Stoneridge Inc (SRI) 2014 Q3 法說會逐字稿

Good morning to you, ladies and gentlemen, and good day. Welcome to your Stoneridge third-quarter 2014 conference call, which is presented to you today by your Corporate Treasurer and Director of Finance, Mr. Ken Kure.

My name is Kathy and I am your event coordinator during the call. During the call, your lines are on a listen-only mode only. (Operator Instructions)

Now I'd like to hand the call over [to self]. Ken, please go ahead sir.

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 the accompanying presentation has been or will shortly be filed with the SEC and has been posted to our website at www.stoneridge.com.

Joining me on today's call are John Corey, our President and Chief Executive Officer; and George Strickler, our Chief Financial Officer. Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans.

Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties and actual results may differ materially. Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-K filed with the Securities and Exchange Commission and 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 under continuing operations and wiring results will be reported as a single line called discontinued operations.

In addition, our balance sheets and statements of cash flow include the wiring business through July 31, 2014. Our forward projections from this point forward would be for our remaining segments only, as our historical results including the wiring business are not indicative of future performance.

John will begin the call with an update on significant events for the quarter, current market conditions in the third quarter, our growth strategies, and business development. George will discuss the financial and operational aspects of the third quarter and the repositioning of the Company from the selling of the wiring business and refinancing the Company.

We've prepared and published an earnings presentation providing more detailed schedules to help your understanding of the third-quarter results, trends for our continued improvement, and update on key initiatives to improve financial performance. A copy of these items can be found on our website at www.stoneridge.com in the investor relations section. After John and George have finished their formal remarks, we will then open up the call to questions.

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

Good morning. We completed the sale of the wiring business on August 1 of this year. Net cash proceeds from the transaction were $71.4 million. These proceeds were used to deleverage the Company and we completed our refinancing on October 15, with the redemption of the remaining $157.5 million in senior notes.

Our third- and fourth-quarter results will include the recognition of the sale of the wiring business, non-cash goodwill impairment for PST, and refinancing expenses and amortization of the deferred financing costs.

With the debt refinancing completed in October, we have established a capital structure that permits us to deleverage the Company by reducing overall debt at a lower interest rate. See slide 6 for a reconciliation of the reported EPS and the impact of unusual items and our adjusted EPS from continuing operations. George will address the refinancing in more detail in his comments.

The sale of the wiring business also repositions Stoneridge business strategically and removes some of the volatility in our financial and operational performance. The Company's three business segments are technology driven, with global reach, and should generate higher profitability and free cash flow in reasonable market conditions.

Stoneridge's consolidated revenue in the third quarter was $170.3 million, an increase of $8.8 million or 5.4% over the third quarter of 2013. Sales increased at control devices by $5.3 million or 7.2%; in electronics, by $10.1 million or 22.5%.

Sales at the electronics increased by $4.9 million or 10.9% after excluding the sales of $5.2 million to Motherson, which were previously accounted for as intercompany sales to wiring and are now recorded as third-party sales.

Revenues in our passenger car and light truck category, which are productively control devices sales, were $63.3 million in the third quarter, an 8.4% increase from the third quarter of 2013. Sales of $58.4 million on higher volumes of existing products and new program sales included a shift-by-wire program.

Sales in our commercial vehicle category, which are predominantly electronics, were $61.5 million in the third quarter compared to $51.7 million, an 18.7% increase over the second quarter, due primarily to higher volume sales of instrument products in Europe. Excluding the intercompany sales now classified as third party to Motherson, the sales increase would've been $5.6 million or 8.9%. Slide 4 provides the detail.

PST sales decreased by $6.6 million, or 15.1%, to $37 million in the third quarter of 2014 compared to the third quarter of 2013. Year-over-year foreign exchange rates remained relatively stable, with little impact on the sales translated to US dollars.

Brazil's GNP annual growth rate is now expected to be 3/10 of a percent compared to 1.3% as projected in the second quarter. The International Monetary Fund has now predicted Brazil's economy to grow at only 1.4% in 2015.

Brazil's inflation rate has increased to 6.3% in 2014 compared to 2.5% in 2013 and interest rates have risen to 11% in response to the weaker economic environment. The economic environment impacted customer behavior negatively. As a result, PST continues to experience lower demand across most of its product lines.

During our second-quarter earnings call, we reviewed the cost initiatives taken by our Brazilian management team. In the third quarter, PST reduced an additional 140 management staff with a cost of $900,000, which was recorded in the third quarter.

These actions were taken to help preserve the profitability against the impacts of inflation, foreign-exchange devaluation, and market weakness and to improve the profitability in the future. See slides 15 for details. PST's gross margin, excluding $300,000 for purchase accounting, was 37.7% in third quarter of 2014 compared to 40% in the third quarter of 2013.

Revenue decreases experienced across all product lines were driven by lower motor car and motorcycle alarms, which traditionally have higher margins, and audio sales, which were also lower than the prior year. Excluding purchase price accounting, PST had a breakeven operating margin compared to $3.8 million or 8.6% in the third quarter of 2013.

While 2014 results have not met expectations, PST sales have improved sequentially throughout 2014, though not to the level we were expecting in the second half. As revenues have lagged, our projections for the new audio line purchase component reduction of $6.3 million will now be phased into the first half of 2015, as we sell out our current audio inventory.

The cost reduction actions taken in April and July of 2014 will benefit 2015 by approximately $12.8 million over the first quarter of 2014's cost structure. We do not expect significant improvement in the Brazilian economy in 2015 and will manage the business with an emphasis on cost control and selective revenue opportunities, like track and trace, the new audio line, and OES business accessories.

Consolidated Stoneridge operating income margin, excluding the income recognized for the finalization of the goodwill valuation of PST, decreased to 4.7% in the third quarter of 2014 compared to 7.8% in the third quarter of 2013 due to PST's performance.

Stoneridge operating margins excluding PST were flat compared to the second quarter of 2014. PST's breakeven operating margins in the third quarter improved versus the first and second quarter, where PST's operation margins were negative 3.2% and negative 3.6%, respectively. Slide 5 of our deck has a complete P&L breakout of the third quarter of 2014 versus the third quarter of 2013 for continuing operations, which includes the PST goodwill finalization of the estimated goodwill charge in the second quarter of 2014, which resulted in an income of $5.8 million or $0.17 per share in the third quarter.

Slide 4 identifies Stoneridge's segmented shares increase and decreases versus the prior year's third quarter. Slide 9 of our deck identifies the bridge item differences between the third quarter of 2014 and the third quarter of 2013 earnings per share. The differences are primarily due to growth in revenues at control devices and electronics offset by an unfavorable mix and lower volume at PST.

In the third quarter, we had higher design and development expenses at control devices and electronics to support new business launches in 2015 and the cost for the PST realignment. ESP from continuing operations, excluding the goodwill impairment charge and debt extinguishment cost, was $0.16 per share compared to the third quarter of 2013 EPS of $0.26 a share.

Our operating margin in our businesses, excluding PST, was 7% compared to 8.6% in the third quarter of last year. Operating income was lower in the third quarter of 2014 compared to last year's level for control devices and electronics due to the previously mentioned higher spend for D&D to support product launches and higher compensation and related expenses at control devices and electronics.

New and replacement business awards for Stoneridge's control devices and electronics businesses in the third quarter were $15.1 million, representing $11.2 million in new business awards and $3.9 million in replacement awards.

Among these awards were an instrument cluster award for a European commercial vehicle customer, a temperature sensor award for a North American customer and its commercial vehicle market in Europe, and an emissions vent line award for a North American passenger car and light truck -- light vehicle manufacturer. These awards are reflective of our portfolio strategy in electronics and emissions.

Minda Stoneridge, our unconsolidated JV in India, posted third-quarter sales of $12.6 million, an increase of 45.3% versus the third quarter of last year. The Indian economy is again improving and the rupee has slightly strengthened in comparison to the third quarter of last year.

Excluding the effects of foreign currency exchange, Minda sales increased by 42.7% compared to the prior year. Our share of Minda's net income from operations in the third quarter was a profit of $266,000 compared to a profit of $97,000 in the third quarter of 2013.

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

As we review our outlook for the business, control devices should continue to perform well. Electronics may have some possible softness in selected customer schedule, which we've factored into our projections.

PST will continue to have a difficult fourth quarter, given the state of the economy, but the cost and product actions management has taken and product additions management has taken will benefit 2015.

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, PST's performance should return to former levels. We have a new flexible debt structure and a significantly lower interest cost. Overall, the Company has an attractive product and technology portfolio and the ability to grow organically and with acquisitions to deliver improved results.

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

Thank you, John. With the completion of the wiring transaction on August 1, we have repositioned the Company. We have improved our risk profile and our geographic diversification to be more balanced, with North America sales representing 50.9%, Latin America 21.7%, and Europe-Asia 27.4%.

Our sales growth from our $176 million in net new business is being driven across all regions. And this can be seen on chart 8. Our customer diversification has improved with a balance between automotive and commercial customers, as can be seen on chart 7.

PST has a negative impact on 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 15 lists the key actions that will generate net savings for PST of $2.4 million this year, with an annualized benefit in 2015 of $12.8 million.

If the real continues to weaken, which is currently being forecast to devalue in the range between BRL2.50 to BRL2.60 compared to the dollar for 2015, then this could create a raw material cost increase offsetting some of our savings.

With the completion of the wiring transaction, we paid off 10% of our existing bonds, nearly $17.5 million, at 103% of par, using proceeds from the transaction on September 2, 2014. We have completed deleveraging the Company by paying down an additional $57.5 million of debt and refinancing the remaining $100 million at significantly lower interest rates.

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. On September 12 of this year, we executed a new $300 million senior secured agreement with our lending group. This agreement replaced our ABL agreement and was used to refinance our 9.5% senior notes.

On October 15, we redeemed the remaining balance on our bonds of $157.5 million. Using cash on hand, our new US debt balance is $100 million and the initial borrowing rate 1.61%. This compares to the third quarter of last year where our bond balance was $175 million and our coupon rate was 9.5%. See slide 6 for the EPS impacts of this transaction for both the third and the fourth quarters.

In the second quarter, we recorded an estimated goodwill impairment of $29.3 million or $0.85 per share. And in the third quarter, we finalized the goodwill impairment assessment, resulting in a non-cash goodwill income of $5.8 million before noncontrolling interest, or $0.16 per share recognized.

As a result of the benefit recorded in third quarter, the year-to-date non-cash goodwill impairment of $23.5 million, which resulted in the net charge of $0.68 per share between the second and the third quarters.

Even with the net valuation reduction, PST has a carrying value in excess of $130 million. As per our usual policy, we will perform our annual impairment test on all goodwill balances, including PST, during the fourth quarter. Though we are unsure of what the new valuation may yield, fourth quarter 2014 may be affected.

If the assumptions and estimates including but not limited to the Brazilian economy and the automotive market and consumer spending change in an unfavorable manner, additional goodwill may be recognized.

For the nine months ended September 30, the Company recognized an income tax benefit of $800,000 and a pre-tax loss from continuing operations of $20.7 million or an effective rate of 3.8%, including the pre-tax losses and non-tax deductible goodwill impairment charge of $23.5 million.

The tax benefit recognized on adjusted pre-tax income is due to the tax benefit related to the PST loss, exceeding the tax expense recognized on the remainder of the continuing operations, which includes the US earnings for which we did not provide tax expense due to the valuation allowance.

For the third quarter, the Company recognized an income tax benefit of $1.2 million on pre-tax income from continuing operations of $8 million or an effective tax rate of 14.7%. Included in pre-tax income is $5.8 million nontaxable adjustment to the second quarter estimated goodwill impairment charge.

The Company adjusts its estimated annual effective tax rate each quarter as required. Due to the revised estimate annual effective tax rate and the change in the forecasted annual results of PST, the portion of the tax benefit recognized in quarter three related to PST loss is disproportionate to that recognized in the previous quarters.

Our ability to drive topline sales and profitability remains our primary focus for continuing operations. And with the completion of the sale of the wiring business, cash flow generation capabilities of our continuing operations remains our second area of emphasis.

In the third quarter, operating cash flow was an inflow of $6.2 million in comparison to $19.2 million during the third quarter of last year. As indicated on slide 14, we improved debt leverage as measured by total debt to EBITDA ratio from 2.9 times at December 31 of 2012 to 2.7 times at December 31 of last year.

With our 2014 guidance and the sale of the wiring business, we expect our debt to EBITDA to be in the range of 1.5 times to 2.2 times by the end of the year and includes the effects of our expected refinancing initiative.

As the Brazilian economy has weakened, PST's inventories have increased. PST management has not attempted to lower inventory with pricing actions, but through normal sales, [brac] actions, and promotional programs. Inventory has been reduced by $11 million in the third quarter and will be reduced by another $5 million in the fourth quarter.

Receivables have increased by $7 million as sales have increased. As a result, debt has only been reduced by $2 million in the third quarter versus the second quarter, but will continue to decrease as inventory continues to be reduced.

We have continued to focus on topline growth with our remaining businesses, and now that the sale of the wiring business has been completed, we will focus our resources on leveraging our technology capabilities by further investing in both our electronics and control devices segments.

During the first and second quarter earnings calls, we shared some of the key initiatives on which we continue to make progress. Now that we have closed the wiring transaction and have the refinancing in place, we will focus on growing the Company with our organic growth supplemented by bolt-on acquisitions for our control devices and electronics businesses.

These focused initiatives will continue to improve our financial performance and enhance shareholder value. Our favorable outlook is based on our confidence that we have repositioned the Company for improved operations and financial performance. Continuing operations are improving for control devices and electronics and they are running well.

With the continued weakness in Brazil, PST's management continues realigning their cost structure to match their channel and product opportunities. The management team has taken the right courses of action with aggressive cost actions and also positioned for growth opportunities in track and trace, new audio lines, and OES business accessories.

The Company has repositioned as a higher value market participant in the completion of the wiring transaction on August 1 of this year. And the redemption of 10% of our debt in September and the subsequent redemption of $157.5 million of 9.5% senior secured notes using the new $300 million revolving credit facilities is a significant step in the deleveraging process of the Company.

These actions have positioned the Company well to continue to enhance shareholder value. And as seen in our recent earnings release, we have changed our guidance from $0.55 to $0.75 and reduced that to $0.40 to $0.55 in the update, based on what we've seen in both the third and the fourth quarter.

With that, I'd like to turn the call over for any questions.

(Operator Instructions) Justin Long, Stephens Incorporation.

This is actually Brian Colley taking the call for Justin today. So my first question, now that the refi has been completed, how are you thinking about additional debt pay down in 2015 and beyond? So should we expect this to be the primary use of free cash flow and do you have a leverage ratio that you're targeting?

Brian, I think that we will continue -- the other side of the question is really what do we do with bolt-on acquisitions. And in the absence of that, and we don't have those in place, then we will continue to run reducing overall debt levels.

And primarily, we got to reduce debt levels in Brazil, for one, but yes, we will take down our revolving credit agreement that we now have. We now have the flexibility to do that continuously, but I think at the level we are at right now, because we will be approaching somewhere around 1.5 times of debt to EBITDA, that's way below what we normally typically run.

We are comfortable of 2.5 to 3 to 3.5, which we historically run. But it really depends on how fast we can generate bolt-on acquisitions. If we don't have those in place, we'll continue to reduce our debt.

Okay. That's helpful. And then looking at your guidance for the fourth quarter, could you talk about your assumptions for PST? And also could you give an update on how PST is tracking quarter to date?

I think the key thing with PST -- and it's clear when you look at our results -- is that it's down against last year, but sequentially, it appears that we've hit the trough in the second quarter and we are up sequentially quarter to quarter. So our third quarter was up almost 14.9% over the second quarter.

We're looking at the same kind of percentage lift in the fourth quarter. It's clearly not to the level that we would normally expect in the third, fourth quarter of previous years, but it's a significant improvement over the second quarter.

So I think the cost actions we have in place and the growth opportunities that both John and I mentioned between track and trace, what's going on in the new audio line, and what we are seeing in OES accessories, that that trend will continue into 2015.

So I think we are well positioned, both from the cost side and also from the growth side, and we are seeing that in our results here in the third and fourth quarter. It's clearly not the level we want, but I think we've adjusted the overall plan to meet what the economy is doing right now.

One of the other comments, and it's kind of been buried in the numbers -- in our track and trace line, which we are quite enthusiastic about, because of the way the Company has been able to grow that business. And when we originally started in the track and trace business, it was really done through insurance companies.

And one large insurance company in Brazil, about a year ago, 1.5 years ago, decided to go on its own with its own tracking system and partnered up with another company, primarily for that. So they have been -- as our contracts expire, they have been transferring theirs over to their own company. So we've kind of had this treading water experience.

But if you take that contract out and we look at the growth of this line, we probably looked at the growth of probably about 20%, and we expect to see even more growth next year, we expect that the final contracts with this insurance company will expire in the first quarter, or maybe as late as April, but will expire in the first quarter. And then the real growth aspects of this track and trace line will show up and will show up as much higher margins than our normal business.

The other side, as we talked about -- we have some new customers down there. And one of them that we are particularly proud of is Hyundai. So that's on the OES channel and we are going to sell Hyundai some power window lift modules, some keyless alarm systems, and parking sensors. And those will start all in next year.

So we've got some good growth prospects, selected growth prospects in the market that should help PST as we go forward, even though the economy, general economy, will have a lower rate.

And then in addition in 2015, we're going to introduce new alarm systems probably in the second quarter. So we'll have hopefully something that will stimulate that market also.

So we got a series of activities that the PST management team is focusing on not only on the cost reduction, but also on generating their topline revenue, which should help us in 2015.

Thanks, that's really helpful. And then just if I could get one last question, if we just look at where the balance sheet will exit this year, what are you expecting for a run rate on interest expense headed into 2015?

I don't think it's going to change much and from where we are at. But our interest, as we mentioned today, is 1.61%. I think it will stay in that range of 1.6% to 1.8% at the outside.

So I think the question behind that, and we are very active at looking at this, there are forward hedge opportunities in the marketplace and we will continue to evaluate that, if we should lock into some of the rates in the fixed rates.

So we will run it with the current variable interest rates today, but we will look at hedges for 2015, depending on where we think the overall markets are going and where interest rates are headed.

Okay, great. That's all my questions. Thanks, guys.

Rhem Wood, BB&T Capital Markets.

Hey guys, good morning. Can we dig in to PST a little bit more? It sounds like two of the businesses are going very well; PST, still, you're losing a little bit on the operating income line, but you talked about sequentially in the fourth quarter things getting better, doing a little more on the cost side.

Can you get to a breakeven on the operating income line in the fourth quarter? And then maybe along with that, how much additional cost do think you can take out of that business at this point or is it just about recapturing the sales?

I think we are to the level of costs that we have -- unless the market continues to deteriorate dramatically beyond where we think it is. But I think we are positive of what we see.

You know as I mentioned, in local currency terms, we are up 14.9%, second quarter, third quarter, and it looks like we're going to be in that same kind of a range in the fourth quarter.

So volume takes us to roughly breakeven in the fourth quarter. And then I think from there, with the growth aspects that we are looking at, and then we'll have to adjust cost depending on where we see the market as we open up 2015 and where it's really at.

GDP has dropped to 1% and we were working with close to 2%. So yes, I think originally in the last analyst call, we said that we thought we could it get in the range of 5%, but based on the market levels we are seeing, that's not feasible at this point. But we will be breakeven in the fourth quarter.

Yes, I think the other thing on Brazil is that -- Brazil is a highly inflationary work environment, so that's -- we are having to manage wage costs rather aggressively. And these are more contractual than anything else.

So as we are taking out some of this cost action, it's to offset some contractual wage increases. The management team is looking at additional action, should the year 2015 not start -- not turn out to be a strong year.

But we are also looking at the other side, which is, as I said, to drive the revenue growth in some selected product lines, particularly the track and trace. Because that's got a very high margin. So we may be adding some resources to further expand our penetration to that market.

We feel very comfortable in what we're doing with that product line and the market. We are getting a lot of acceptance in it. We're into the cargo tracking, where we have a disposable tracker as well as other trackers and we're starting to win some fleets on that.

As their own contracts expire, they transfer to ours. And one of the reasons is, as we've talked about, our technology -- we are the only ones that have a technology that's almost jam-proof. By that I mean if somebody wants to steal something, they can jam a GSM and a GPS, but some of our other technologies they haven't jammed.

And when they were tested, our product was tested, we were the only ones that weren't capable of being jammed. That doesn't mean they can't jam it, but it's got a much higher reliability rate. So that's one of the things I think the fleets will like and we'll continue to stress that in the marketplace.

And again, I think the issue is really to start to drive topline growth above, even though the economy is going to be weak, looking at these things that we've got with some of the OES opportunities, which the awards are in place. We now just have to start the production next year. And in the new audio line, where we get the cost, the sellout.

We've actually started this month with our first new -- the first of the new designed audio lines, and it's a deckless radio system in there. It's going to be one -- it's going to fill out our low-cost end, but we are actually improving our margins on that product and expanding our capabilities.

That's what you'll see in the audio line as we go forward. We will able to adjust prices to be very competitive in the market, but we're going to expand our margins at the same time, because our cost is decreasing.

Okay. That's helpful. And then just to stick with PST for a second, the inventory levels -- how long do think it will take you to draw that down to where you want to be?

We phase [on this] -- the principal driver of the inventory levels is audio line is, as you know, the sellout. So we have a plan, the management team has a plan, where we will start that -- that inventory will be phased out over the first four months of next year as we sellthrough. And then we're ordering new inventory to come in on the lower cost.

We would expect -- worst-case scenario that by April or May, we are out of all the old inventory. In that timeframe, though, we will be phasing in certain models, so we will be achieving some of the benefits from these models as they roll out over the first quarter of next year.

And that's one of the reasons our profitability is not as high as what we originally anticipated, because we did not force and want to force price reductions to sort of lower the inventory. So we wanted this to flow in a natural sense, a more normal way, and that's why it's a little more delayed in terms of bringing in the new products.

Given the inflation rate that is going on now, the foreign exchange, the valuation, the last thing we wanted to do was try to communicate -- send a signal that somebody might misinterpret about cutting prices. That's not what the market is going to need going forward if the exchange rate still stays low -- or still is weak, and the economy stays less than robust.

Okay, great. And then -- so you guys have about 50% of your business now that international. Can you talk a little bit about where you see the biggest opportunities in some of those markets and then maybe some opportunities where you think you have the ability to cross-sell between auto and commercial vehicle, some of the recent success as you've had -- that you been having?

I know you talked about temperature and sensing as one example recently. Just any color on that. Thank you.

Yes, I think when we look at the emissions segment of our portfolio that comes out of control devices, that is where we see a lot of ability to cross-sell. And we had some success there in those market spaces.

I think when we look at the electronic side, it's really -- there's not the same cross-sell for us to be in automotive electronics. We don't see that as part of our portfolio.

However, what we are doing in our electronics business is we are supplying electronics to our control devices business unit and we will expand that -- as a matter of fact, we will look at that as we go forward with soot sensor to expand electronics for our soot sensor from our own electronics. So that's where you'll see some kind of intercompany sales that will be hidden, but going into the automotive segment.

In terms of geographic growth, where China is in a -- we are launching our first instrument clusters in China next year. It's been about a year longer than we had anticipated and the EGT line is starting to -- is growing very nicely in there and we expect that to continue. So we see some good growth opportunities in China.

In addition, in India, as we have talked about, the Indian market is recovering. With our new -- we have two agreements now in India. One is our old agreement and then a new one for the new technology. So we'll get some benefit, some additional benefit, to our bottom-line when that new technology goes into that market.

So I think overall, we are well positioned in the North American market with control devices. We do have opportunities to grow in electronics in the North American market and we will have some program awards coming in there and some quotes going on there. And then in Europe, we had some opportunities. Principally with soot and emissions to grow in the European automotive market.

Great. Thanks for the time. I'll pass it on.

Jimmy Baker, B Riley and Co.

So I just wanted to follow up on the use of cash question from an earlier caller. I understand that you'd want to reduce debt in Brazil, but I'm just a little bit surprised by your commentary regarding debt pay down in the core Stoneridge business, absent any bolt-on opportunities.

I would just think given your low cost of debt today and how underlevered the business has become, that you might consider using the excess cash flow to return some capital to shareholders here through a buyback. Can you just talk about weighing those two opportunities?

I think as we have shared with you before, it took us a long time to get our availability and float up. And that certainly is an alternative, but it's not our best alternative for increasing return on invested capital for the Company versus buying back the shares.

So we are looking at exploring a number of opportunities right now for bolt-on acquisitions. I just don't want to give the impression that we have any imminent right now, but we are actively looking at two or three opportunities.

So clearly our first -- and I think John with his comments in relation to growth -- we have some significant contracts coming up in electronics in China now. We've got developments in India. We got soot sensing, which are all commercial applications now really for the North American market.

So there's a number of investments that we are seeing coming up with organic growth that will probably lift our capital expenditures versus what we have been running. So first one is increase our organic growth, and that comes through the internal, both in product lines and geographic growth.

The second one would be bolt-on acquisitions would supplement gaps that we have in the overall business, geographically and with product lines. And then something like capital, I think, is a little ways out, because that doesn't make sense to us at this point.

We have more opportunities to generate returns for the shareholder through investments of organic opportunities and bolt-on than we do by buying back stock.

Okay. That's helpful, George. Could you maybe just expand a little bit in terms of the M&A target funnel in terms of end market and size that you're looking at, understanding that maybe nothing is imminent, but just kind of where you are focusing.

And then separately, I understand and appreciate the enthusiasm and belief that the PST can return to prior levels, but this is the third consecutive year that it's been a significant contributor to a mid-year guidance reduction. I'm just wondering what you would need to see there that might cause you to reevaluate that belief.

Well, I that think on the growth side of the business and where we are looking at, we are actually looking at some -- we are looking at some opportunities in Europe and in North America right now. They are in various stages of investigation, meaning how far along we are with those. Those would be both supporting both control devices and electronics and so forth.

But we are not ready to pull the trigger yet; we've still got some work to do. As you know in this market, multiples are fairly high and we want to be somewhat cautious that we are not buying something at a high multiple.

But the deal size we are looking at, too, is somewhere around $30 million to $80 million in sales, so it's relatively something that fits in well with our size, with our credit capabilities, and all that. And those deal size, if EBIT are tend to running about 10% op income, so you're looking at deal size anywhere from $30 million to $50 million to $60 million, roughly.

I think on PST, I think, again, trying to unbundle the portfolio -- yes, it's been -- the market has really been the primary driver of some surprises down there. And we have been repositioning the Company down there.

But I think, as I mentioned earlier, when we get a chance to go inside and look at the business model what we've got coming, the track and trace business is a very attractive business for us. And we are growing that; we're going to grow that business rather aggressively.

As I said, what's happening right now is we're seeing some churn in that business as the former insurance company exits out, but we are still selling, so we are actually growing slowly at about 4% in that business, but we expect that growth rate to go up to 20%, 30% once we are out of there.

And in that market space, just remind you, Michelin paid a high multiple when they bought Sascar, which is a competitor of ours in that track and trace market. We have a better product than they do, so we think we're going to be able to grow this market and grow at a high profitability.

That and then the combination the audio line. Now I can't change the economics of what's going on down there, but I think we can stimulate some additional revenue and have repositioned the Company and we are just now getting ready to roll that out.

Okay, thanks. And then last, I just wanted to clarify. In light of the wirings, though, can you just update us on the current geographic breakdown of your commercial vehicle sales?

It's about two-thirds Europe and about one-third North America with the sale of the wiring. Because predominantly, all the wiring was mostly in North America. So of the commercial sides, two-third Europe, about one-third North America.

Okay. Perfect. Thanks very much.

(Operator Instructions) Robert Kosowsky, Sidoti.

Just a few numbers questions first. As far as the $9.3 million of operating income you put on slide 5, is that a clean number for the legacy Stoneridge?

Slide five.

I'm just trying to figure out what a clean operating income number is for the Company for the quarter.

Yes, that's a clean number, Rob.

Okay. Then if we look at Brazil, that's breakeven, that's pre-$1.3 million of purchase accounting adjustments, and then there's also -- you've also included a $900,000 restructuring in the number as well?

Right.

Okay. All right. So net-net, it would be about $400,000 loss for PST.

Yes. PST, if you look at it and you look back over the quarters, they lost about [2.5] in the first quarter, [2.5] in the second quarter. It's a little higher than that; it's over $1 million in the third quarter and they're breakeven roughly in the fourth quarter. But what we're looking at --

We might do better than break -- if you looked at the third quarter, sequentially, they were getting better every month in the quarter. Of course, we've got the transition cost -- the restructuring cost of the $900,000.

So I think we've got them -- they've got their cost position pretty well adjusted for what's in the market now. And as George said, we are expecting breakeven in the fourth quarter, but there could be a positive on that side.

Okay. And that --

No, Rob. You are right, because the $900,000 is embedded in there, so it would have been about $400,000 of operating loss in the third quarter.

Okay. And then in the breakeven would -- that would include that $1.3 million of purchase accounting, I assume, right?

Yes, it does.

Okay. Then one other numbers question. I assume in interest expense, you're including $900,000 from the bond redemption and the debt discount as well?

In the fourth quarter, you mean?

In the third quarter. Represents your --

Actually -- we actually have a schedule that shows the exact amount in the earnings release itself.

It's running through interest expense, though, Rob.

Okay. Thanks for clearing that up. Otherwise, just a question on what was driving the outperformance of electronics? Because even if you back out the sales that you made to Motherson, it was still up 10%, and Europe was down 10% from a production environment. North America was up.

But I think from a blended market standpoint, you're probably flat, but you had about 10% market outgrowth. What were the major drivers for that and how sustainable is that outgrowth rate?

As we said, those were -- we've been adding content to the vehicles. So that really what was driving it. And really, that growth was driven primarily out of Europe.

North America was kind of -- even though the classic market here is more robust because of our customers in that market, we didn't get some that robustness in the growth model.

So as we expect that -- as the North American market continues to improve and some of our customers improve and then we put some new program awards in here, that we'll be able to continue to grow. I'm not so sure that we will have the 10% growth rate going forward, because we've kind of launched all those projects products. We got a few more to launch next year, and that's kind of the steady-state as we go forward.

Okay. What specifically were the major project -- or products that you saw the biggest growth rate from?

The biggest growth rate in products?

It's all instrumentation clusters, Rob. That's essentially -- that's their largest product and that's where they're really getting the content growth. And they have been with two key customers, especially.

And we'll see some additional growth out of our [tagger graph] product, which you know is the legislative product in Europe, as we been able to increase our share at some of the OEM -- or at one of the OEMs. So we expect to increase share in that market space also.

I think the one question we have is [Scania], as you know, has been a real contributor over the last 18 months, even though the market has been down, because that was exports into Brazil. There's some question whether that is starting to fall off and we are starting to see some of that right now.

Okay. That's helpful. And finally, as far as shift-by-wire is -- how is that ramp going along? I think you're putting in a couple production lines. How much revenue do you think you'll be doing in 2015 and just any more color you can on the scale of the product?

Shift-by-wire really rolls out to -- we've got some now, as we said. Part of our revenue growth in control devices was one of the early shift-by-wire program wins, which is now in production.

The real ramp of that, the real volume from that program comes in 2017. We will be ramping programs in through 2015 and 2016. I think we will be at full potential of that in 2017. So somewhere around that $150 million number that we said.

So as you look at it, we will consistently build from here on out as we bring on these programs. So that, I think, you'll see positive growth in that line of -- I know you'll see positive growth in that line of 2015, and then the full potential of that in 2016, with the absolute number in 2017.

Okay. Thank you very much. Good luck.

We have no other questions on the audio at the present time. So therefore, I'd like to hand back to Mr. John Corey for closing remarks. Go ahead, please, sir.

Thank you again for joining us on the call. This quarter has kind of had a lot of ins and outs with the refinancing, the different actions we have taken there -- which are all positive for the company -- the goodwill impairment on PST, and then, of course, the market conditions.

Again, as we look at our Company's portfolio, we think our products are in the technology -- we're moving more to technology portfolio. We see good growth still in the North American market. We are cautious about Europe's growth, because Europe economy hasn't really kicked in into the high growth rate.

And we do see improvement in PST, primarily even if the economy stays at that low growth of 1.4%, as we can launch these new products and get greater penetration in these markets, we will see the benefit from that.

So it's going to be -- the fourth quarter, it is going to be a little choppy, as George said, but we are confident that we've got the Company positioned in the right direction. And with our refinancing, we do have the capability to go out and put on those bolt-on acquisitions.

So with that I'd like to thank you for joining us on the call.

Thank you, gentlemen -- thank you, ladies and gentlemen, that concludes your conference call for today. You may now disconnect and please enjoy the rest of your day. Thank you.