new technology that they have developed, which has the best anti-jamming capabilities in the industry. Fourth, Michelin's acquisition of Sascar, a competitor in track and trace, establishes value in the track and trace business in Brazil and supports our outlook that the new business opportunities continue to be developed, which can drive double-digit annual growth.

Finally, as the economy recovers, PST's financial performance can return to more historical levels. Consolidated Stoneridge operating income margin decreased to 3.8% in the second quarter of 2014 compared to 6.9% in the second quarter 2013 due to PST's performance and currency impacts.

Stoneridge operating margins excluding PST remained flat compared to the first quarter of 2014, while PST's margins excluding purchase accounting was a negative 3.6% in the second quarter versus the first quarter's operating margin of a negative 3.2%. Slide 5 of our deck has a complete P&L breakout on 2014 versus the second quarter of 2013 for continuing operations, which includes the PST goodwill charge of $29.3 million or $0.85 a share for the second quarter.

Slide 4 identifies the Stoneridge segment sales increases and decreases versus the prior-year second quarter. Slide 8 of our deck identifies the bridge item differences between the second quarter of 2014 and the second quarter of 2013 earnings per share. The quarters' differences are primarily due to our growth in revenues at control devices and electronics, offset by unfavorable mix and lower volume. In addition, we incurred higher design and development expenses at control devices and electronics to support new business launches in 2015.

EPS from continuing operations, excluding the goodwill impairment charge, was $0.06 a share compared to our second-quarter 2013 EPS of $0.21 a share. Our operating margin in our businesses, excluding PST, was 6.8% compared to 7.1% in the second quarter of last year.

Operating income was lower in the second quarter of 2014 compared to last year's level for control devices and electronics. As I said, higher spending for D&D was incurred to support product launches at control devices.

Our net new business wins over the next five years remained intact, as the majority of our future program wins have been generated by control devices and electronics. New and replacement business awards for Stoneridge's control device and electronics business in the second quarter were $32.7 million, representing $29.1 million in new business awards and $3.6 million in replacement awards.

Two of our larger new business wins in the second quarter include an electronics cluster and control module for a large Chinese heavy truck manufacturer, which totaled $8.2 million; and another shift-by-wire award for a large North American passenger vehicle and light truck customer, which totaled $4.5 million. As we have previously stated we expect shift-by-wire category to be a significant contributor to control devices' global growth over the next three years, with potential annual peak level of $150 million for this category of product by 2016. This is significant growth, considering that three years ago we did not have any business in this product line.

Minda Stoneridge, our unconsolidated JV in India, posted second-quarter sales of $11.1 million, an increase of 16% versus the second quarter of last year, in spite of a 9.5% devaluation of the Indian rupee. Excluding the effects of foreign currency exchange, Minda's sales increased by 27.1% compared to the prior year. Our share of Minda's net income from operations in the second quarter was a profit of $147,000 compared to a profit of $73,000 in the second quarter of 2013.

In summary, from a market perspective the North American passenger car and commercial vehicle and the European commercial vehicle sales met our market expectations, and the outlook is positive. PST underperformed due to Brazil's continued economic weakness.

As we review our outlook for the businesses, control devices and electronics should continue to perform well. PST will have a difficult second half, given the economy, but the cost and product actions they are taking should benefit the second half. While the Brazilian market is down, as we saw in the second quarter of 2012 to the second quarter 2013, the turnaround can be significant.

With the sale of the wiring business, we have three businesses which have the capability to deliver double-digit operating income before corporate expenses. The sensors and actuation market growth will benefit control devices, and the growth in electronics will benefit our electronics business. As the Brazilian market recovers and we launch the new products, we will see PST's performance return to former levels.

We will have a new, flexible debt structure and significantly lower interest expense. Overall, the Company has attractive products and a technology portfolio which can deliver improved results.

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

Thank you, John. As Ken mentioned earlier, our overview and discussion of the second-quarter results will not include our wiring segment's performance for the current and prior year. With the sale of the wiring business, we believe we have repositioned the Company for enhanced shareholder value for the future.

Over the last three years we have had negative impacts from volatility in our financial results from our wiring business that has negatively impacted our valuation metrics. The inconsistent financial performance of our wiring business has resulted in Stoneridge trading lower than the peers in our sector.

This has resulted in a lower market capitalization, and it was one of the major reasons for the decision to sell the wiring business -- in addition to John's comments on the investments required to more vertically integrate to lower raw material costs.

With the completion of the wiring transaction on August 1, we took a major step in addressing this issue. As an additional benefit of the wiring business sale, we have improved our risk profile, and our geographic diversification will be more balanced. We now have a balance of our sales between North America at 48%, Latin America at 20.3%, and Europe/Asia at 30.5%, with growth coming in all four regions. This can be seen on chart 7.

Our customer diversification has improved, with a balance between automotive and commercial customers, which can be seen on chart 6. PST has had a negative impact in the last four quarters, but our PST management team has been very aggressive in their cost alignment actions to correspond to the market opportunities by channel. Chart 14 lists the key cost actions that will generate net savings for PST of $5.4 million in 2014, with an annualized benefit in 2015 of over $20 million. The question that may arise: will some of the 2015 cost savings need to be utilized to address competitive pricing pressures in the market?

With the completion of the wiring transaction, we called 10% of our existing bonds -- $17.5 million -- at 103 of par, using some of the proceeds from the transaction. Now, with the close of the wiring transaction, we will begin to aggressively deleverage the Company as our first priority, by paying down debt and lowering our interest expense.

One of our main goals in the refinancing is to provide stability of long-term borrowing capacity while providing the ability to pay down debt, which will offer flexibility at substantially lower interest rates. We are preparing the Company to take advantage of the lower interest rates by ensuring we are ready to refinance the long-term bonds by October 15 of this year.

One other issue that we needed to address in the second quarter was the assessment of goodwill impairment for PST in Brazil. Due to the uncertainties of the Brazilian economy, we reassessed the economic value of PST based on the discounted cash flows. From these factors the goodwill impairment assessment resulted in recording a non-cash goodwill impairment of $29.3 million or $0.85 per share. But even with this valuation reduction, PST as a carrying value in excess of $130 million, which is supported by the recent acquisition of Sascar by Michelin.

Our ability to drive top-line sales and profitability remains our number one objective for continuing operations. With the completion of the sale of the wiring business, the proceeds of the transaction and the cash flow generation capabilities of our continuing operations remains our second area of emphasis.

In the second quarter operating cash flow was an inflow of $9.1 million in comparison to $4 million during the second quarter of last year. This was driven by lower receivables as a result of the lower-than-expected sales at PST.

As indicated on slide 13, we improved our total debt-to-EBITDA ratio from 2.9 at December 31, 2012, to 2.7 times at December 31 of last year. And with our 2014 guidance and sale of the wiring business, we expect our debt-to-EBITDA to be in the range of 1.5 times to 2.5 times by the end of the year and includes the effects of our expected refinancing initiative.

Our North America ABL remains undrawn since November 2012. Due to the inventory buildup of PST, they temporarily borrowed $7 million in short-term debt in the first quarter of this year to fund working capital growth needs in the first quarter, but will pay down the debt before the end of the year as they lower inventories in the last nine months of the year. See slide 13 of our deck.

We have discussed over the last year our continued focus to grow the top line with profitable business. With the completed sale of the wiring business, we will be able to focus our resources on leveraging our technology capabilities by further investing in both our electronics and control device segments that have always had greater profitability and cash flow potential.

During the last earnings call we shared some of the key initiatives on which we continue to make progress. Now that we have closed the wiring transaction, we will continue to pursue bolt-on acquisitions for our control device and electronics businesses.

And all these initiatives will continue to prove improve our financial performance and only enhance shareholder value. Our favorable outlook is based on our confidence that we have repositioned the Company for improved operations of financial performance.

Our continuing operations are improving for control devices and electronics, even though Brazil suffers from lowers GDP growth and consumer uncertainty. With continuous weakness in Brazil, PST's management continues realigning their cost structure to match their channel and product opportunities.

The Company is repositioned as a higher value market participant with the completion of the wiring transaction in August 1, 2014. 10% of our debt will be redeemed by September 2 of this year as the Company begins its deleveraging process using the proceeds from the sale of the wiring business.

We intend to refinance our remaining outstanding $157.5 million in senior notes by October 15 of this year, which will significantly reduce our interest expense. These actions have been taken to produce more consistent and predictive financial performance, which we believe will lead to an increased shareholder value.

Our EBITDA for 2014, excluding the non-cash goodwill charge, is running at the year of nearly $69 million; and combined with improvement in our continuous operations and deleveraging our debt, we are well positioned to improve our shareholder value. We will now open up the call for questions.

(Operator Instructions) Justin Long, Stephens.

My first question is on PST. You did a good job of breaking out the cost initiatives on the slide in the presentation, but as we think about this business longer-term, what's a reasonable operating margin target we should be thinking about?

Well, we've always said that PST -- historically, PST has operated at a double-digit operating margin, and we expect that to reoccur as we go forward. It will be a different mix of products that will drive that.

Our alarm business will be a -- was a double-digit, significantly high double-digit performer. And as the track and trace business grows, that will offset some of the margin that we might see coming down in the alarm business as the market stabilizes.

And then the audio business, with the cost reductions, will drive that up into a higher contribution range. Audio line was usually around the 20% gross margin range -- 20%, 22%. We expect that to bring that up over 30% with these new lines.

So we'll have product lines that will drive on a gross margin basis over 40% plus gross margin, with the exception of the audio line. And we think that will -- return to the business. Plus, one of the other things we are going to do -- PST is going to do -- is they are not going to -- you know, as the business comes back, we are going to hold cost structure -- try to hold the cost structure to support a higher leverage on our existing base.

But, Justin, I think it's reasonable, as we get into 2015, is that we should see operating margins -- operating income margins in the range of about 10% to 11%.

Okay. That's great. That's helpful. And taking a step back and just looking bigger picture, I know you guys have historically discussed some longer-term targets for the business -- organic revenue growth of 6% to 8%, an operating margin target of 8% to 9%.

Now that you have divested wiring, does it change how you think about these targets? Is it the top line target that stays relatively the same, but the margin target is higher now, because you got rid of wiring? How are you thinking about that?

You know, I think, Justin -- I think what you're going to see is we've always targeted 6% to 8% on the top line. I think excluding wiring now, you will see a little faster, rapid growth there.

In fact, with the net new business, which has not really been impacted substantially -- it's out there at about $176 million, but of that, wiring was only $5 million. So I think you are going to see us a little higher than that 6% to 8% target.

In terms of operating income, which is the most important for us in ROIC, I think you're going to see our immediate targets go up a little quicker than what we anticipated. But I think longer-term we still hold that view of 8% to 9% as a good level, because there's going to be a lot of competitive pressures. You are seeing consolidation of supply base and competitive pricing pressures, but even at that level we will generate substantially north of 20% ROIC. And that's our most important target is really the ROIC that comes from the business and cash generation.

You'll see that between the continuing operations and the proceeds of wiring, I think we can substantially ramp down our debt. And that gives us the ability to invest and make the priority choices for the investments in control devices and electronics, especially, and would even entail some bolt-on acquisitions.

So I think the modeling, you might say, could get above that level. But I think we're -- right now, to achieve that 8% to 9% over this next year to 18 months is, I think, our immediate goal. And then we'll measure it from there. But, you know, pricing becomes an issue. And consolidation of the supply base is always important to where that level finally settles down.

Okay. That make sense. I'm going to ask two quick ones on the guidance and then pass it along. But first, I wanted to get what you were using for the first two quarters of the year for EPS -- what we should be comparing to, I guess, the full-year guidance?

It's the continuing operations, Justin, piece of it. That's what we have used. And in the first quarter it comes out to $0.02; and in the second, negative $0.79.

It's $0.06. So you know, at those -- excluding operations.

So $0.02 in the first quarter and then $0.06 in the second?

Right.

Okay. Great. That's helpful. And then, secondly, on the $0.10 of benefit you said you expected from lower debt and interest costs, could you walk through what you are assuming as you calculate that -- a certain level where this debt gets refinanced?

I think with the rates we are seeing in the market, we have looked a different alternative to how we are going to approach it. I think we mentioned that we're going to use some flexibility in terms of the ability to pay down debt.

Our assumption is essentially that we think we can refinance this debt somewhere between 2.5% and 4% on an annual interest basis. It also gives us the ability to pay down debt as we generate cash.

We've done a tax restructuring in Europe, so we can bring the cash back from Europe. We can utilize the cash from continuing operations. But for the most part, the average is right in there between 2.5% and 4%, and that will be over a five-year tenure. So it does have a significant bearing on our interest expense.

Great. That sounds good. I will leave it at that and pass it along. I appreciate the time.

Jimmy Baker, B. Riley & Co.

Just a follow-up there to the interest savings. Could you maybe just paint us a little bit more of an elaborate picture of how you would like to see the cap structure at year end -- beyond, let's say, the EBITDA leverage ratio that you are targeting? Just trying to understand exactly how you will be, let's say, balancing -- lowering the gross debt outstanding against retaining some dry powder for M&A?

Well, you know, we have looked at different alternatives, Jimmy, in the market. We've looked at bank debt; we've looked at revolving credit agreements and long-term indentures. And we are leaning more towards the bank debt and revolver capability, because one of the things the Company will do is generate a significant amount of cash flow.

Our primary focus right now is getting the Company delevered and reducing interest expense substantially. And then what we would envision from this structure -- and we do have the ability to do a forward hedge, because most of it will be floating rate. So we can take forward hedges on the interest expense. And those are still very attractive over a five-year term.

And then as we go out, I think if we make an acquisition -- and we will be permitted to do this -- that we could arrange some what I would call longer-term/permanent fixed-rate money for any potential acquisitions that are bigger than what we would have from our line. But the line is the sufficient and of the size that we will have availability and float and have the ability to make what I call the bolt-on acquisitions that John and I have always talked about and still give us flexibility that we can pay down debt, which is what we were limited by by our indenture provisions -- because the investor rates, as you know, are almost nonexistent today; and our coupons were 9.5%.

So we are trying to create that structure that permits us to pay short-term. We can do an interest rate swap, where we can lock into fixed rate. Those rates are attractive right now in the marketplace.

So we get the combination of both things. We have substantial availability from this. We can make the acquisitions, and at the same time we can pay down debt and lower our interest expense.

Okay, thanks. And could you just talk about the impact, if any, to your electronics segment from the wiring sale going forward? And let's say maybe you could just share a little bit of your customers' response to the wiring announcement?

Yes. I think as we went in to talk to all of our major customers on the transaction, they were supportive of that transaction. So I think they view it as a positive thing. You know, the customers -- I think we've handled it very well, because one of the things customers are concerned about -- would this go to a firm that would just start slashing and burning costs in the wiring business? And would it bring value to our customers of wiring?

I think with Motherson's acquisition, they see the opportunities for the synergies that we talked about, so that's positive. In addition, we are continuing to sell those customers electronics products. Where we had agreements or common agreements, those agreements have been split now. So we have an agreement for Stoneridge, and Motherson will have their own agreement on the wiring business.

But overall we don't see a significant -- we don't see any negative impact from the transaction on the electronics business. And we see a significant positive for the customers as they go through this process with Motherson.

Got it.

Some of the transactions, Jimmy, that we have are direct with our customers themselves. So those contracts are all in place. And so electronics has done a very good job over the years, and they remain as a supplier to a few of those key customers.

Understood. That's helpful. And lastly, just a clarification on the guidance. I think the prior guide assumed about $1.5 million a quarter, or call it $6 million for the year, in purchase price accounting charges at PST. Is that still correct, or does the updated guide assume some benefit there or lowering of those charges after the $23 million write-down?

No, they both included $3.3 million in non-cash expense. So that hasn't changed, Jimmy.

Right. We will come out and give you some more guidance in terms of what that is -- amortization for the future.

Got it. Thanks very much for the time.

(Operator Instructions) Robert Kosowsky, Sidoti.

In slide 14 -- just a couple clarification questions regarding the PST cost cuts. First off, the $4.7 million: are those cost cuts all slated to hit in the second half of this year?

Say that one again, Rob?

The $4.7 million of benefits from cost cuts --

Right. Those are all essentially in the second half.

Okay. And then next year, the total benefit from that round is going to be $10.9 million minus $4.7 million -- so an additional $6 million relative to that?

Yes, exactly.

Okay. Cool. And then as you look at the 2015 actions and the change to go to the design houses, what are some risk points about changing your cost structure to go to this? Do you see more upside potential or downside risk to that $9 million to $10 million of cost cuts? I want to get a better sense of the risk profile of actually realizing that $9 million to $10 million. And also, are we on schedule, as well?

As we have talked about in the audio business, we needed to get to a certain scale before we could leverage the supply base. So PST has been able to grow that business rather aggressively. At one point in time, we feel we were about the number two audio supplier in the market.

So in doing that, we have now gone direct to these design houses and have leveraged that spend. So we have locked in the new rates, sort of new prices. I guess the two factors that might impact that would be, one, currency movements; and then, two, as George said, if those happen, do you use some of that in the competitive marketplace? What are our competitors going to do in the market space?

But outside of that, I think those savings are pretty much locked in. Now, again, it's a fluid market, so we are looking at it right now and saying: as we execute our plan, as we drain down the old audio line, so to speak, then we will start introducing the new components in the audio line and those new designs in the audio line which should generate and drive those savings. Originally we thought that would happen in the second half of this year, but due to the slowdown in the market, it's been pushed out a little bit as we manage the inventories.

Rob, we've had our engineering teams in China twice now -- once early in the second quarter, and once right at the end of the second quarter. So we've gone through we designs, what their capabilities are. So we know the cost structures of those components and original, final designs. The only thing that limited us from implementing quicker and the number you are looking at was the buildup in the inventory and the lower sales in Brazil.

Okay. That's helpful. And then on the shift-by-wire opportunity in control devices, I was wondering if you could talk about what some of the initial design expenses are; but then, maybe more importantly, talk about -- as soon as this thing is ramped up, and it seems like we are getting closer to having this meaningful revenue lift, is this margin profile going to be accretive to the 28% that you posted this quarter?

Rob, in the shift-by-wire, because of the magnitude of the project itself -- and there's two key customers involved in this -- is that, one, you saw some higher D&D costs in the second quarter that we referred to. It really had to reflect on the additional expenses we are incurring right now, because they are trying to accelerate some of the ramp up for 2015.

In addition to that, I think what you are going to find, and I think we shared with you before, is we don't see a substantial uplift in the gross margin because of the volume -- and these parts are now selling at $120 to $150 a part -- that what you are really going to get is a good leverage off the SG&A and D&D investments we have made. So we'll get a bigger lift at the op income than we will at the gross margin level for the shift-by-wire.

And when we look at this, part of the -- there's multiple models that will have this. So each model might have a slightly different design characteristic to it. So that requires some additional engineering capabilities to it.

While the common components are standardized, the exterior might be different. In addition, there's different software modifications that have to go into these things. Overall, those are where the predominant expenses are now as we start to move these products through into the production cycle.

Okay. But is it fair to look at, say, as we get to fourth quarter next year, this particular slice of business could be coming in at, like, a 10%-plus operating margin profile?

It's got the opportunity to get at that low level at that double digit.

Okay. And I think you mentioned that you are currently on a run rate of about $68 million of EBITDA. Is that right -- what you said, George?

That's right.

So if I did some pretty simple math on that, you can easily get to, like, $1 of free cash flow based on that. And I'm just wondering: as soon as you get past this debt refi, and you get to a more, maybe, flexible bank debt environment, do you think you would be looking to start buying back stock? Because it seems like the stock is pretty attractive at just 10, 11 times this free cash flow estimate.

We always have discussions with our Board regarding that. As George said at the beginning, we think our stock is undervalued in the marketplace. We think part of that was our erratic performance. And as we start to stabilize and improve the performance, we think the stock value will start to drive back up. And so we will continue to evaluate that, but there is nothing currently expected on that front.

But that's a point of discussion as you get past this debt refi -- that maybe you could turn to that if the stock is still where it is?

Well, I am hoping when we get past this debt refinancing, they will see that -- and we'll start to see -- one of the things we are seeing is we are gradually -- we are optimistic that we are seeing somewhat of an improvement in the Brazilian market.

So as we start to see these things come back -- and if you look at our performance over our control device business and our electronic business, both, we think, are performing relatively well right now, should continue to do that. And as we bring on the PST business back up to standard, I think the stock price is going to go up. People are going to see it.

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

We have no further questions. I will now turn to call back over the management for closing remarks. Please proceed.

Well, thank you for joining us on the call. It was a quarter with a lot of activities going on. I think as we said, the most notable, though, is the repositioning of the Company with the sale of the wiring business. And then we will restructure the debt level.

As I just alluded to before, we are -- the markets in control devices and electronics are positive. And we expect those to remain that way as we go forward here for the balance of the year. And we are seeing, at least, preliminarily, signs that are encouraging coming out of the Brazilian market in terms of sales improvement coming through that market. So we expect to see further improvements coming out of Brazil.

And with the cost reductions taken out of Brazil, and with the modest revenue enhancements, we think we will be able to hopefully get that business back to where it should be in the relatively short term. However, we are also look at that and say, you know, the presidential elections happen in October; and so we are managing the PST business as if it's going to be -- you know, the market revenues are going to be about where they are today in our projections.

But we are optimistic about where we can go with the Company now. And we look forward to talking to you about our third quarter. Thanks very much.

This concludes today's conference. You may now disconnect. Have a great day.