Stoneridge Inc (SRI) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Stoneridge fourth-quarter 2014 conference call. My name is Matthew and I will be your operator for today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. And now I would like to turn the call over to Mr. Ken Kure, Corporate Treasurer and Director of Finance. Please proceed, sir.

Good morning, everyone, and thank you for joining us on today's call. By now you should have received our fourth-quarter earnings release. The release and 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 such statements are based on 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 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.

With the sale of the Wiring business our financial reporting starting in the second quarter for Control Devices, Electronics and PST, were reported as continuing operations and Wiring results were reported as a single line called discontinued operations.

In addition, our balance sheets and statement of cash flow include the Wiring business through July 31, 2014. Our forward projections for 2015 are for our remaining segments only as our historical results, including the Wiring business, are not indicative of our future performance.

John will begin the call with an update on the significant events for the quarter, current market conditions in the fourth quarter and our growth strategies and business development. George will discuss the financial and operational aspects of the fourth quarter, the repositioning of the Company from selling the Wiring business, refinancing the Company and the impact of significant changes in currencies due to the strengthening of the US dollar.

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

Good morning. We closed 2014 with fourth-quarter EPS from continuing operations of $0.25 a share compared to $0.12 in the prior year. This performance is the fourth consecutive quarter Stoneridge has recorded successive quarter-over-quarter profit improvement. This improved profitability is the result of actions taken during 2014 as we have discussed on prior calls.

By business unit, Control Devices and Electronics continue to perform well as the North American automotive and commercial vehicle markets had good growth in 2014 and the outlook remains positive for 2015. European markets are likewise improving in 2015.

PST's performance did not meet expectations as the Brazilian market has not recovered and the outlook is for a continuation of poor economic growth. However, we expect PST to improve in 2015 and to grow between 10% and 15% in local currency terms.

This improvement will be driven by the sales increases in the track and trace which will represent approximately 27% of PST's volume in 2015 and the introduction of the redesigned audio one representing approximately 19% of their sales volume in 2015. So even in a lethargic market we expect PST to return to profitability by the third quarter of 2015 and to be positive for the year.

In addition to the improving markets in North America and Europe, the Company will launch nearly $20 million in 2015 of new products and an additional $85 million of new business in 2016.

Finally, we refinanced the Company in the fourth quarter with the redemption of the remaining $157.5 million in senior notes. The lower level of debt and lower interest rates will save the Company approximately $11 million to $12 million in interest in 2015 over 2014.

So as we exit a difficult 2014 we have repositioned the Company to continue to capitalize on the organic growth and to be positioned to grow through acquisitions.

Now to the details of our fourth quarter. As I stated, EPS from continuing operations excluding PST's goodwill impairment charge and a debt extinguishment cost, was $0.25 per share compared to the fourth quarter of 2013 of $0.12 per share.

Our GAAP accounting results in the fourth quarter include the write-off of all remaining PST goodwill of $28 million or $0.81 per share and the refinancing expenses and deferred financing cost of $9.8 million or $0.36 per share. See slide 6 for a reconciliation of reported EPS and the impact of unusual items and our adjusted EPS from continuing operations.

Stoneridge consolidated revenues in the fourth quarter were $166.8 million, a decrease of $2.4 million or 1.4% over the fourth quarter of 2013 as PST sales declined by $9.8 million or 21.5% while Control Devices and Electronics increased by $7.4 million or 6%. By business unit sales in the fourth quarter increased at Control Devices by $2.8 million or 3.9% and at Electronics by $4.8 million or 8.8%.

Excluding sales of $6.3 million to Motherson, which were previously accounted for as intercompany sales to Wiring and are now recorded as third-party sales, sales in Electronics decreased by $1.7 million or 3% as revenues were negatively affected by approximately $4.9 million due to the weakening of the Swedish kroner against the US dollar.

Passenger car and light truck revenues were $59.7 million in the fourth quarter, a 9.1% increase over the 2013 fourth-quarter sales of $54.7 million as volume increased on Control Devices products including new programs in shift by wire and seat track position sensors. Overall it was a very good year for North American automotive production and for Control Devices, and the outlook for 2015 is equally positive.

Sales in our commercial vehicle category, which are predominantly Electronics sales, were $60.9 million in the fourth quarter compared to $58.5 million, a 4.1% increase over the fourth quarter of 2013 due primarily to higher volume sales of instrumentation products in Europe and include sales of $6.3 million to Motherson which were classified as intercompany sales in 2013.

As previously mentioned, Electronics revenues were negatively impacted by a weakening Swedish kroner against the US dollar. Slide 3 provides the detail. PST's fourth-quarter sales declined by $9.8 million or 21.5% to $35.9 million compared to the fourth quarter of 2013. These results were negatively impacted by $4.2 million as the Brazilian real devalued by 12% in the fourth quarter of 2014 over the fourth quarter of 2013.

While 2014 was a poor year for PST, we are optimistic about 2015 even with the stagnant Brazilian economy. PST sales have improved sequentially since the second quarter of 2014. We have seen good growth in our security line of cargo trackers and expect this line to grow at over 25% in 2015. We believe we have the best cargo tracking system because, in addition to GPS and GSM, we have our own 900 megahertz system strategically located in the country.

Brazilian Risk, an agency which tests these systems for the industry, has tested and reported favorably on our tracking system's anti-jamming capabilities. The cost actions executed in 2014 and the redesigned audio line will benefit PST in 2015 between about $12 million to $13 million excluding foreign-exchange impacts. See slide 12 for the details of these actions.

Consolidated Stoneridge operating income margin excluding PST goodwill write-off decreased to 3.1% in the fourth quarter of 2014 compared to 5.6% in the fourth quarter of 2013 due to PST's performance. Stoneridge's operating margins excluding PST decreased to 5.1% or $6.7 million from 7% or $9.3 million compared to the third quarter of 2014 due mostly to higher direct material costs.

Operating income excluding PST was lower in the fourth quarter of 2014 compared to the fourth quarter of last year by $1.4 million on higher warranty cost, compensation expenses and lower engineering cost reimbursement.

Excluding the effects of purchase accounting of goodwill PST had a negative margin of 1.5% in the fourth quarter. And while we are not satisfied with this result, it is an improvement over the first quarter's negative 3.2%. We expect to see a return to profitability in the third quarter of 2015 as seasonal demand increases.

Slide 5 of our deck has a complete P&L breakout on fourth quarter 2014 versus the fourth quarter 2013 for continuing operations with the bridge item differences and includes the write-off the remaining PST goodwill.

Slide 3 identifies Stoneridge's segment and sales increases and decreases versus the prior year's fourth quarter.

New and replacement business awards for Control Devices and Electronics in the fourth quarter were $68.8 million representing $22.5 million in new business awards and $46.3 million in replacement awards. Among these new awards was an electronic chassis module of work for a European commercial vehicle customer, a temperature sensor award for a North American passenger car and light truck customer, and a seat track position sensor award for a European passenger and light truck vehicle customer.

For the full year we had awards of $201 million of which $136 million were new and $65 million were replacement, most of which are shift by wire awards reflected in our net new business. See slide 14 for the details.

From a business awards standpoint it was a very solid performance in the year. Minda Stoneridge, our unconsolidated JV in India, posted fourth-quarter sales of $11 million, an increase of 16.7% versus the fourth quarter of last year. The rupee remains stable in comparison to the fourth quarter over the last year. Our share of Minda's net income from operations in the fourth quarter was a profit of $141,000 compared to a profit of $151,000 in the fourth quarter of 2013.

In summary, from a market perspective the North America 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 continuing economic weakness. However, our sales in Brazil have improved sequentially since the second quarter of 2014, though some of this is in part due to normal seasonality.

The state of the Brazilian economy and the continued strengthening of the US dollar will present challenges for PST in 2015. However, the cost and product actions taken by management in 2014 will benefit PST in 2015 and they will return to profitability by the third quarter even in a lethargic market.

As we review our outlook for the business in 2015, Control Devices should continue to perform well. Electronics may have some possible softness in selected customer schedules which we have factored into our projections. Our European business will also be affected by a strong dollar in sales and profits as a result of the transactional and [translational] risk. These risks are also factored into our 2015 guidance.

Our net new business has also been adjusted to reflect our current best estimates of organic sales growth program awards that did not materialize, weaker foreign-exchange projections and lower production estimates in Europe.

Overall, the Company has an attractive product and technology portfolio as evidenced by our business awards this year. We have taken actions to grow our business in the Brazilian market and to improve the performance of PST. We have the ability to grow organically and, with our flexible debt and capital structure, to pursue acquisitions to deliver improved results. With that I would like to turn the call over to George.

Thank you, John. With the completion of the Wiring transaction on August 1 and the refinancing completed as of October 15 of this year we have strengthened the Company. We have improved our risk profile and our geographic diversification will be more balanced. Our sales in North America will represent nearly 50% of our total sales, Latin America 21% and Europe/Asia 29%.

Our recently revised sales growth projection of $130 million in net new business is being driven across all regions and this can be seen on chart 7. Our customer diversification has improved with the balance between automotive and commercial customers as also can be seen on chart 7.

And PST has had a negative impact on our operating performance in the last four quarters, but our PST management has been very aggressive in their cost alignment actions to correspond with the market opportunities by channel. And chart 12 lists the key actions that have been generating savings for PST of $2.4 million in 2014 with an expected annualized benefit in 2015 of $12.8 million.

Chart 13 shows the top-line sales growth in the audio line and track and trace as well as PST other product lines. We have built into our 2015 guidance a real rate of 2.70 to the US dollar. If the real continues to weaken, which is currently being forecast, at a value between 2.7 and 3 to the dollar for this year, then this could create additional raw material cost increases offsetting some of the savings.

Using the proceeds from the Wiring transaction we paid off 10% of our existing bonds, nearly $17.5 million, to 103% of par using proceeds from the transaction on September 2 of last year.

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 primary goals for the refinancing was to provide stability of long-term borrowing capacity which will offer debt flexibility at substantially lower interest rates.

And on September 12 of 2014 we executed a new $300 million senior secured credit agreement with our group of lenders. This agreement replaced our ABL agreement and was used to refinance our 9.5% senior notes. And on October 15 of last year 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 was 1.6% and our current rate is 1.8%. This compares to the fourth quarter of 2013 where bond balance was $175 million and our coupon rate was 9.5%. See slide 5 for the EPS impacts of this transaction for the fourth quarter.

In the second quarter we recorded 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 non-controlling interest or $0.16 per share.

As a result of unfavorable changes in the Brazilian economy and its impact on consumer spending, we recognized an additional goodwill impairment of $27.9 million before non-controlling interest in the fourth quarter and a $21.8 million or negative $0.81 per share charge which was the remaining PST goodwill on our balance sheet.

And as a result of the charge recorded in the fourth quarter the full-year non-cash goodwill impairment of $51.5 million resulted in a net charge of $1.49 per share. Even with the net valuation reduction PST has a carrying value in excess of $92 million.

For the 12 months ended December 31, the Company recognized an income tax benefit of $1.9 million on a pretax loss from continuing operations of $53.1 million or an effective tax rate of negative 3.5%. Included in the pretax loss is the non-tax-deductible PST goodwill impairment charge of $51.5 million.

For the fourth quarter the Company recognized an income tax benefit of $1.1 million on a pretax loss from continuing operations of $32.4 million or an effective tax rate of negative 3.4%. Included in the pretax income is the $28 million nontaxable deductible PST goodwill impairment charge.

The tax benefit recognized on the loss for the fourth quarter and the full year 2014 resulted from a tax benefit of the PST loss. Exceeding the tax expense recognized on the remainder of the continuing operations, which includes the US earnings for which we do not provide tax expense due to the valuation allowance.

Our ability to drive top-line sales, improve profitability and generate cash flows remain our primary focus for continuing operations. In the fourth quarter operating cash flow was an inflow of $20.7 million in comparison to $21.2 million during the fourth quarter of last year.

As indicated on slide 11, we improved debt leverage for continuing operations as measured by total debt to EBITDA ratio from 4.1 times at December 31 of 2012 to 2.8 times at December 31 of 2013, and now 2.5 times in the fourth quarter of 2014 as we have deleveraged the Company.

As the Brazilian economy has weakened PST's inventories have increased. PST management reduced inventory by $9.1 million in the fourth quarter compared to the third quarter of 2014 through prudent pricing actions, balancing demand forecasts with new order patterns for first-quarter sales.

Receivables increased by $4.1 million of local currency sales increased in the fourth quarter over third quarter of last year. And with the improvement in working capital, PST's debt has been reduced by an additional $2 million in the fourth quarter versus the third quarter and will continue to decrease as inventory continues to be reduced.

We have continued to focus on top-line growth with our remaining businesses and we are focusing our resources on leveraging our technology capabilities by further investing in our Electronics and Control Devices segments.

Now that we have nearly closed the Wiring transaction and have refinanced the Company we are focusing our efforts on growing the Company with 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 Control Devices are by far the largest part of our growth story for 2015 and 2016.

PST Brazil suffers from lower GDP growth and consumer uncertainty and weakness in their local currencies. PST's management team has taken actions to offset some of the market weakness in Brazil by redesigning their audio lines and increasing their efforts in track and trace. And with continued weakness in Brazil PST's management has realigned their cost structure too much their channel and product opportunities.

The Company has been repositioned as a higher value market participant with the completion of the Wiring transaction on August 1 of 2014, 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 facility is a significant step in the deleveraging process of the Company will substantially reducing our interest costs, a savings of nearly $11.5 million in 2015 compared to 2014.

These actions have positioned the Company well to continue to enhance shareholder value. We have included in our guidance the recognition of continued strength of the US dollar against some of the primary currencies in which we operate, especially the euro and the [SEK] as our manufacturing facilities are located in Sweden and Tallinn, Estonia; the Mexico peso for our North America operations of Juarez, the Brazilian real for our PST operations in Manaus.

When we provided guidance on February 11 of this year our plan assumed the following foreign-exchange rates: euros at 1.13 to the US dollar which is a devaluation of nearly 15% below the average of the 2014 rates; the SEK was set at 8.18 which represents a devaluation of 19.2% compared to last year's rate of 6.86; and the Mexico peso was set at 14.64 which was near its historical low and presents a limited amount of upside versus last year's average rate of 13.31 to the dollar; the Brazilian real was set at 2.70 for 2015 which is a devaluation of nearly 14.7% compared to last year's average rate of BRL2.35.

In total, we have balanced our transactional exposure across our European and Mexican exposures and, based on these exchange rates, we have hedged nearly 50% of our euro, SEK and Mexico transactional exposure while the Brazilian real exposure was too expensive to hedge based on the interest rate differentials between the US and Brazilian interest rates.

The more significant exposure is the dollar conversion from local currency with a P&L line item, such as sales, operating income and net income which affects sales in euros, SEK and Brazil real which mask the local currency growth we are experiencing.

When we recalculated our 2014 sales based on our current 2015 plan exchange rates we are actually forecasting to grow by approximately $40 million to $45 million in organic growth in local currency though our guidance implies nearly flat US dollar reported sales growth.

We did the same analysis for operating income as well and that analysis indicates that operating income dollars would have grown by around $7 million to $8 million, when we recalculate 2014 based on current rates and compare to our 2015 plan.

In conclusion, we published our 2015 guidance on February 11, with 2015 earnings per share in the range of $0.77 to $0.92 per share. Similar to how we performed in 2014, we expect earnings to be stronger in the second half of 2015 compared to the first half of 2015. We will now open the call for questions.

(Operator Instructions). Justin Long, Stephens.

I just wanted to start off with a couple quick questions on the 2015 guidance. Could you talk about what you are assuming for the tax rate this year and also any expectation on CapEx?

I think CapEx will inch up a little bit, Justin, from where we have been. We spend roughly I think about $27 million this year, I think it will be in that same range, and a little bit more will be for new line in the shift by wire in Juarez. So it is going to be in that same range, in the probably $28 million-$29 million range.

In terms of taxes our cash tax expense will be very similar to what we experienced in the past couple years, it will be around 3% to 5%. I think based on the stability of Brazil, and it would be profitable this year, our tax rate should affect -- be in that same range historically where we've talked about 13% to 16%.

Okay, great. So if you look at the FX headwinds, and you gave some color on the revenue impact or EBIT impact, but it essentially worked out to roughly $0.25 in EPS or so?

No, I think it is a little lower than that. It is probably -- it is more in the range of about $0.10 to $0.15 and the impact on the currency.

Okay, $0.10 to $0.15, that is helpful. And I also wanted to ask about the shift by wire business, it seems like some of that may have moved more into 2016 versus this year. Could you just speak to what drove that delay? And are you now comfortable with the timing of that business rolling on the next couple of years?

Yes, there is a push out from 2015 to 2016 and that was really at the customer -- we are following the customer's cadence on that. So as they are working on the development side, so we are pushing a little bit more into that year.

We are very confident that as these programs roll off that our forward projections are pretty solid. As we said in the past, we think shift by wire in total can be a -- probably a $150 million line business for us.

In addition, we are getting some early indications, although it is very early, that there may be some other models that we might be considered for as we go forward. So we might have some -- next year might have some additional net new business awards on this line.

Okay, great. And last question, we are a couple of months into the quarter I was wondering if you could comment on each of your businesses and how they are trending quarter to date? Are things playing out relatively in line with your expectations thus far?

Yes, I think so. I made you think the North American automotive market, as I said, still remains strong, as a matter fact it looks very strong in February. So that is benefiting Control Devices. Electronics business is playing out about where we expected and Brazil is playing out about where we expected as we go forward. So for the first quarter, as what we know today, things are at the pace that we expect.

And, Justin, that is in the light to that we said it would be more for second half because Brazil is typically lower in the first quarter. They are trending in their normal progression as they do.

So they should be -- we will have a loss in the first quarter but then we will have close to breakeven the second quarter and then we will be back in the profitability, as John said, in the third and the fourth quarter.

But for the year it does appear that we will be profitable in PST with all the actions we have taken and the top-line growth that we are looking at in track and trace and the new audio lines.

Great, that's very helpful. Thanks for the time.

Chris Van Horn, FBR.

Just a follow-on on the shift by wire. Could you give me a sense of the competitive landscape for that product? And kind of how the awards are expected to flow and what kind of your competitive advantage is on that product?

Well, our competitive advantage -- I mean the competitors in North America -- there's probably one or two competitors and they primarily are on the Chrysler platform, our products are not on a Chrysler platform. And our competitive advantage where we believe our competitive advantage is on this is that we are able to package a high torque actuator in a relatively small space.

The other thing is we have got a sizable amount of awards on this program already. So companies are finding value in our product. So it is priced right and it performs well. And we are launching this program, as we said, we are already on the Lincoln models, we are moving down for the Ford models and we are moving on the GM models. And those models will launch in 2015 and 2016.

So that is going to be one of the key things that we have to do this year is make sure we launch those models effectively. And as I said earlier, we may even have some additional opportunities there. In Europe we don't do anything on shift by wire, they have their own capabilities over there. They kind of stay over on that side of the pond and we are competing on this side. So good program for us.

Chris, the other advantage with our shift by wire, it is actually a bolt-on application to our existing transmission. So when you look at some of the competitive products, they are more the dual clutch transmission. But those tend to come when you redesign a new powertrain or a new transmission.

So what Ford and GM have done and now we're looking at other customers, it is an existing transmission configuration that they have and we can bolt-on our technologies to that. So we are starting to see some interest in expanding the two existing customers we have plus applications in Asia. And we seem to be very well positioned because of our uniqueness with our product.

Great, great. And could you give a little more color on the 9.6% growth in pass car? That is a very impressive growth rate given the SAR. And just want to get a sense of what product lines you are seeing a lot of traction with?

Well, we are seeing it on our emissions product line, on EGT product lines and also as we have launched these shift by wire. We have product on the truck platforms too which is emissions product, which is driving that.

Got it. And any sense of like the mix between pass car and light truck?

Well, that is a good question because it really does vary by product family. For instance, shift by wire is all pass car, and as the grows you will see a greater shift towards mix. But you look at some of our products like trailer tow, EGT products, there are a lot of those on the light truck platform.

Okay. So roughly split.

We're probably about 40% light vehicle and 60% in pass car. It will start to switch a little bit of the shift by wire comes in, so it will start to influence more on the auto side. And that's not saying they can't apply it to some other platforms in light vehicle, but right now they have not done that except GM has done that with some of their SUV applications with the Cadillac line.

Got it, got it. Great, thanks so much. Thanks for taking my call.

Jimmy Baker, B. Riley & Company.

First I just had a question on the -- as I look at the revenue guidance. So at the midpoint you are looking for call it a $16 million year-over-year improvement. But you have again at the midpoint $16 million of net new business coming online in 2015. So can you just explain why like all of your recurring business nets out to flat for the year? It seems to be something more significant than FX is triggering this.

I think it really does stem around currency, Jimmy, is that if you look at -- and we have gone back and looked at the 2014 run rate versus 2015. And if you look at the impact in total it is approaching $50 million, as I mentioned in our analyst speech. So a lot of this is the currencies influenced about half in Europe and half in PST, almost evenly split between that $50 million impact.

Okay, well maybe I am going to stick on the FX scene then. If I look at the 26.9 gross margin in the quarter, first does that have any unusual charges in it? And then separately, can you kind of help us walk through what is driving the higher direct material costs, if that is entirely FX?

And did I understand your comments correctly that if this FX headwind continues into 2015 that you might see some of your cost initiatives that are outlined on slide 12 offset by the FX headwinds?

Yes, the biggest challenge we have in Brazil, as you know, we had the same issue in 2012, that if our competitors have inventory on stock there is a reluctance to really raise prices. But with the real now going at about 15% that has a direct translation into raw material cost in Brazil.

And our real challenge, because we can't really hedge it, it's so we expensive because of the interest rate differentials, that we have to work on raising prices or redesigning and coming out with new products like in our large system business we traditionally launch a new line generally between April and June and we try to get prices up that way and then try to bring the whole market with us.

So we are actively working on price increases in Brazil right now to offset some of that. And it is really being driven by Brazil right now because of the significant currency change and what that is doing to their imported raw material cost.

Okay, great and then just lastly kind of a housekeeping item. Just to clarify, there seems to be some confusion on the adjusted EPS schedule. So does your adjusted EPS include the tax benefit that you booked in your GAAP results for the fourth quarter? And then did I just hear as a response to an earlier question that your 2015 guide assumes a 13% to 16% book tax rate?

Well for 2015, yes it does, that is the rate that we will look at because the unusual thing in 2014 is there is a nuance in the tax laws in Brazil is that once we incurred a loss for the year, which we did, at their local currency levels, then you go back and you book a tax credit based on their statutory rate, which is 34%.

Now that we are back in a profitable position for this year we will be back accruing taxes in Brazil at 21% for the year, which is their benefited rate from Manaus. So -- and then in our schedule the only adjusted items that are in there are the PST goodwill and then the costs that were incurred, the premium costs and the amount of the amortization of the prior deferred cost from their previous financing. So that is what is showing in the adjustment schedule for the $0.36 and the $0.81 for PST goodwill.

There is actually an exhibit, Jimmy, on the -- right at the very end of the press release that ties into the P&L and shows you the adjustments.

Understood. So just to be clear, those have no impact on your tax rate so the tax benefit remains, correct?

Right, that's right.

The goodwill wasn't tax affected.

Right, the goodwill has no impact and then all of the financing costs and the interest is really in the US where there is no taxes.

Okay, great. Very helpful. Thanks for the time, guys.

Robert Kosowsky, please state your company name, sir.

Good morning, guys, Sidoti. I was wondering on this slide 8, the 3Q to 4Q earnings bridge, you had an $0.08 negative variance with Control Devices and Electronics overhead. Can you expand on what that is and kind of the sustainability (inaudible)?

You said slide 8?

Yes, slide 8.

Well, as I indicated in the speech, we have some -- we have incurred some higher warranty cost in there, we had some higher compensation and then we didn't get the reimbursement of some of the engineering.

I think the real question at the end of the day, Rob is, those are not continuous increased costs in overhead.

Okay, so the $0.08 essentially was a one-time negative variance in the quarter that is going to be relieved as we go throughout the year.

Yes, third quarter to fourth quarter, right.

Okay. And then also do you see any benefit from the decline in raw material prices generally speaking?

We are working aggressively on that right now to get some of those. We have not yet seen that benefit come through on our contracts. But we will expect to look at that as we go forward. We will see because particularly with oil prices we are looking at all our plastic parts and our resin suppliers and looking to push them down on pricing actions.

We are also looking at transportation costs and our freight carriers and looking to see if there is opportunities there to drive cost lower. On electronics we don't see -- we see that normal kind of cost recovery on those items. So the big opportunities are on the resin products.

Okay, that's helpful. And then with PST, can you talk about what the gross margin headwind might have been because you are slowing down the inventory? How much inventory you need to see brought down? And then finally, the cadence of that $13 million of cost benefits you are going to see?

Well, the cadence for the labor and the overhead side is in place so that will be evenly over the four quarters. The other piece is the savings on the redesign of the audio line and originally, and we still have about $5 million of inventory that we have got to pull down. And so it is slated that we will start and have the implementation between April and June of the new line.

We factored that into the overall savings that you are seeing on the chart, but that is one of the influences, Rob, of why the profitability looks much better in the third quarter than the fourth quarter. Because we have it fully implemented with the audio line, track and trace is in place and we are signing contracts and moving forward.

So that is the dilemma and we didn't want to lower the price because all that does is take the price down in the overall market. So we have been selective how we have done that, we have reduced inventories we mentioned $6.5 million, we have got another $5 million that will happen between January and April.

But we will have new product coming in through that April/June timeframe and that is one of the big reasons why that benefit comes more in the second half.

Okay. And then did you say what the cost headwind was or the margin percent headwind was from the drawdown in inventory in the quarter?

No, there really wasn't any impact on that. It was more of a mix of products and the cost increases in the raw materials is what we have. So they are running a lower gross margin, they historically have down around 38%. But I think with the positioning that we are looking with the cost savings and also the new audio line, our margins will get back up in that range of 40% to 43% for this year.

All right, thank you very much.

Andrew Fleming, Heartland Advisors.

Congratulations on the deleveraging of the balance sheet. So I am just curious, it looks like we ended fiscal 2014 with $87 million of net debt. Where do you anticipate that being as we exit 2015? Especially when you noted in your earlier commentary that we will be able to take the inventory levels down in PST, I am wondering how much cash you might be able to generate from that.

Well, that will probably be another $5 million. But I think as you and I have talked, our mission at this point with our low interest rates is not to really take debt down substantially. I think for the year we are forecasting that it will be a margin of reduction, probably somewhere in the range of $5 million to $10 million in debt.

The real challenge we have is where are we going to invest. And we are actively looking at bolt-on acquisitions, we are making investments to really support our growth in Asia and with the shift by wire. So that has been a lot of the focus and where we will continue to focus for this year.

Okay, great. And then what is your -- I missed the earlier commentary. What do you expect your quarterly interest expense to be? Is it the 1,800 -- I'm sorry, the $1.8 million this quarter, is that a good run rate to think of going forward?

Yes, I think based on the new rates we are looking at is that our quarterly interest expense will be somewhere in the $1.3 million to $1.4 million range.

Okay. And the guidance for 2015, what would be the organic growth rate if we excluded PST?

For the two businesses we are probably looking somewhere right around 4% to 5%. And one of the things that has happened, Andrew, is that a lot of the shift by wire, we still have roughly $17 million to $20 million in new business which is coming and a lot of that is shift by wire. But a lot of that is now sitting in 2016. In fact we have the largest lift ever in the history of the Company, about $85 million of net new business in 2016.

Okay. And then as we are trying to think of the inherent operating leverage in the business model, is SG&A pretty fixed at about $30 million a quarter moving forward?

SG&A is going to be pretty flat this year. We are looking at very little increase at all partly because of the -- one, the reduction that we have seen in Brazil we have done. So it is going to be flat compared to last year.

Where we are really going to see and your question is as we ramp up the leverage that we are going to get from our new products, especially shift by wire is going to come on the op income side as opposed to gross margin. So I don't think we will see a huge lift on gross margins, but we will end up experiencing a leverage at the op income level.

Okay, and just so we are clear, so you have guided to a gross profit margin between 28% and 30%, looks like SG&A will be pretty flat at about $30 million per quarter. And then design development, are you targeting that as a percentage of sales?

Well, we have historically, but we generally have spent a dollar amount, somewhere in the range of $40 million to $43 million depending on what we're doing. I think the philosophy we have within our business teams and ourselves is that we can leverage that too.

So it is not a matter we are going to increase the same percentage to sales. As our sales ramp-up I think you will see our dollars stay fairly constant in that range and then our percent of sales will go down from there.

And a lot of it depends on what we see as opportunities that are coming up (inaudible). So we are already looking at what we might be doing in the 2017 and 2018 year time -- 2017-2018 timeframe. But right now as we look to fill in those things there might be slightly higher initial [D&B] expense for some of those programs.

Okay, great. Well, appreciate the step pay down and the continued focus on Control Devices and Electronics.

(Operator Instructions). [Daniel Nouri], Varna Capital.

Hi, this is Svetlana Lee from Varna Capital. Congratulations on delevering the balance sheet. Just a quick question on the PST debt. Is that debt still denominated in US dollars and how much of that remains?

No -- very good to talk to you again. But our Brazilian debt is predominantly all local currency. We have really gotten out all of the dollar debt. And of the debt that we have 75% is really what we call state tax incentive funds that we borrow from the [Sudamfanami] because we spend enough money on new technology that we are granted term loans, they generally run about three years and our interest rates are in [reis] at 4.5% to 5.5% for that debt.

And then we do have in the piece that I talked about of paying down is really working capital loans that we've borrowed and those rates tend to be in the 11.5% to 12% range. So our mission this year is to pay down the working capital debt and then we will continue -- we will pay down the maturities of the state tax incentive funds over their current maturities which are -- I think they pay out over the next two to three years.

That is great. And then is there any US dollar exposure there on the transaction side?

Yes, there is because we import -- and it varies. It is somewhere between $1.5 million to $3 million a month because we import a lot of components and assemblies out of China. Historically what we have done is we have actually deposited in dollars as a way to hedge that mechanism from the currency and so that is our one real exposure in dollars and we estimate.

And when I talked a little bit earlier about the transaction cost and the change in the currency, there is built into that $0.11 that I said to Justin there is roughly about $0.04 dealing strictly with that item, the transactional exposure that we have in PST for importing dollar components and assemblies.

Okay, that is helpful. And then can you talk a little bit about the M&A opportunities now that you are in a good position to get some of the cash flow to deploy there?

Yes, I mean when we look at the control device products, as we have said all along, we would look at things that are perhaps in the actuation space as we might want to fill out that space. We think there are some good growth opportunities in there beyond our shift by wire and some of the front axle disconnect products we have. So we will look at that.

And we will also look in the emission segment, we are going to look at some things in there in the sensor side of the emission segment that may offer -- may fill out that portfolio. And as we've said, we would look at things -- we have got a good position in North America so we would be looking at -- to see if we can enhance our position in Europe on the Control Device products.

On Electronics it will predominantly be looking at maybe -- I would say module suppliers that are currently competing on the smaller (inaudible) and smaller volumes, so that could be anything from door modules or products like that. And then we'd also look at perhaps instrumentation.

And then also as we look at the emergence of what is going on in the market, we might be looking at some opportunities in the -- I would say the in cab enhancements that would enhance driver safety and driver visibility.

And one of the things we are seeing in the market right now is there are a lot of opportunities coming up in Europe. And it seems to be driven by the low interest rates. And there seems to be an expectation or at least a feeling that if some privately held firms want to monetize a piece, this seems to be an appropriate time to do it. So we have seen a significant increase in opportunities in that part of the region of the world.

Great, thank you.

Thank you for your questions, ladies and gentlemen. I would now like to turn the call over to John Corey for the closing remarks.

Yes, again, thank you for joining us on today's call. As we look forward, the markets, as I said, North American automotive, commercial vehicle market look very good for 2015, European market is improving in 2015, and the Brazilian market we've essentially booked in our projections as being a flat market.

But I think that the -- we are going to continue to improve the performance in our businesses and we should continue to be able to improve the delivery of results. And then with potentially our ability now to invest in acquisitions for the business I think Stoneridge has got a very good possibility of growing significantly in the near future. And with that I would like to thank you for joining us on the call.

Thank you for joining in today's conference, ladies and gentlemen. This concludes the presentation. You may now disconnect. Have a very good day.