Stoneridge Inc (SRI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Stoneridge first-quarter 2014 conference call. My name is Tracy 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, and thank you for joining us on today's call. By now you should have received our first-quarter earnings release. The release and the Company presentation has been or will shortly be filed with the SEC and it has been posted to our website at www.stoneridge.com.

Joining me on today's call are John Corey, our President and Chief Executive Officer; and George Strickler, our Chief Financial Officer.

Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties and actual results may differ materially. Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-K filed with the Securities and Exchange Commission 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 in the first quarter, our growth strategies, business development, and his thoughts on future initiatives. George will discuss the financial and operational aspects of the first quarter in more detail.

We have prepared and published an earnings presentation to provide more detailed schedules to help your understanding of the first-quarter results, transfer 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 the formal remarks, we will then open up the call to questions. With that, I will turn the call over to John.

Good morning. First-quarter results announced today were below our expectations, due to the downturn in the Brazilian economy and an 18.6 devaluation of the Argentinian peso against the Brazilian real.

Consolidated revenues in the first quarter were $236.4 million which was a minimal increase of $700,000 or 0.3% of 1% over the first quarter of 2013. Sales increases at control devices -- sales increased at control devices by $5.4 million or 7.5% and in electronics by $5.6 million or 12.6%, both slightly above our expectations. Wiring sales were lower by $1.7 million or 2.3% versus the prior year, primarily due to declines in the agricultural market.

PST sales were down $8.5 million or 20.1%. PST's US dollars revenues were impacted by an 18% decline in the real versus the dollar compared to the first quarter of 2013. This devaluation accounted for $6.3 million of the reported $8.5 million revenue decline.

EPS was $0.05 a share compared to our first quarter of 2013 EPS of $0.15 a share. Our operating margins in our businesses excluding PST improved to 5% compared to 4.8% in the first quarter of last year, as operating income was about equal to last year's level for control devices, electronics and wiring, while PST was down as a result of the economic downturn and currency impacts.

Consolidated Stoneridge operating income margin decreased to 3.2% in the first quarter of 2014 compared to 4.4% in the first quarter of 2013. Stoneridge's operating margins excluding PST improved over the fourth-quarter rising from 2.9% to 5%. PST's operating margins excluding purchase accounting was a negative 3.2% in the first quarter, a decline from the fourth-quarter operating margin of 6% as a result of continuing weakness in the local economy, higher labor costs, and higher imported costs due to the US dollar denominated imported materials.

PST's results were also impacted by an 18.6% devaluation of the Argentinian peso compared to the real which occurred in the last two weeks of January. This resulted in a pretax foreign exchange loss of $1.6 million and a $700,000 net income or $0.03 a share.

Slide five of our deck has a complete P&L breakout of the first quarter of 2014 versus first quarter of 2013. Slide four identifies Stoneridge segmented sales increases and decreases versus the prior year's first quarter and slide eight of our deck identifies the bridge item differences between the first quarter of 2014 and the first quarter of 2013 earnings per share.

The quarters' differences are primarily due to a growth in revenue at Control Devices and Electronics offset by unfavorable mix, lower volume, and foreign exchange movements at PST from the devaluation of the Argentinian peso. In addition, we incurred higher design and development expenses at Control Devices and Electronics to support new business launches in 2015.

Revenues in our passenger car and light truck category, which are predominantly Control Device sales, were $63.1 million in the first quarter, a 9.1% increase from the 2013's first-quarter sales of $57.9 million on higher volumes of existing products.

Sales in our commercial vehicle category which are predominantly electronic and wiring sales were $95.4 million in the first quarter compared to $89.6 million, a 6.6% increase over the first quarter of 2013, due primarily to higher volume sales of electronic products in Europe.

Agricultural equipment sales decreased by approximately 5.5% to $36.4 million in the first quarter of 2000 -- from the first quarter of 2014 due to reduced sales to our large agricultural customer. Slide four provides the details.

As previously discussed in past calls, the performance of the wiring business has been impacted by significantly lower volumes and we are adjusting cost structures to match the volume declines. We believe the bottom has been reached and in the second quarter, we are seeing positive improvements in the commercial vehicle markets and improvements in our internal operations.

We still have work to do to return this business to our profitability expectations, but it is on the right track to do so.

New and replacement business awards for Stoneridge's businesses in the first quarter were $27.1 million, representing $13.9 million in new business awards and $13.2 million in replacement awards. Our new business awards in the first quarter include an exterior release switch for a large North American pass car and light truck customer and a ship by wire award for a large North American vehicle and light truck customer.

Based on the past awards and current activity, we expect the ship by wire category to be a significant contributor to the Control Devices' global growth over the next three years with a potential annual peak revenue of $150 million for this product category. This is significant growth considering that three years ago we did not have any business in this product line.

And then to Stoneridge, our unconsolidated JV in India posted first-quarter sales of $10.1 million, an increase of 16.9% versus the first quarter of last year in spite of a 9.8% devaluation of the Indian rupee and a weak Indian economy.

Excluding the effects of foreign exchange, Minda sales increased by about 33.5% compared to the prior year. Our share of Minda's net income from operations in the first quarter was a profit of $225,000 compared to a profit of $231,000 in the first quarter of 2013. Minda's profit was impacted by higher SG&A costs in the current quarter.

PST's first-quarter US dollar sales were $33.9 million based on an average exchange rate of BRL2.36 to $1.00 compared to $42.4 million in the first quarter of 2013 based on an average exchange rate of BRL1.99 to $1.00, a devaluation of about 18.5%.

In US sales -- dollar sales, PST's sales decrease was about $8.5 million or 20.1%. In reais, the sales decrease was about 5.3% or BRL4.5 million. Excluding foreign exchange impacts, lower sales were the result of -- lower sales were a result from sales in car and motorcycle launch in the aftermarket channels.

PST's gross margins excluding $300,000 for purchase accounting was 36.4% in the first quarter of 2014, compared to 42.5% in the first quarter of 2013. This decrease was driven by lower volume in car and motorcycle alarms, which traditionally have higher margins.

Excluding purchase price accounting, PST had an operating loss of $1.1 million or a negative 3.2% of sales compared to a positive 6.9% in the first quarter of 2013. The operating margin decline from the gross margin production was partially offset by reduced SG&A expenses which were primarily sales-related.

The Brazilian economy's performance has impacted all PST sales channels and management is taking actions to reduce costs until a more positive trend is indicated.

Summing up from a market perspective, the North American passenger car in commercial vehicle markets and the European commercial vehicles markets met our expectations. Wiring is beginning to be restored to former profitability levels and should benefit from an improvement in Class 8 production and a recovery by our largest CV wiring customer.

PST significantly underperformed our expectations. The economy is underperforming and has not benefited from development investments to support the World Cup and the Olympics or other government stimulus programs. It appears that the economy will remain underperforming until after the presidential elections. Brazil's inflation rate has increased to 7.4% while interest rates have risen to 11.5% in response to a weaker economic environment.

PST has developed significant costdowns to reduce direct material component costs by sourcing directly in China. The benefit should start to be seen in the fourth quarter as we manage inventory and supply pipelines. In addition, besides direct material cost actions, reductions of headcounts in logistics and warehousing costs initiatives are underway.

As we review our outlook for the business, control devices and electronics should continue to perform well. Their volumes were up in the first quarter and their gross margins have improved. In the wiring business, we have made progress in matching costs to revenue and are improving operational efficiencies and we expect continued improvement in the wiring business over the course of the year.

PST will have a difficult first half given the economy, but we expect with the actions they are taking -- with the actions they are taking these should benefit them in the last half.

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

Thank you, John. Many of our markets have been improving over the last three quarters with the exception of Brazil. Our first-quarter financial performance was below our expectations of improved profitability due to lower sales in PST and the 18.6% devaluation in the Argentine peso against the Brazilian real at the end of January.

As John indicated earlier, control devices and electronics performed our expectations, but PST was negatively impacted by the downturn in the Brazilian markets and the peso devaluation.

In addition to profitability, we continue to focus on cash flow generation. Our first-quarter operating cash flow was an outflow of $16.2 million and was affected by inventory increases, primarily at PST, as a result of the lower sales demand, the length of our supply chain for the audio lines from China and accounts receivable increases in our other Stoneridge businesses. The sales increase in February and March of this year compared to our November-December rate from last year.

PST's plan is to reduce inventory by $20 million from the March 31 levels by the end of the year compared to the current levels and have already reduced $6 [million] in the month of April.

As indicated on slide 11, we improved the total debt to EBITDA ratio from 2.9 in December 31 of 2012, 2.7 times in December 31 of last year. And with our 2014 guidance, we expect our debt to EBITDA to be in the range of 2.5 to 2.9 times by the end of the year, excluding the effects of any refinancing. This is approximately the same level it was in 2013.

Our ABL remains undrawn since November of 2012 and due to the inventory buildup at PST, we temporarily borrowed $7 million in short-term debt in the first quarter this year to fund working capital growth needs in the first quarter (technical difficulty) before the end of the year as they lower inventories in the last nine months of the year. See slide 10 of our deck.

In comparison to the first quarter of last year, PST sales decline of $8.5 million or 20.1% was due to the reduction in the consumer market and the devaluation of the Brazilian real. The 18.6% devaluation of the Argentine peso during the last two weeks of January of this year negatively impact PST's earnings by $0.03 per share. PST's operating margin excluding non-cash purchase accounting dropped to negative 3.2% which is significantly lower than the profit margin of 6.9% in the first quarter of last year.

Reduced sales levels and unfavorable mix across most product segments and channels negatively affected PST's first-quarter operating results. As PST management did in the second quarter of 2012, they just as quickly took action in April/May to address the market downturn with a number of aggressive cost reduction initiatives.

PST has accelerated cost reduction programs with each Chinese design house to save $5 million to $8 million in component cost annually which PST will benefit fully in 2015. PST is working to reduce its logistics and warehouse expenses and have an aggressive headcount reduction program that is being incremented in May. PST purchase accounting in the first quarter of 2014 continues to be consistent with our expectations to lower expenses in 2014 as discussed on our last call. See slide nine of our deck.

For Control Devices, Electronics, and Wiring businesses, we maintained a similar gross margin first quarter of this year compared to the first quarter of last year on slightly higher sales. And operating margin improved from 4.8% to 5% even with higher spend in design and development efforts.

With the recent wins at our actuator business, we have begun to invest more money for a higher level of launch activity in 2015 and 2016. We have discussed over the last year our continued focus to grow the top line with profitable business. And during the last quarter we continued to complete some key initiatives that will deliver topline growth and improve profitability, cash flow, and return on invested capital.

We have completed negotiations to establish a new joint venture with our existing partner in India for all new products and technologies. The new venture will have a 60% controlling interest with the option to increase our ownership to 74%.

We have completed a small acquisition of an aftermarket distributor in Germany to strengthen our position in the tachograph aftermarket business in Europe. We completed the transaction April 1 of this year.

We continue to pursue acquisitions for our Control Devices and Electronics business units and in April we won a major addition to our ship by wire business that will require two new lines in our Juarez facility to meet the customer launch in 2015 and beyond. This latest win was not included in the new business awards that John discussed.

We should be able to give you more details in our second-quarter call. And as John stated, with this win our ship by wire product line should reach peak sales of $150 million in the next three years.

We have been working to be ready to refinance our long-term bonds by October 15 of this year as markets continue to remain strong with very competitive interest rates, terms, and financing conditions. All of these initiatives will continue to improve our financial performance and enhance shareholder values.

John and I shared with you today our management team's actions which address the overall lower production volumes, slowing markets, specifically in Brazil. However, our performance in control devices and electronics reflect our successes to win new business, develop new technologies, and develop global business for our global customers by leveraging the investments we have been making over the last five years.

From our current market projections, we expect second-half sales from control devices and electronics to be at or slightly lower than the first half of this year, while we expect PST sales to improve above our first-half sales and our forecast to be just above 2013 sales for the year on a local currency basis.

As we shared with you today with the exception of PST, the first quarter went according to our plan and we believe we have taken the actions necessary to position the Company well for the remainder of this year. PST has been a strong performer over the years and the management team is taking the substantive actions to reduce cost and lower inventory levels. Their inherent capabilities position them well to address the changing market channels.

We will now open the call for questions.

(Operator Instructions). Justin Long, Stephens.

Good morning. My first question was on PST. When you talked about the aggressive cost actions that are being pursued, are these changes incremental to your initial plans headed into the year? And secondly, is there any way to quantify the savings you are targeting as a result of these initiatives?

The material design savings were part of our plan for the year. We have been working on those and actually we thought we would see those occur little bit earlier, but now with us all down at the market, we have got to manage through the pipeline, so that will come a little bit later in the year. But they were in our plans.

The reductions in headcount, the changes into some of our logistics and distribution patterns, those were not planned in our plans and those will help offset the drop in the revenue volume that we see.

And the other one, Justin, is really redesigning our logistics and warehousing [bath] savings. And a lot of these, as John is saying, because of the drop in the demand, we were looking at these in the third and fourth quarter but tend to come later in the year, but they should be fully in effect and running for 2015.

I think, as we mentioned with the raw material side, it is $5 million to $8 million. We actually see a potential to improve that because the designs are more standard in China than we originally thought and so I think that will have a tendency to go up.

Logistics savings is roughly between $2 million in $2.5 million. And then the labor count is, we are taking out 154 people in the month of May and we will have a severance cost in the month of May of roughly about BRL1.4 million.

So I think these plans will start to get the profitability back in the third and fourth quarter. Not to the level that -- because the drop was fairly significant and then hidden in this when you really look at it, the drop in sales in the first quarter of 20%, a major part of that is really the devaluation change in the currency.

Now that adds some issues to us because that means that imported dollar cost for raw materials that will come in at higher cost levels. So we have got to find ways to offset that through pricing and, really, designs of our products.

But I think overall our guys -- our management team in Brazil has taken the proper actions to really reflect where the market is at and what we need to do to improve the profitability.

Yes and on the Argentinian peso decline, the team has taken actions to move pricing on that. So, we are trying to actively manage that in with the local market conditions.

Okay, great. That is all helpful detail. I appreciate it.

I think as a follow-up, it is fair to say that in the first quarter Brazil was a little bit below expectations. But you maintained your full-year guidance, which to me implies a better outlook for some of the other businesses that can serve as an offset to what is happening in Brazil.

Could you just give some more color on the areas of the business where you feel better today versus your original expectations at the beginning of the year?

Well, I think clearly as we shared with you today that our control devices and electronics business continued to do extremely well. Control devices was up 7.5% in sales. Electronics was 12.7% up.

So, I think the margins are very well-positioned in that market. We see the market's being very stable.

Wiring business, I think we've continued to be a little bit behind because of the drop in really the Ag market as John mentioned earlier. And so we are finally getting to the point we are positioning our headcount and our overhead costs in relation to the demand schedules that we are seeing.

So I think we were fairly open that we said we can get back to that low end of our range in the second half, late third quarter, fourth quarter, around 4%. I think we feel good with where we are trending and we are still relying on the expectation that our largest customer will continue to gain share and the Class 8 market will come back up.

I think with the Brazil devaluation, what we are sensing is that now that it is in place and it really had an impact on us in the first quarter, it did stay fairly consistent at the level we are at right now. In fact, our plan was done at [230]. It is trading this morning at [221]. That should be a benefit to us and then with the cost actions we are taking and then the real challenge we have is we need to get this supply chain for the audio line, as John mentioned, back in line because we built some inventories.

So some of the benefits we would have seen late third quarter, fourth quarter will probably push into the first quarter.

Overall, I think we feel very good with the two key businesses that have been performing very well. Wiring is improving. I think what we need is just the expectation of the Class 8 market coming back to some extent during the course of this year. And I think Brazil will continue to see some improvement with our cost initiatives and the stabilization of the market.

Okay, great. And one more for me. On the guidance, I was wondering if you could talk in a little bit more detail about the earnings guidance you expect over the remainder of the year.

Should the second quarter look pretty similar to what we saw in 1Q, maybe a little bit better, given some of these near-term headwinds are starting to get a little bit better? And Wiring with the ramp in the back half of the year, how do you think things play out on a quarterly basis to bridge us from 1Q to your full-year guidance?

Well, second quarter will be better than the first quarter and when you really look inside our numbers and from the deck we provided, Brazil cost is probably about $0.11 a share in the first quarter with $0.03 being (inaudible) on currency. The other $0.08 really in the drop of the sales volume. So I think by just getting that back to some extent it will start to push you up in the second quarter but I think the real pullthrough starts to come through in the third and fourth quarter because of the increase in the Class 8 and then traditionally the first quarter's lowest quarter for PST.

And if you look at the trend that we are seeing, is that we should see sales uplift in the third and fourth quarter. Maybe not to the levels we experienced a couple of years ago, but we will see improvement over where it was.

Yes, our plan -- and just to reiterate. Our plan over the year was to have the stronger second half based on the market for commercial vehicles in North America and also a recovering market for commercial vehicles in Europe. And so we still see that on track. As a matter of fact, there are some very positive signs on the North America commercial vehicle market as we are looking at that going out.

So, and, again, as we said, it is our largest customer in that Wiring segment, hopefully regain some share in there that will benefit us also.

Okay, thanks. I will leave it at that. I appreciate the time.

Irina Hodakovsky, KeyBanc.

Good morning, gentlemen. A quick question for you on the Wiring operations, medium and heavy-duty truck, overall, the industry is showing some positive signs. You are talking about positive expectations for Stoneridge. Overall it went up 6.6%. But your wiring operations, medium and heavy truck part of it went down. Can you talk about that a little bit and what you expect going forward and what caused the decline?

Are you talking about a decline from the first quarter of last year?

Well, I am looking on slide four and I am looking at quarter -- year-over-year results. Medium and heavy-duty truck and the Wiring went down 2.7%. But it seems (multiple speakers)

Irina, that is still a reflection of where our largest customer is at in terms of where they were a year ago. I think we still believe in the expectations that they will continue to improve over the second, third, and the fourth quarter. And that as we did mentioned in it doesn't show in that line, in medium truck, but clearly the Ag market is off a little over 5.5%. But it is predominantly still the expectation that our largest customer will start to gain traction and volume.

Yes, specifically in the first quarter. And in the anti-commercial vehicle space, we have plans -- higher export sales of product through our customer base -- and those export sales have not materialized at the pace that we originally expected in the plan. As a matter of fact, in our forward planning we have looked at that and because of various factors, we see the export market for the North American export market and commercial vehicle being a little bit weaker. And so we factored that out in our plans, but we also see some improving strength in the -- as we have said in the commercial vehicle markets going forward.

So X the export market, we think there is going to be a good performance out of the commercial vehicle market. And our revenues in that export market were not relatively significant for us.

And I think what you see, Irina, in the charts is there was a nice uplift from fourth quarter to first quarter, but first quarter compared to last year is down, as you mention. So and it is really attributed to the comments that John just made.

The expectations for the large North American customer, do you expect them to go up sequentially or on a year-over-year basis going forward?

Well, if we looked at their impact last year, it was predominantly -- it went into the second half of the year. So we are expecting them to improve as they go forward again. But so I would expect that we will see sequential improvement in this going forward in these quarters. Again it depends on how quickly they can recover -- well, not quickly, how the market develops and how they maintain their position or gain share in that market.

And if I can also ask, on the wiring operations, their very small mix is passenger car, light truck and then there's Other segment. Again, very small mix, but they are -- you are increasing those (inaudible). Is that new business you are adding in? Is there opportunity to get more of light truck passenger car business within the Wiring operations and maybe growth that segment of it? That mix of it?

Yes, I think that's --. No, that is just probably as we look at it. That would be some sales that are going into that category, but we don't see significant growth in that category.

Thank you very much.

Robert Kosowsky.

Good morning. On PST, it looks like first quarter in sales in Brazilian local currency were down versus an easy comp versus last year because last year had been down about 10%. So what gives you the confidence outside of seasonality, obviously, that you are going to get this pickup in sales growth rate throughout the year?

Well, I think as we look at it again, we are -- we were somewhat concerned about this state of the Brazilian economy. As we look at it, we see the Brazilian economy perhaps improving in the second half. We don't really see it happening in the second quarter.

But there are some other product lines in there that for instance on our cargo tracking business where we are on test on several fleets and should those tests -- and every indication is that those tests are running well -- when those fleets go to change, we would have a good opportunity to win business there, so improve that business.

We also believe that, with the repositioning of our cost structure and the audio line, we will have some opportunities to price that line more competitively, but also to improve our margins on that line. So that might drive some additional demand in there.

What -- how much --? Did you quantify what the cost cuts are going to be that you are currently doing right now?

Well, on the material cost cuts, I think George gave you an indication of 6 to 8.

$5 million to $8 million there and we said we have got some upside because what we are finding, Rob, is we have gone in and worked with a design house. There was really an issue do we have to redesign some of our parts and components or can we use standardized products that they have in the design house. And we are finding that they are matching up very well with our designs.

So I think we will be able to improve the cost. And as we have gotten down into my platform, I think there is some upside there.

The warehousing logistics is running around $2 million to $2.5 million. Some of that depends, though, on the volume and the inventory levels we are positioning right now. And then the headcount as I mentioned is 154 people which we are taking in in May.

So overall, the cost reductions we are working on this year would have a benefit of roughly about $5 million to $6 million for this year. But it is going to be more weighted in the second half. And then the full effect of these will come in 2015.

Okay. So $5 million to $6 million total benefits in this year which mostly is going to be in the second half of the year, so say $4 million give or take and then you will have another $4 million easy comparison first half of next year.

Yes, I think a good model --

Something like that.

If you look at the second half of 2000 -- second quarter of 2012 when we had to take those -- Brazil had to take those reductions. Then when you follow that through the last two halves, you will see a somewhat similar pattern.

Okay. But for the revenue growth a lot of it is just some new products coming out and hope -- I guess hope that you are going to have a stronger Brazilian economy post the elections?

Yes. We are still -- I think compared to last year and you said that the comparison is sort of -- but it is not. I mean, last year we had a very outstanding first quarter. In fact we sold in dollar terms about $42 million. This year, we did $33 million.

So of that drop of 5%, 5% -- or 20%, 5% was due to local market reductions and the rest was all due to currency.

So if you look at the comparables for next quarter, we did about $47 million in 2013. We think we can do somewhere roughly about 10% less than that for the second quarter and then it starts to build in the third and fourth quarter because we had almost the reverse. The Brazilian market was starting to go down in the third and fourth quarter last year. So we are going to see a sort of a switching of the currency or the quarters just based on where the economy was at and what is coming up.

And then, the elections are in October so you will start to see an improvement as the government is trying to incentivate the economy and do some other things. So --

Yes and the other thing we are looking at, we try to monitor what distributors are carrying in their inventories. And in some cases, we have seen in the alarm business distributors carrying inventories below historical averages. So with the market upturn, there could be -- I don't want to suggest that there -- well, I am not suggesting there would be a quick pop. But there could be some demand there as they go to replenish those inventories.

But right now, I think, in Brazil, you are seeing everybody being very, very cautious managing their inventories very tightly. So, we are going to monitor that. But on some of our alarm business, there are lower than normal historic norms for distributors' inventories and so that may offer an opportunity as we go forward.

Okay and then on the Wiring business, I guess it is good to see the sequential growth. I am wondering if you expect that segment to be profitable this year.

Yes. We expect that segment to be profitable that year. We didn't talk about it much on this call, but we have taken actions in the first quarter, but most of those actions, what we have been doing in the first quarter is really rebalancing to the new revenue realities.

So one of our issues has always been trying to match a customer's forward forecast to their actual forecast and then being available to meet that actual forecast. And historic -- what we have seen recent -- what we have seen in the last year and maybe a little bit in the first quarter this year, is the forward forecast was higher than the actual forecast. So we ended up with a little -- with more manpower and staffing that we needed.

And as we go into the second quarter, we trim that down and we have some substantial headcount reductions that are coming out of the plants in the second quarter. They have already -- they started in the first quarter, but the bigger push comes into the second quarter.

Do you get some --? I guess better productivity so you get better efficiencies, you are able to take some headcount out in second quarter and that is going to -- [back by was] market share pickup by your customers is going to drive profitability maybe in the second half of this year that could potentially outweigh a loss in the first half?

Well, on an operating profit basis now the business is profitable. And we expect that to continue and we expect that to improve as we see the full benefit of these headcount reductions. And then, as volumes pick up that should -- we will be able to leverage those volumes also. So, yes.

I would say one thing. There is some productivity improvement in there and I think the other side is that last year there was some inefficiencies in our business as we were. As I said, when we saw our large customer drop line significantly in the second half versus the forward forecast which did not indicate those kind of volume drops, you are always trying to chase it to catch up. So we think we have gotten ahead of it now. We think the market is stabilized to a certain degree.

We are looking at some forward trend from some other customers that were currently running below forecast, but look like they are going to come back up to forecast in June and July timeframe, which are giving us positive signals that that market is recovering and our customer base might be moving in a positive direction also.

Good to hear. So, basically, your major customer had a nice 20% lift of production rates in certain of its plants. So you are pretty confident you will be able to fully -- you have the right staffing for that and will be able to fully execute on that ramp.

Yes. We haven't -- we are monitoring that very closely. We don't -- we don't have, have not had an issue with that yet.

Good to hear. Finally the $1.6 million unfavorable currency loss relative to Argentina, that is just a one-time charge that hit this quarter that is not going to be recurring again next year, right? Or next quarter, right?

Right.

Right. As long as the currencies stay aligned as they are right now, Rob. Because we produce in a strong currency and then we ship into Argentina and sell in pesos. So that one-time exposure at that point.

Yes, maybe a little for when we collect the rece -- we have shortened our receivable terms, too, because that was one of the things that we had longer term -- not long -- longer terms out there. So the devaluation in January as we collect those January receivables will -- there will be minimal impact into the second quarter, but some.

All right. Thank you very much and good luck.

Thanks Rob.

(Operator Instructions). Jimmy Baker, B. Riley & Co.

Good morning. Most of my questions have been addressed at this point, so really just have a couple of follow-ups. Regarding the cost-cutting, is anything material taking place at the Stoneridge level or would you say that these are all relatively contained to the PST entity?

Well, no, we are. As we talked about the wiring business as having reductions in headcount primarily in the operational side of the business and so it is there and at PST. As a matter of fact, in our other businesses where they are growing, both Electronics and Control Devices we are trying to hold the headcount line on those. Although we may have to invest a little bit as we indicated in our D&D expenses to support some of these launches that are coming on in 2015.

But we think we are -- with the plans that they have got and maybe some continued market improvement that we will be able to manage that effectively.

Okay, well, then maybe I missed it, but can you reconcile your expectation and I think most involved expectations for pretty significant commercial vehicle uplift as we move throughout the year and in particular I suppose from your largest commercial vehicle customer, if -- the expectation for growth there versus your plan to reduce headcount at Wiring?

Well, again, when I look at the -- we can adjust our headcount back. As a matter of fact that is one of the things we are looking at right now. How significantly do we adjust headcount back?

But when we look at what has happened in the Ag market and the impact that we are seeing on that from primarily delayed programs, programs that are getting pushed out so not necessarily with some lower market -- market share loss on that. So we are adjusting those headcounts out. And we will keep on balancing the headcount as we see the latest forecasts coming in from our customers.

So it is -- it is somewhat of a cat and mouse game so to speak in that you have got to look forward and see what they are projecting in their forward forecast and make a determination if you are going to staff for it. We have -- last year we erred on the side of overstaffing for it. This year we are going to look at it much closer. We have a SIOP meeting that goes on which is a self inventory operations planning meeting and we get input from the commercial side and of course the operations side, and we make a call as to what we see.

If we have to, we can work additional overtime if volume ramps up beyond what we see. And then, we will staff the plants accordingly. But we are watching that very closely, but our current plan for reductions in headcount have that taken into account.

Okay, got it. On getting back to the PST business, any concern that some of the weakness that you have been seeing in local currency sales might be attributable to market share issues or pretty confident that this is market wide and your competitors are feeling weakness in line or more severe than what you are feeling?

As we look at that business, when we see what is happening in the automotive sales down there, I think you have seen a lot of like Fiat and GM and others come out and report poor sales performance. So that actually doesn't stimulate (technical difficulty) then there is less opportunity to install an aftermarket product if the car is not sold in the first case.

As we look at -- one of the things that are longer-term trend that we are going to have to watch out for is increasing vehicle content and that may have an impact on our aftermarket base. But as an example, we talked about a program we had with promoters where we were having 15 individuals in the San Paulo area go around and visit the installers and provide them service through the distribution outlet.

And as we have looked at that, they have done a study about share of market there. And actually with those installers, even in a declining market our share of market has gone up about 4 or 5 points now. These are our own people taking the survey, so it is not a scientific third party, but it does give us an indication that we are holding or slightly increasing our share in those businesses.

Okay, understood. Lastly, wanted to tackle the guidance maybe from a different angle. It just seems that given the Q1 underperformance that there is a significant hole to dig yourself out of here with regard to a full year earnings guidance. Do you feel comfortable you have given yourself enough of a cushion for all the variability that might come over the next three quarters to be able to stay in that $0.80 to $1.00 range?

Well, I think, Jimmy, how we view it is that rather than going out and changing guidance, I think we are looking at the midpoint to the low end of that guidance now as opposed to that $0.90 to $1.00. So -- and rather than modifying all of that guidance, I think that is how we are viewing it. We are probably somewhere in the range of $0.80 to $0.90 within that guidance we have provided already.

Okay. Understood. Thanks very much for the time.

Rhem Wood, BB&T Capital Markets.

Good morning. I want to try it one more time with the guidance question asked earlier. But just the cadence, there are a lot of moving parts in the second quarter as we talked about. But are you talking about for the guidance and you just talked about the range, but are you talking about 25%, 30% in the first half versus the second half? Does that sound reasonable or is that aggressive?

No, I think that is about matching up because I think between the first and second quarter it is going to be in that range, 25% to 30%, and then the second half will be offset to that.

Okay, thanks. One last one, just to understand. When I look at the quarter, the real kind of hurt you in the first part, but then it came down and ended lower and typically wouldn't translate to sales in US dollars.

It is a benefit, but it sounds like maybe you had some import costs that were hurt. But I guess the question is going forward if it stays at this level, this should be a benefit going forward assuming that it stays around this level.

Yes, I think as long as we stay right in this range of [230]. In fact, like today it is trading at [221]. So if it stays in this band, I think we can manage that. It is when it really -- I mean Argentina, I think, caught us all by surprise. I mean it devalued 23% in one day two weeks prior to the end of January. That created an imbalance. We immediately raised prices in Argentina to offset that roughly 23%. But as you can imagine when you pump that kind of an increase in so the demand has fallen in Argentina. But we are following that very closely and we will have to balance the market prices versus what the costs are. And in some cases maybe even pull back on some products that just don't sell in Argentina if it has got a significant loss.

But for the most part, we have looked at that situation and said it is still a good business. It is a profitable business at these levels. So we just have to manage the cost structure coming out of Brazil to what we sell in Argentina.

And then in the case of Brazil, we have seen some instances where -- but the dealers have taken a more aggressive action. They haven't built inventory. In fact they are trying to ratchet their inventory down because it just rates are going up and John mentioned in his opening that interest rates have now climbed to 11%, 11.5%. A new loan for individuals are up to almost 15% now. So that will have some curtailing of demand.

But what we have seen so far, it looks almost like a mirror image of what happened in 2012 in the second quarter where you get that initial shock from consumers because it is not -- and I think Jimmy asked the question, do you see a variation. But if you cross all our distribution, they are all down roughly about 4%, 4.5% in local currency. So it tells you that -- and we have been into the details saying, have we lost any share and the answer comes back, no. We have enough touch points within the market, that looks good.

So that I think what we have experienced is a little bit of consumer reservation. Dealers have cut some inventories, but I think we are comfortable moving forward. That it was more -- our results were more reflective, because of currency changes as opposed to fundamental market because the market was only down about 5%.

We've taken a little more aggressive position even if it costs us some sales, we said let's take a cost structure that is more substantial and make sure that we have the cost of benefit back rather than expecting it to come back and it doesn't. So we force the organization to take a little harder look at the cost structure and offset to this.

Great. That's all I have. Thanks.

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

Yes, well, as we look at the first quarter, certainly Brazil was historic for us in the first quarter. It masked a good performance in Control Devices and Electronics and the improving recovery we see in the Wiring business. We expect those trends of Control Devices and Electronics to continue for the balance of the year. We expect Wiring to continue to improve for the balance of the year. Not only because of our own internal improvements, but also because of market space improvement.

And Brazil as we go forward, we are taking the actions necessary to respond to the market as we go forward in that. So any uplift in the present economy we should be a very positive benefit in that and could quite frankly turn around very quickly the demand patterns of the business.

So we are cautiously optimistic as we go forward and pleased with the performance of the Control Devices and Electronics business and encouraged by what is happening in Wiring.

So with that, I would like to thank you for joining us on today's call.

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