Stoneridge Inc (SRI) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Stoneridge fourth-quarter 2013 conference call. My name is Sue, and I will be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Ken Kure, Corporate Treasurer and Director of Finance. Please proceed, sir.

Good morning, everyone. Thank you for joining us on today's call. By now you should have received our fourth-quarter earnings release. The release and the Company 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. The 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 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, under the heading Forward-Looking Statements.

During today's call, we will also be referring to certain non-GAAP financial measures. Please see the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

John will begin the call with an update on the current market conditions, operating performance highlights and growth strategies, business development, and his thoughts on future initiatives. George will discuss the financial and operational aspects of the fourth quarter and our 2014 guidance.

We've prepared and published an earnings presentation to provide more detailed schedules to help your understanding of our fourth quarter, year-over-year results and trends. 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'll open up the call to questions.

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

Thanks, Ken. Good morning, everyone.

We've seen continued improvement across most of our business segments over the last three quarters. However, the fourth quarter was disappointing regarding the performance of wiring and PST. As mentioned in our release of February 5, we incurred higher costs for premium freight and labor in wiring, as demand changes impacted production. Weakness in the Brazilian economy and a supplier quality issue had a significant negative impact on our results in the fourth quarter.

2013's fourth-quarter consolidated revenue, as shown on slide 6, was $235.8 million, an increase of 5.9% from the fourth quarter of 2012. Sales for control devices in North America, combined with commercial vehicle product launches and a limited pre-buy effect in Europe, were positives to the revenue line.

PST sales improved 13.7% in local currency, though the weaker real to the dollar offset this increase on a US-dollar basis. The Brazilian real depreciated from BRL2.06 to BRL2.28 to the dollar, or 10.7% during the fourth quarter of 2013. So, while we are benefiting from a solid performance in North American automotive and ag markets, we still have not seen the sustained recovery in the commercial vehicle markets, though our electronics business growth in commercial vehicles is due to added content and new program sales.

Control devices, electronics, and PST continue to exceed our corporate growth targets, as they did in the second and third quarters. Wiring's performance continues to be impacted by weak market conditions for class A trucks, fluctuating customer production schedules, and a drop in the medium-duty business as a result of a key customer in North America.

Our full-year operating margin improved to 4.2% this year, compared to 3.1% last year, on slightly higher sales. We reported $0.56 per share for the year compared to $0.20 per share for 2012. The fourth quarter was significantly below expectations, driven by the performance of the wiring business and lower expected results from PST.

In our wiring business, lower volume resulted in operating inefficiencies, and lower recovery of overhead costs in our Mexican facilities. Because December is traditionally a lower-volume month, and January a significantly higher-volume month, we maintain some labor and overhead resources in place in anticipation of the production ramp-up we expected, and to a certain extent, have been experiencing in the first quarter of 2014.

PST sales were higher by 13.4%, as I said, in the fourth quarter compared to the fourth quarter of 2012, in local currency, even though those sales also came in below our expectations because of PST's delayed shipments in the audio line due to a supplier component quality issue. We delayed these shipments to protect the brand, and to avoid future warranty costs.

New and replacement business awards for Stoneridge, excluding PST's businesses, in the fourth quarter was $74.2 million, representing $21 million in new business awards and $53.2 million in replacement awards. The cumulative 12-month total for Stoneridge, excluding PST, totaled $185.7 million, of which $115.9 million were new business awards, and $69.8 million were replacement awards.

Our new business wins in the fourth quarter include an instrument cluster award for commercial vehicles from a large North American OEM for its North American and European markets; and a soot sensor award for a North American commercial vehicle customer. This is one of our developing emissions technologies, and this award represents our second soot sensor award in 2013. While these initial awards are small, they validate our technology, and position us for further growth in this product line.

We expect net new business to be $176 million over the next five years, driven mainly by technologically advanced, higher-value-added products. In addition, our net new business sales for 2013 were better than expected by more than 20% compared to the high end of our expectations. A breakdown of our segment results can be seen on slide 6 of our earnings presentation, while slides 7 and 9 provide significant detail around our year-over-year and sequential quarters of business progress by segment.

Control device revenue is mostly comprised of North American automotive and light truck business. However, they have future growth for emissions applications in the commercial market in Europe and in Asia, and actuation, or shift-by-wire, in the North American and Asian markets. Control devices' 2013 year-over-year fourth-quarter sales has an increase of 12%, while compared to the third quarter of 2013.

Control devices decreased by 1.7%, which is more than we expected for the fourth quarter, though some reduction was expected from the holiday shut-down. Sales in our passenger car and light truck category were an 8.6% year-over-year increase, primarily due to volume increases and new product sales. For control devices, global opportunities that are being mandated with higher emission standards and fuel economy guidelines, coupled with technological capabilities like soot sensor and shift-by-wire, new business wins referenced in our previous call will benefit future performance.

The electronics segment sells primarily to the medium- and heavy-duty trucks and buses' markets globally. The electronics group is performing well, in spite of Europe's and North America's commercial vehicle market performance, and in line with their long-term organic growth goals. Year over year for the fourth quarter, the electronics group reported a top-line sales increase of 24.8%, which was the result of a limited pre-buy effect in Europe, and product launches which began in the second quarter.

Compared to the third quarter, electronics' sales increased 15.3%, due to increased orders prior to the emissions regulation changes that will take effect in 2014. The electronics group has a great partnership approach to their global clients, which has resulted in the deep knowledge of their customers. The team has developed some very strong engineering and software capabilities, which has helped expand our content and develop larger platforms, which should help us maintain solid growth for the years to come.

The wiring business is about 60% medium and heavy truck, and 40% ag, and predominantly serves the North American market. Wiring has, for several quarters, been impacted by lower overall market demand, and share loss by one of our customers, which continued in the fourth quarter.

The Business faced continued ongoing revenue challenges, as it roughly down 8.5% on a year-over-year basis. This includes an 18% reduction in commercial vehicle sales compared to the fourth quarter of 2012. The year-on-year reduction was the result of continued lower sales to a large North American commercial vehicle customer. Slide 11 contains the details.

Agricultural equipment sales decreased by 1% in the fourth quarter compared to the fourth quarter of the prior year. Lower volume increased the impact of seasonality on this Business. During the fourth quarter, we made the decision to maintain labor and overhead resources, rather than to ramp up from a traditional December low-volume month to a higher January, a problem we experienced at the beginning of 2013.

Because the wiring business is labor-intensive, ramping up and ramping down creates inefficiencies and labor imbalances due to production schedule variability. The wiring business had a negative impact on labor, mix, and overhead costs in the fourth quarter of 2013 of $0.16 per share, as compared to the fourth quarter of 2012, as indicated on slide 12, while sales were $6.2 million lower than in the fourth quarter of 2013 compared to the fourth quarter of 2012. Longer term, if the commercial vehicle orders do not improve, we will need to adjust production capacity.

PST sales in the fourth quarter of 2013 were 13.7% higher than the fourth quarter of 2012 on a local-currency basis. On a US-dollar basis, PST sales were 2.9% higher than the fourth quarter of 2013 because of the de-valuation of the real compared to the prior year, and 4.9% higher than the third quarter of 2013. PST's local currency sales also posted their 4th sequential sales increase.

For the year, PST's 2013 sales of BRL385.3 million were up 9.9% compared to 2012, though on a US-dollar basis were basically flat because of the currency de-valuation. PST's revenue increases, product mix, cost initiatives, and debt-reduction actions taken last year continue to be key factors in their profitability improvement. The estimated EPS impact for this quarter is seen on slide 12 of our deck.

PST continued to see very solid gross margins, which, excluding $300,000 for purchase accounting, were slightly lower at 38.4% in the fourth quarter of 2013, compared to 44.3% in the fourth quarter of 2012. Margins were lower as the service business was impacted by general economic concerns by customers, a partial reduction in service programs from a large insurance company, and increased audio volume sold through mass merchandisers and OEM dealers, which carries a lower gross margin than the after-market products.

Our Minda joint venture in India continues to deal with the economic slow-down and significant de-valuation of the currency. Minda's sales increased about 5% compared to the prior year, despite being affected by weaker economic environments in the region. Our share of Minda's net income from operations for the fourth quarter was slightly above break-even, and above the profit of $41,000 in the fourth quarter of 2012. Our translated profits were also adversely impacted by a 14.5% de-valuation of the Indian rupee compared to the US dollar.

In summary, while our financial performance in 2013, while not as good as projected, it did significantly improve over 2012. 2013 earnings per share of $0.56, or 180% above our earnings per share of 2012 of $0.20 on a 1% sales increase.

Three of our four business units are performing to our expectations, while our wiring business continues to face market and cost challenges. We continue to balance our cost structures for the wiring business to balance production schedules to customer demands. Our objectives of top-line organic growth and more sustainable cost position, improving technology in our development of new products, and lastly, our improved balance sheet, have kept Stoneridge largely on track.

As we look forward to the performance in 2014, we expect to see continuing benefits from the North American automotive markets in the control device business, and improvements in the European OEM production environment, benefiting electronics. We expect for see improvements in PST due to new programs and services, and cost initiatives being implemented in the third and fourth quarters of 2014. Finally, we expect to see improvement in wiring as we achieve a closer balance between demand and production capacity and cost.

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

Thank you, John. As the markets have been generally improving over the last six quarters, we've been able to benefit from the actions that we implemented during 2012 to improve our operations, reduce our costs, generate positive cash flows, and reduce our debt levels. Our [fourth]-quarter 2013 performance, though, was not to our expectations. Lower-than-expected [sales], unfavorable mix, and higher cost affected our performance.

Revenues in the fourth quarter were $235.8 million, an increase of $13.1 million, or 5.9%, over the fourth quarter of 2012, driven primarily by higher market activity in North America, and new business sales in North America and Europe, and stronger export sales from Europe and Brazil with our largest European customer.

Revenue in the fourth quarter of 2013 increased by $1.3 million, or 2.9%, over the third quarter, [due to] the increased sales of audio [at] PST. The trend in the market has been improving over the last six quarters. And from the improvements in our margins, we've been able to leverage these revenue gains over the last four quarters.

We also believe that with further operational improvement, especially in our wiring business, as John discussed, and continued (technical difficulty) our control device and electronics businesses, we can leverage our earnings further. We believe we are positioned well to improve gross and operating margins if the markets continue to recover. Our earnings per share in the fourth quarter of 2013 [were] $0.01 per share compared to our fourth quarter of last year of $0.10, and down significantly from our $0.19 per share reported in the third quarter of last -- of 2013.

We posted operating margins in our Stoneridge business, excluding PST, of 2.9%, compared to 3.2%, with sales being higher by $4.4 million. For consolidated Stoneridge, including PST, our operating margin decreased in the fourth quarter of 2013 to 2.9%, from 3.9% in the fourth quarter of 2012, due, in part, to labor and overhead resources we maintained in anticipation of increased first-quarter 2014 commercial vehicle sales for the wiring group, as well as reduced sales of higher-margin products at PST.

Operating margins, excluding PST, decreased 2.9% in the fourth quarter of 2013, from 4.3% in the third quarter, due mostly to our wiring business. PST's operating margins, excluding purchase accounting, was 6% in the fourth quarter, which is a decrease from the third quarter of 8.6%, which was due mostly to lower sales of car alarms.

Contributing to our performance were improved material costs as a percentage of sales, benefiting the year-on-year earnings performance increase. Slide 14 of our deck shows the direct material impacts of these actions of Stoneridge, excluding PST gross margins. The PST impact was due mainly to lower service sales and higher audio sales in the quarter.

In the fourth quarter of 2013, operating cash flow was an inflow of $21.2 million. Fourth-quarter 2013 cash flow was negatively affected by increased inventory to support increasing sales levels, mostly in PST, and cash deposits dispersed by PST for our Chinese suppliers to offset currency de-valuations of components denominated in US dollars. We plan to reduce inventory levels for both the wiring business and PST in the first quarter of 2014.

Slide 7 of our deck has a complete P&L break-out on fourth-quarter 2013 versus 2012. Slide 6 identifies Stoneridge, excluding PST, sales, which were 6.6% above the prior year's fourth quarter, and primarily due to the passenger car, and light truck and commercial vehicle businesses. Slide 12 of our deck identifies the major bridge-item differences between the fourth quarter of 2013 and the fourth quarter of 2012 earnings per share. The fourth-quarter 2013 compared to the fourth quarter of last year difference is primarily due to higher volume, lower direct material costs, cost-reduction benefits offset by wiring [inefficient].

Positive cash flow continued to be one of our primary objectives for 2013. Cash generation has allowed us to reduce our enterprise risk and make great (technical difficulty) debt-reduction goals, as well. (technical difficulty) slide 16, we improved the total debt-to-EBITDA ratio from 3.5 times at December 31 of 2011, to 2.9 times at December 31 of 2012, to 2.7 times at December 31 of this year. During 2012, we reduced debt by $65.7 million. During 2013, we reduced another -- debt by $4.2 million, and our ABL remains undrawn since November 2012.

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

We are encouraged that some of the business segments and markets are running well. The control device and electronics business units are performing well. Each one of these business units have been able to perform well above the market growth rates. Control devices was up 12% in the fourth quarter of 2013 over the same period of last year, which was on top of their sales increase in the third quarter of 2013 of 12.7%.

For the year, control device sales increased by 8.7%. Their growth is reflecting the business unit's capability to focus their technology and product offerings to meet market requirements, geographic reach, and ability to meet customer requirements across all our technologies to multiple customers.

Electronics has been able to grow significantly in the face of commercial market being down in both the European and North American market. The electronics business unit sales were up 24.8% in the fourth quarter of 2013 compared to the fourth quarter of last year. This was driven by significant sales improving European volume, mostly as a result of limited pre-buy, and product launches that started in the second quarter of 2013.

The electronics team has been able to enhance their software engineering capabilities to build more integrated solutions for their global customers, such as the (inaudible) instrumentation in the Asian market. They are working to build their successful product and technology platforms using their European capabilities, which will permit them to transfer the capabilities to the North America and Asia markets.

PST still has some risk due to the uncertainty of the overall Brazilian economy, and this (technical difficulty) de-valuation of the Brazilian real over the last two years. In the first quarter of 2012, the real [to the dollar] was about $1.75. Today, it's about $2.34, which represents a de-valuation of nearly 34% during the period.

The market in Brazil has become more complex during the last five years. During the last five years, PST's market channels have changed from 85% aftermarket to about 32% after [the] 21% OES dealers; 2.9% OEM dealers; (technical difficulty) with mass retailers; 19.3% with tracking devices; and 7.9% with their Argentina branch.

This has led to more complexity, but also offers PST many more opportunities to expand product offerings, new technologies, and ability to enter adjacent markets. A few examples -- PST is now entering the cargo tracking market and home security. We have discovered that cargo tracking is a very technical sale driven by more driver management applications. It requires more benefits and features, but once these capabilities are developed, they represent long-term sales opportunities.

We've reduced our dollar exposure to minimize the potential de-valuation risk of the weakening Brazilian real. We had $25 million of US debt in the second quarter of 2012, which has been paid down in (technical difficulty) $3 million by the fourth quarter of 2013. We deposited US dollars for US-dollar-denominated imports as a way to protect our dollar-direct material purchases. At December 31, 2013, our cash deposits were $8.2 million for inventory [and transits].

Overall, PST's performance in the local market has improved in the last five quarters. PST's mix of products has improved with alarm systems and tracking devices, returning to their historical share of PST's sales. With the disruption in the market and the troubles with some of the Chinese competitors, we are experiencing return of some of the volume and pricing of the audio business, while margins are returning for total PST to more historical levels in the 40% to 43% range.

PST is looking to resource its audio electronic components through design [houses] by the third and the fourth quarter of 2014, which [will have] a significant cost improvement. The annual benefit for 2015 would be expected to be in the range of $3 million to $5 million. We are forecasting that PST's growth will continue in the tracking device area, which will keep their gross and operating margins in the range of the historical levels.

The wiring business is the one business segment that we continue to provide resources and people to enhance the processes to make sure our cost structure is in balance with the variability we're experiencing with our customers' schedules. This is our one business that is labor-intensive and must have robust supply-chain processes to make sure we can keep our production schedules aligned with our customer demands.

With a significant drop in sales from our large commercial customer, our production schedules were significantly impacted, which led to cost inefficiencies and excess inventories. This has been a challenge again this year, as we continue to experience significant variability from our customers' [demand] schedules, or in a few cases, the customers' schedule has been down this year to date, and the fourth-quarter forecast continue to show declines. We will continue to work to make this business successful, as it's been over many years.

In summary, 2013 performance in the first three quarters was largely as expected, but was adversely affected in the fourth quarter. However, we've been able to manage and perform well within the markets that we participate. Our diversification has provided us the opportunity to minimize some of the volatility that has been different in each one of the business segments. The passenger car market in North America, our electronics businesses in Europe, and PST in local currency has performed well, in spite of the lower market in Europe. The commercial market in Europe has been down, but we have been performing well, and it appears we are starting to see some strengthening in the forecast later in the year.

PST is starting to show more stability in the market, but still faces uphill challenges. The overall GDP is growing around 2%, and the consumer setting is somewhat pessimistic. We believe that the wiring business can be fixed to run in the range of 4% to 6% operating margin. We do believe the commercial market fundamentals are still favorable for volume increases in 2014. We are seeing weakness in the ag market. It now appears that ag forecasts are showing a reduction of 5% to 7% for 2014 compared to 2013.

Regardless of the market changes, we continue to manage those activities that we can control. We continue to improve our operations, and our operations team has put in place standard metrics across all 19 facilities worldwide, with specific objectives for cost management, quality, and delivery of service targets. Each one of our business segments has worked to improve our raw material cost of sales over the last eight quarters, and we've recognized the improvement.

We have managed our controllable costs like SG&A and D&D to hold the line in costs in relation to our top-line sales. We continue to work on our direct labor costs and overhead costs in relation to sales, and we try to react to the volatility we're experiencing in our customer demand schedules, especially in our wiring business.

We believe we have positioned our four businesses well to deliver improving operating and financial performance in 2014. Based on this, we released our annual guidance for 2014, with sales in the range of $994 million to $1.083 billion; gross margins in the range of 25.5% and 27%; operating margin in the range of 5.3% to 6.3%; and EPS in the range of $0.80 to $1 per share.

We will now open up the call for questions.

Thank you, ladies and gentlemen.

(Operator Instructions)

Please stand by for your first question. Your first question comes from Justin Long, Stephens, Inc. Please go ahead.

You've talked before about a target at 6% to 8% organic growth in the top line over the next few years, and it's something you mentioned in the prepared remarks, as well. I was just curious based on the contracts you've won, and it sounds like there's been some pretty significant contract wins in 2013, how much visibility do you have in that target? Is it a pretty significant portion of that 6% to 8% that's already locked in, or is there still more work to do?

When we do our net new business, Justin, we have a lot of visibility to the -- I would say the next two to three years, because many of our contracts we do development work of two to three years, and those contracts run for anywhere from three to eight years.

When you look at our growth in 2014 as it come in, and if you take the mid-point of our cadence we have in our release and our presentation, we come in around $23 million then jump to around $37 million. In 2015 it goes to about $48 million. Most of those contracts are all ready and we've alluded to, have been shipped by wire.

We have some EGT contracts and some instrumentation. For the next three years, those have high visibility and pretty well on track, and we don't see really deviating much from the cadence that we share with you in our net new business outlook.

Okay. That's helpful. Thanks, George. If I look at your 2014 guidance on an EPS basis, it's a pretty wide range. I know there are a lot of moving pieces, and that makes sense. If you think about the major swing factors that would cause you to either come in at the low end or the high end of this guidance, what would they be?

I think there's probably two. We do believe that in the commercial market in North America, we have seen the trough, especially with our key customer in the third and the fourth quarter, and that continued throughout the second half. There are probably -- we've seen some up-tick in Navistar at our customer here in the first quarter.

I think the negative that we're seeing right now is that in the ag market, there's been releases that are now we would project for to go back probably in the late third quarter or early fourth quarter, looked like the ag market would be up maybe 2% to 3% for the year. It now does appear it's going to be down 5% to 7%.

I think the extent of the drop in the ag market would be one risk. I think where we come out with our largest customer in North America in both the Class A -- and quite frankly, the medium truck, which is even more important. That market was up last year, and we were down fairly significantly, and it was really driven by our key customer.

Then Brazil -- I think we've shared with you that our quarterly trend on sales have been very good in local currency. We were up roughly about 13% in the fourth quarter. We've been up quarter to quarter over the last six quarters.

But it's always under the influence. You've got GDP running at 2%. We continue to see the devaluation of currency fairly significantly, which has offset a lot of the local currency growth.

I think as Brazil sort of moves forward, it's really how does that economy react to where it's at. It's seen significant devaluation. I think as we shared with you in the past is that we've done a lot of work to balance our currency exposure, but the key thing is we still import roughly $3 million a month for our components, primarily in the assembly alarm system, but really in the audio.

That ultimately says you have to take price increases in the market. We found in 2012 that became a little difficult because there were a number of competitors. Certainly that's helped because our largest Chinese customer declared bankruptcy five months ago. Sony had exited that end of the market.

I think some of those product lines will be influenced by the overall economy and where the currency sort of moves forward. And they raised interest rates to offset that, which has a potential to slow growth in Brazil, but the GDP is down running around 2%, which is half of what it was two years ago.

Right. If I look at your assumptions in your 2014 guidance for Brazil specifically, what are you assuming on both the top line and from a margin perspective?

Well, I think we're -- the top line, we're in the range of probably 6% to 8%. It could be a little higher than that, it depends on the audio volume that we have.

The margins, we believe -- we've shared with you that we're working on changing some of our sourcing patterns for the audio equipment to show some potential to improve that margin, but that would be mostly for 2015. But if the mix stays about where it is, you saw in the fourth quarter we're down around 38%. But I think our targeted range is right in the 40% to 41% for Brazil with the mix of products that they have.

Okay, great. That's helpful. My last one was on the cadence of earnings throughout the year. It sounds like there were clearly some near-term head wins in the fourth quarter. Some of those might persist into the first quarter. How should we think about your earnings progression throughout each quarter of 2014, getting to that guidance number for the full year?

Well, I think a good way to look at it is that it's clearly going to be second-half loaded, both from a demand side and from the commercial side. I think you're going to see a sequential -- PST, as you know, is a cyclical nature, and tends to have a better second half than a first half. (inaudible) in the first half, you're probably looking in the range of more 30% to 40% of the guidance, and then the rest will be in the second half of the year.

Great. That's helpful detail, George. Thanks so much for the time. I'll pass it along.

You're welcome, Justin.

Thank you. Your next question comes from Brett Hoselton from KeyBanc.

This is actually Irene in for Brett Hoselton. How are you this morning?

Hi, Irene.

I had a couple of questions for you guys. Your guidance, looking at your revenue, you've raised your revenue mid-point by 2.5%, but margins and EPS range all remain the same. There are two parts to the question. What drove the increase in revenue guidance, and why do you not anticipate that higher volume to roll through to the bottom line?

Well, I think we're seeing two things. We're recovering from the wiring business and in some of that, the volume really comes in in the second half. We're still trying to work, as we alluded to in the fourth quarter, we're balancing our customer demand with our production schedules. That was a little bit out of sync in the fourth quarter.

We still have a little bit of that going on, so that's going to tend to dampen some of the profitability on the sales lift that we experience there. But I think we will have that trued up by somewhere in the second quarter.

Then Brazil, their mix of their products has continued, so that's lowered the overall margin. As we shared with you before, the audio tended to run down in a gross margin around 25% to 28%. Somewhere where we talked about the design (inaudible - technical difficulty) has the ability to raise that margin by anywhere from 2% to 4%, but that's going to become -- that won't really be fully in effect until 2014 -- or 2015, I'm sorry.

I think it's a mix of the products in Brazil that's going to lower the margins a bit, even though their volume is going up, because there's a major launch in Brazil in audio. We're the number two audio manufacturer in Brazil now behind Panasonic, with the departure of the imports from China, and also the exit of some of the high-end component guy that got out probably about 12 months ago. I think it's really just a matching of the wiring progress and the sales side going up, and the balancing of the demand and the production schedules we have to match that.

Got it. Thank you for that detail. If I can ask you also on backlog, you mentioned a few minutes that were -- at the beginning of the call -- that you have $176 million over the next five years. That was the backlog expectations before, which were including 2013 through 2017. So is this over the next five years meaning shifting it out 2014 through 2018?

No. Irene, remember how the schedule works, is that once it comes into net new business like it did in 2013, it's now in the base period for the following year. So it is a continuation looking out over the five years. I think the one thing we haven't included in there, and we're reassessing that, is we continue to gain on the actuation side; but we haven't really changed our overall net new business. In fact, it continues to grow.

It's just -- we gained in 2013. It looks like it's going to be about the same in 2014. Then we really start to see some lift, both on the actuation side and the ship-by-wire and our EGT. That's really coming in strong in 2015 and 2016.

We're very comfortable with where we are with our net new business. I think the thing about when you look at the schedule, once you go through the net new business, it goes into the base for the following year. We may update that some with our ship-by-wire, because we're working on some other platforms with our two key customers on that side.

Can you tell us if any of that new business is going into your commercial vehicle segment, wiring operations?

No, most of -- in fact if you look at the -- there's a chart in our last release that we had on net new business -- the wiring, we have some new customers coming in there, but for the most part our growth is really coming in electronics, control devices, and PST.

As you know, we don't include the growth in PST in that growth chart of $176 million. That's independent. So almost all that growth is really coming in control device and electronics. But I do want to remind you this year we exceeded our net business by almost 20% in 2013. We feel pretty comfortable where we're going in 2014 and 2015, especially.

Thank you for that detail. The last question I had for you, PST, you mentioned delayed shipments in audio due to supply quality issue. Can you tell us, are there any anticipated costs associated with that quality issue, like a potential warranty cost, or other forms of financial responsibility? The second part to that, do you expect these delays to continue and when do you expect normal shipments to return?

Irene, well the quality issue was related around a transistor that was intermittently defective, so it was difficult to determine whether there's a real failure mode, or whether there was just -- it took us some time to figure that out. We went back to our supplier.

The supplier didn't believe that this was a problem because they couldn't detect it in the boards they were sending to us. So it took us some time to do that. So we pulled products off.

In the mean time, they were shipping products to us that potentially will impact us into the first quarter of this year, because we're not sure those products are valid, viable products to put into the audio line. I expect that we'll see continued supply disruptions that starts -- which will phase out by the end of this quarter because of that product.

I think the team down there did the right thing. I mean, if you follow the progress of our audio line, we've done -- they've done a very good job in building that audio line. As George said, it's now the number two audio line.

But in addition to that, as we're growing and we're gaining that volume, we are now starting to leverage that volume, which is the next phase of that project, which will drive the cost savings that George mentioned going forward, because we're now into the design houses and using more common components, and we're getting volume purchases on those components.

So the quality problem was contained. We don't expect any significant warranty costs from that quality problem. We do still have and see slight supply problems through the first quarter of this year.

Thank you very much. That's all the questions I had. Thank you very much, and good luck in managing through all of this.

Thanks, Irene.

Thank you. Your next question is from Robert Kosowsky with Sidoti. Please go ahead.

A question on the wiring business. You've spoken about how we can get to a 4% to 6% operation margin in wiring. Is this exclusively a volume slash utilization problem, or do we need to do more work on the cost structure side?

There's really a combination of three events. One, it is a lot of volume-related improvements that are necessary. If you looked at the volume declines we've had in that business over the last couple of years from the one significant customer, they've gone about 40% decline.

We've got to replace that volume. In addition, we have a separate -- we built a separate plant for that. Timing of that was unfortunate.

There is a combination of volume improvements that need to come back into that business. More importantly, the volume improvements will give us some schedule stability.

That is important when we look at who we man the plants. That's the issue we're focusing on right now, is trying to get the proper manning in those plants related to the demand patterns that we're seeing from the various customers.

Then in addition, I would say that we may have to look at different initiatives to recover costs through charging for certain of the -- what I'll call services that we provide to the customer. In some cases, when a customer breaks into a schedule with a hot lead item, we're going to have to figure out how we get paid for that.

There will be a combination of -- I don't want to say pricing, because I don't want everybody to get excited that there's going to be a large price increase on it -- but there will be a combination of cost recovery through customer payments. Then there will be a volume improvement segment, and then an additional cost reduction as we go through. Because our costs have been a little bit higher than we expect in the business.

Okay. Can you give us a sense of what your utilization is right now versus what utilization you'd need to get to that 4% to 6%? Better than that, what truck and what market-share assumptions are needed to do?

The real way to look at it, if you look at the business historically, we need to run around a 10% to 11% on the labor line, and about a 15% to 16% on the overhead line. That would equate to -- I mean, if you look at it, it varies by plant on utilization, and then again it varies by platform.

So our utilization runs as high as 80%, and our most complex product probably runs around the 45% range. Overall we would sit there and say we've got a target to be on average at about 60%. Again, remember when you compare this to automotive wiring manufacturer, they're much higher volume, much less variability. ¶ Their utilization rates can run up into the 80% and 90% range. In the commercial vehicle ag market, where there's low volume, high variability utilization rates tend to be lower.

Okay. Does that translate into like a $400 million annual revenue line item for wiring, just to get a sense of what it means?

No, I don't think that -- I think revenue is not going to be at that range as we look at the mix of products. We're going to be less than that. I think we're going to see a modest growth this year in 2014, and then we'll continue from there.

But we're being maybe more selective in how we're looking at business, so it's not just -- it's not a volume-based business. It's a profit-based business now for us.

Okay. Just to go to numbers questions. Can you give me an idea what tax rate we should be assuming for the year and what CapEx?

The tax rate has inched up effectively. It's sitting right around 18% to 20%, Rob. That's because of the lot of profits coming from both Brazil that has effective rate, and it varies between about 19% to 20%. Europe is about 22%.

I would suggest that you could continue to use somewhere in the range of about 18% to 20%, and then cash taxes will only be -- this year it's about $5 million to $8 million. That will be about the same for next year.

CapEx will stay in the range that we have run. It's about $21 million to $23 million for the base business of Stoneridge, and then Brazil has got roughly about $6 million to $8 million. But a lot of that -- 60% of that applies to tracking devices, which is included in the service agreements. We recover that cost over the life of the contract, which tend to be about 12 to 18 months.

Okay. Finally, is the debt refinancing still on the table for I guess later this year? Remind the timing of that?

It clearly is. I think so far as we watch the markets, the markets are holding well. We're encouraged that our first opportunity that it's a refinancing by November, and Ken and I spent a lot of time in that area, and that's something we are planning to do this year.

Okay. Thank you very much, and good luck.

You're welcome, Rob.

Thank you.

(Operator Instructions)

Your next question is from Jimmy Baker, B. Riley Company. Please go ahead.

Just a quick follow-up to all that wiring commentary, which was really helpful. What's the time frame to get to that 4% to 6% operating margin target, and what have you assumed in the 2014 guide?

The way this would unfold, it will be more back-end loaded. But I think John had some other input into that, also.

Yes. I think that because of the way we see the commercial vehicle market, right now we're seeing -- as George indicated -- we're seeing some softness in the ag market. We're seeing some strength in the commercial vehicle market, modest rate, but it has to get stronger in the second half.

I would say we would start to see that more towards the second half of the year, and definitely because of some other actions that will happen at the beginning of 2015, we would be positioned then to achieve that target consistently. But a lot of it depends on the volume demand we see coming back this year, and how fast that demand comes back.

So am I thinking about it --

(multiple speakers) It will be at that low end of the range. I think the 4% to 6% should be going more into 2015. I think we can reach the bottom end of that range in the second half, and then that 4% to 6% range would be more 2015 model.

Okay, perfect. Understood. Also, the change in distribution channels for the PST JV, you talked about that fairly extensively and how that's evolved over the years. Can you give us a little more color about what drove that shift? Then as you look out over the next year or two, are you anticipating any additional major changes in kind of the distribution mix there that you might have to tackle?

Yes. As we looked at -- as you look historically at PST they held a dominant position in the alarm market in Brazil and Latin America. We were looking at the future growth of that market as we saw in alarms market with there.

We didn't see them getting significant share increases because they already had a rather large share of the market. They started looking around for alternative areas for growth. One was to continue to follow that alarm methodology, and we brought in the track and tray system, which is actually tracking cars and then disabling cars if you buy into the service.

From that we went into the cargo tracking system, which I think George alluded to again. It requires a little more customization than we originally understood for th fleets, but once you do the customization and you're on a fleet, you get some good revenue streams off of that. That follows the alarm kind of scenario.

Beyond that goes to the home alarm scenario, which we're just starting out in the market place on that. All of those elements have a potential service element, too -- a call center element where you subscribe to a monthly service and pay the fee and then you call in and use the service as needed. That's one avenue as how we've progressed, or how we will progress through that.

The second side is we looked at it. We saw some opportunities to leverage the brand name of Positron in the Brazilian market, because it's a highly regarded name because of their work in the alarm systems business, because of the quality of their product in those markets. They were -- initially the reason, their kind of reason for success was that they produced a quality product that withstood the elements and actually lasted.

As we've looked at that, then the audio line we saw an opportunity to enter into the audio line to position ourselves in a mid range -- I'll say is a mid-price-point range product with a higher feature content than other mid-range products. So we were going to position ourselves below the high-end product, above the low-end product, in the mid-range product. As that market's developed, that market, though, because it goes through mass merchandisers, does command a lower margin than the traditional distribution markets.

As we've gotten into that market, we've seen that, but as we said today, we're seeing now the next phase of that strategy unfold as we go. As we've gotten volume and we've gotten share, we made the number two position in the market, we are now able to start to leverage that, and we're actually going through this whole redesign of the product line, with the emphasis to take cost out and to improve our margins on that. That will roll out in the second half of this year and really have full benefit in 2015.

I would say over the next several years you're going to see continued expansion in those channels, but no new channels coming in. We'll still have the OES channel for the automotive, we might have a little more OEM; but relatively speaking, I think the growth rate will be driven primarily by those other channels.

Okay, thanks, John. Last one for me. Can you just talk about the opportunity to re-fi your debt here in 2014, how you'd like to see the capital structure following the re-fi, maybe in terms of net debt or leverage ratio? Also, should we be thinking about any of those savings being baked into the guide, or I assume that's just up side?

Jimmy, we built no benefit into our guidance for the re-fi, because it's so late in the year it will be roughly November. I think one of the things we're doing is, as you can imagine, that there's a lot of opportunities in market. We're looking at both long-term indentures.

We're looking at the bank debt market. That's very attractive right now. I think what we're going to do is size that depending on what we believe we can also do in some bolt-on acquisitions.

As we work through our capital structure and the flexibility one -- and one of the things we are evaluating is that, as you know, the Company generates significant cash flow. We want to make sure we also have a blend of flexibility of our debt, so that we have the ability if we generate the cash and we can still handle our bolt-on acquisitions, the flexibility to pay down some debt if it comes to that.

Those are some of the things we're looking at to provide the flexibility for our capital, sure. But there is nothing built into the guidance for refinancing, and most of the benefit will come fully in 2015 if we get the deal done in November.

Very helpful. Thanks, George. Thanks for the time, John.

You're welcome.

Thank you. Your next question comes from Rhem Wood, BB&T Capital Markets. Please go ahead.

First question, what exchange rate for the Brazilian real are you using for your 2014 guidance?

We're in there at $2.35, Rhem. Right now, as you know, the market was up to about $2.42. It's been running around $2.33 the last week or so. It seems to have stabilized again somewhere in that range, but every time we say that it starts to change again. But we're in there at $2.35.

All right, okay. Secondly, Navistar mentioned their order share had really picked up in January, February, and into March. Are you guys starting to increase your production schedules there? Are you starting to see that already? When do you expect to see that specifically?

Well, we've actually -- if you looked at our first month, we saw some improvement in Navistar's business. We do believe in the first quarter we'll see continued improvement in their business, but we're not going out beyond that quarter, because -- the second quarter and the third quarter.

We haven't really looked in depth at those quarters yet based on their forecast they're giving us. We're trying to focus mainly on what's happening in the first quarter. In January we see some improvement.

Now again, when we did our budget, we took Navistar's projections and we discounted them a little bit, so we're running ahead of our projections. I'm not sure if those are exactly on with Navistar's projections would be, or slightly above or slightly below, but we're running ahead of our projections somewhat.

Okay, that's good. That's helpful. But you have the correct amount of labor down there to accommodate any kind of ramp this year? Is that correct?

Any kind of ramp?

Based on what you expect to see from Navistar?

Yes, right now, that is one of those things we're addressing. We do have the labor right now. A matter of fact, if you look at our production facility, we produce for Navistar out of three plants.

We produce out of our Portland, Indiana, plant, our Saltillo plant, and our Chihuahua plant. That depends on the truck, of course, medium duty and heavy duty truck. But right now we don't have any issues with labor. Based on the schedules we've seen from them, we are not having any problems with that manning.

We're not planning to really man up a lot on these schedules, because we actually ended the year as we said, with more manpower than we normally would take over the year end; but that's because if you looked at, for instance, the December results, we would be down probably $5 million to $8 million in December from what the January results would be. We've just kept the manpower on.

We should be good for the first quarter. As I said, we'll go through a detailed review here -- matter of fact, next week -- to determine what staffing and manning levels should be.

Great. Thank you.

Thank you. I would now like to turn the call over to John Corey for closing remarks.

I'd like to thank everybody for joining us on the call. We closed the year much better than 2012, not up to our expectations. As the Management team goes forward in 2014, our focus is on improving the performance, continuing to improve the performance of the Company. As we look at it, as we said, that will -- we'll see the year unfold with greater improvements towards the second half, not only due to market improvements, but also due to some programs we'll have kicking in then.

With that, I'd like to thank you all for joining us.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.