Kenneth Kure - Corporate Treasurer and Director of Finance Jonathan DeGaynor - President and Chief Executive Officer George Strickler - Executive Vice President and Chief Financial Officer.

Justin Long - Stephens Inc. Jimmy Baker - B. Riley & Company Tristan Thomas - Sidoti & Company.

Good day, ladies and gentlemen, and welcome to the Stoneridge First Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. Later, we will be hosting a question-and-session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded over the webcast line.

Now, I would like to hand the floor over to Ken Kure, Corporate Treasurer and Director of Finance. Ken, please proceed..

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

Joining me on today’s call are Jon DeGaynor, our President and Chief Executive Officer; 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 maybe found in our 10-K filed with the SEC 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. Jon will begin the call by addressing the strategies discussed during our previous earnings calls and our progress on new business plans.

George will discuss the financial and operational aspects of the first quarter. George will also review our 2016 sales and earnings guidance based on the trends that we have seen through the first quarter.

We prepared and published an earnings presentation to provide more detailed schedules to help your understanding of our first quarter results, trends of our continued improvement and updates on key initiatives to improve financial performance.

A copy of these items can also be found on our website at www.stoneridge.com in the Investor Relations section. After Jon and George had finished their formal remarks, we’ll then open up the call to questions. With that, I’ll turn the call over to Jon..

Good morning and thank you all for joining us. I’m pleased to report that we recorded a strong first quarter financial performance, which represents another quarter-on-quarter improvement.

The Control Devices and Electronics segments continued to perform well during the first quarter as their combined operating margin including unallocated corporate charges has reached 8% to net sales in the first quarter, which is an improvement from the 4.2% in the first quarter of last year and 7.5% in the fourth quarter of 2015.

Both Control Devices and Electronics segments saw significant improvement in operating margins in the first quarter from higher sales at Control Devices, continuous strength in European commercial vehicle sales, currency tailwinds and improved operating efficiencies at Electronics.

The results of these segments allowed Stoneridge to overcome the headwinds caused by currency changes in the difficult economic environment in Brazil. The financial performance by the Stoneridge team continues to demonstrate the resolve of our management group working together to deliver on our commitments.

This quarter we continue to deliver on our commitment of increased earnings excluding unusual items compared to the prior year. George will provide more detail on this section on the financial performance of the first quarter. During last quarter’s call, I described focus areas for the organization.

The diligent efforts of our management team in these focus areas have helped us to deliver consistent financial performance in the face of difficulties we have experienced in certain markets. I would like to highlight a few areas that are driving our consistent performance.

Our number one focus for the second-half of 2015 and into 2016 has been and will continue to be the flawless launch of the shift-by-wire programs. Our launch continues to go as planned in the activities in our Canton, Massachusetts and Juarez, Mexico facilities have met all customer commitments and internal objectives.

Control Devices sales were up by $12.5 million over the first quarter of last year, as the first quarter of 2016 sales by shift-by-wire performed close to our expectation. Even though sales in the Asia-Pacific region for shift-by-wire were slightly lower than expected due to customer market adjustments.

Our shift-by-wire outlook for the year remains on target. As we look at our order book, we see orders filling in the Q1 shortfall by the end of the year. We are also looking to build upon the success of shift-by-wire by extending on to additional platforms with existing customers as well as other customers.

A key win in the first quarter was a hybrid application which demonstrates that shift-by-wire can be continued to grow beyond the initial wins. At PST, our management team continued to aggressively adjust the cost structure and inventory levels in the face of continued sales declines.

When we are planning 2016, we expected PST to be near breakeven levels in the first half and significantly more probable in the second half. The severity of the continued economic crisis has resulted in further sales decline in our first quarter. This economic reality has caused our PST management team to accelerate further cost reductions.

As a result, PST has embarked upon another rightsizing of their cost structure, the third in the last 12 months, which was implemented in January and February of 2016. So, see slide five of our deck for more detail. We expect PST to breakeven in the second quarter of 2016 and to be moderately profitable for the third and fourth quarters.

Excluding previously mentioned, amortization expense related to the purchase of PST that occurred into 2011. The efforts of the PST management team to take out cost improved supply chains and reduced inventory levels has enabled PST to survive the current economic environment and has positioned PST to drive, when the recovery arrives.

Profitable sales growth is a primary objective and focus for the entire Stoneridge’s team. This quarter, I’m pleased to report that our commercial efforts have been productive and our projected net new business pipeline has expanded from $179 million for the years 2016 to 2020 that we’ve released in February 2016.

While, many of the programs that we will discuss were anticipated in our plan they are now definitive wins. We now expect our 2016 to 2020 net new business estimate to increase from $179 million to $232 million, an increase of $53 million or 29.6%.

The increase in projected net new business is due to new program wins and Instrumentation and Telematics for Electronics business and for Control Devices wins in both actuation and sensing.

New and replacement business awards for Control Devices and Electronics in the first quarter were $49.8 million, representing $47.8 million in new business awards and $2 million in replacement awards.

More specifically, these new business awards include at a $11.9 million instrument cluster award for an Asia-Pacific commercial vehicle customer and $18.8 million shift-by-wire actuator for North American passenger car and light truck customer.

This is important win as it represents our first hybrid vehicle award and further expansion of the shift-by-wire product line.

And $11.7 million front axle disconnect actuator award for North American passenger car and light truck customer and a $2.3 million high-temp sensor award for North American passenger car and light truck customer for sales in Europe.

These four new programs represent over 93% of the new business awards in the first quarter with 27% for our Electronics business and 73% for our Control Devices business.

We have also recently received award that we have significant - we have a significant instrument cluster award for a European commercial vehicle OEM and our first soot sensor award for a European passenger car OEM. Both of these have been included in our revised net new business estimate for the 2016 to 2020 timeframe.

These awards are indicative of our ability to leverage existing technology as well as new developments to drive organic growth. From a geographic perspective, our sales in North America represented 61%, Latin America 11%, Europe and Asia was at 28% for the first quarter of 2016. The geographic detail can be seen on Slide 9.

Our customer diversification has improved with a balance between automotive and commercial customers as can also be seen on Slide 9. As we continue to execute our plans in 2016, we are recognizing the significant improvement in our financial results that is tied to our strategic actions.

We’ve realigned our business unit organizations to focus more directly on product lines, taking a holistic approach to each line, primarily focusing on profitable and sustainable top line growth by developing both short - by both short and long-term vision of the products, technologies, and targeted customers.

Concurrently, we are continuously reviewing our goal design and development resources to ensure that we have the correct skills in the right regions to efficiently support the plant growth and new bookings. This review has led to a portion of Q1 restructuring, as we realigned D&D resources geographically.

Given considering these restructuring costs in the first quarter of 2016 are consolidated operating margin was 5.2%, which is a 330 basis point increase over our first quarter 2015 unadjusted operating margin, and would have been 6.4% excluding the restructuring costs in the first quarter.

We continue to review our leadership team with a goal of approving the efficiency and effectiveness of the organization as we move to the future. We’ve previously announced the retirement of our Vice President of Operations Richard Adante, I want to thank for his support of the company. We’ll be announcing replacement in the very near future.

Another important organizational move is our recent announcement of the headquarters consolidation in Novi, Michigan. This move will provide a platform for collaboration between teams that is not been as easy in the past.

The location of this new facility will also facilitate more frequent interactions with customers, suppliers and technology developers allowing us to continue to deliver products and systems that anticipate the needs of our customers. The facility will also help us attract and retain talent as we prepare for future growth.

With the continued diligent efforts of our employees along with the enhancements of the team that have been and will continue to be made. We have great confidence that the organization has prepared to successfully execute the next phase of growth and improved performance of Stoneridge. This is a backdrop.

George will now provide some specifics as to our financial performance in the first quarter. I’ll now turn the phone call over to George..

the overall increase in earnings, especially in North America; and the PST operating loss which can no longer provide a tax benefit due to its full valuation allowance, which we began providing at December 31 of last year.

The 2016 projected annual effective tax rate, which was used to calculate our 2016 guidance is based upon maintaining the valuation allowances that are currently provided against our U.S. and Brazil deferred tax assets throughout 2016.

The exact timing and amount of the valuation allowance reversal are subject to change on the basis of the level of profitability that we are able to actually achieve as well as earnings the can be reliably forecasted. We will continue to maintain a full valuation allowance at our U.S.

and Brazil deferred tax assets until there was sufficient positive evidence to support the reversal of these allowances. The other important thing to remember about this subject is that the timing and amount of any reversals does not change the intrinsic value of Stoneridge or does it change the amount of cash taxes we pay.

It merely affects the amount of book taxes we would recognize in those EPS for the period affected. The other focus for our team is free cash flow and return on invested capital. We are still projecting to generate free cash flow for the year at the top of our range of 3% to 4% of net sales.

And in the first quarter, operating cash flow was an inflow of $0.5 million dollars in comparison to an outflow of $4.3 million during the first quarter of last year. And our free cash flow for the quarter were $6.4 million negative compared to $12.8 million during the first quarter of last year.

Our cash balance at March 31 of this year was $48.4 million, a decrease of $6 million from December 31 of last year. And the decrease was primarily due to higher capital expenditures to facilitate new business and seasonal working capital increases.

And as indicated on Slide 14 we continue to improve our debt leverage from continuing operations as measured by total debt-to-EBITDA ratio, which is now been reduced to 2.2 times at the end of the first quarter of this year. Another important metric that we have been tracking is ROIC, which was at 12.6% in 2015.

And our guidance implies that our ROIC will improve to the range of 15% to 17% based on our ability to increase our profitability by leveraging our sales and cost structure. Well, this is the sixth consecutive quarter that we have improved our earnings, excluding unusual items compared to the prior year.

Our quality of earnings and consistency of the financial results have improved immensely since of the sale of the Wiring business in August 2014 and the refinancing in October 2014, even with the significant downturn in the Brazilian economy.

We are very pleased with our first quarter results and our ability to build on the progress we made through 2015.

Having repositioned Stoneridge to be a high-performing company based on top line growth with a focus in cost reduction and maintaining flat SG&A and D&D levels, our earnings illustrate our ability to increase our profitability despite year-over-year sales being relatively flat in the first quarter, which was driven by currency headwinds in the North America Class 8 market.

We’ve developed a sustainable technology process that is a pipeline for new products and technologies that will continue to drive organic growth over our five your planning horizon.

And earlier Jon shared with you some the awards we landed during the first quarter and early in the second quarter, which adds approximately $53 million to $179 million over the next four years as the awards will impact 2017 to 2020.

In our existing pipeline for future opportunities, we are focused on soot sensing, turbo actuation, high-temp sensing, shift-by-wire to name a few product families for Control Devices.

In Electronics, we have opportunities such as MirrorEye, a new exciting product in the commercial market and ELD legislation recently approved for the North America commercial market, which provides the opportunity for Stoneridge to utilize capabilities developed in Europe and PST for expansion in the North America market.

We are very excited of the opportunities we will add to our revised net new business of $223 million over the next five years. For both Control Devices and Electronics, we have a number of ways to increase top-line sales.

Our content per vehicles increased from products like shift-by-wire for Control Devices and Electronics has the opportunity do the same with mirror replacement.

For Control Devices and Electronics, we have the opportunity for growth by cross-selling our products and technologies in other markets, such as in Europe and Asia, and especially India and China. Our plans are to continue to invest in our opportunities for organic growth.

We are actively pursuing M&A opportunities that fit our needs to support our growth in our Control Devices and Electronics business unit. We are excited about the potential for 2016 as our first quarter is showing we are performing in line with our guidance.

We continue to work on enhancing our net new business and the operating profit leverage that is improved due to the higher sales, as shown on Slide 16. And we are projecting that our sales will grow 12.5% to 14% in 2016 over the last year.

Our operating margin will continue to improve by nearly 2% of net sales by leveraging our cost structures and our earnings per share a $1.10 to $1.30 per share, which will improve between $0.17 and $0.37 per share above our adjusted EPS of $0.93 in 2015.

Jon, this is a very exciting time at Stoneridge, the progress that we have made is manifesting itself with top-line growth and bottom-line improvement. We will now open the call for questions..

Thank you, sir. [Operator Instructions] Our first question comes from the line of Justin Long with Stephens. Your line is now open. Please go ahead..

Thanks. Good morning and congrats on a great quarter..

Thanks, Justin..

Thanks, Justin..

So first question, I had - I wanted to ask about the 2016 EPS guidance for $1.10 to $1.30. I guess, that didn’t change.

Does that exclude the restructuring costs that you saw in the first quarter? So are you using $0.31 of first quarter EPS in that guidance?.

In that guidance, Justin, we are using the $0.26. I mean, it was - we’ve incurred the expense of $0.05 a share. But as we mentioned, we have benefits that represent $5.2 million over the course of the year. So some of those offset each other, and so we’re still performing within that guidance..

Okay. That’s helpful to clarify. And then, maybe following up on that, so the overall EPS outlook didn’t change, but I am curious if any of the underlying assumptions within that guidance moved around, whether it’s a better first quarter than you expected, any change to the shift-by-wire cadence, your macro-assumptions etcetera.

Could you just provide some more color on how that outlook has evolved since the beginning of the year?.

Well, Justin, I guess the best way to say it is that we’re very pleased with our results. And overall, and I think Jon said it very well early in his materials that how we look at this thing is this is a commitment from what each one of our business shipments in Electronics is performing a little bit better than what we thought.

Control Devices was just slightly off, because of the delay at some of the shift-by-wire mostly in Asia market. And then, Brazil clearly was more of a struggle than we expected.

But in the aggregate, we still feel in Stoneridge that we’re feeling very comfortable with how we’re performing in the first quarter and then how that looks for the outcome for the year..

And Justin, just with regard to shift-by-wire, we watched that really closely. And we don’t believe at this point that what we see in the first quarter from a customer pull perspective will impact us on the full year. We actually believe that that will be caught up and that’s what we see in early releases as well..

Okay. Great. That’s all really helpful. And maybe following upon shift-by-wire, Jon, you mentioned the hybrid win and that’s good to hear about. But I wanted to ask about your ability to continue leveraging that product on additional platforms or with additional OEMs.

Just based on the pipeline of opportunities, you’re seeing today and conversations you’re having with customers.

Are there any of those additional opportunities that you think could be - could materialize in the contract announcements at some point later this year?.

I think this first hybrid - this hybrid win, Justin, is an example. We continue to work with other customers and with our current customers on expanding the penetration of the product, the fact that we’ve been able to find an application that’s outside of what was the standard approach tells us that there is room to continue to grow this.

At this point, I can’t say that we have anything that is imminent. But what we know is that our customers are pleased with us, they’re pleased with the product. And we’re getting the opportunities to work with engineering with our customers to try to solve their problems and use the shift-by-wire capabilities to do that.

And that’s where this hybrid program came from..

Okay. Great. And maybe one last one from me. I wanted to ask about the mirror replacement opportunity as well.

Could you just provide an update on how some of those conversations are going, now that you’ve had a little bit more time to market that product? And similar to what I ask on shift-by-wire, are there any contract opportunities that you think could materialize at some point this year on that front?.

We are continuing to be very bullish with regard to the opportunities from MirrorEye, both in the European market and in the North American market. Although, we believe that the past [ph] market will be different in North America than it is in Europe.

We do believe that there will be at least one customer that makes a sourcing decision in 2016, probably later in the year. And we continue to work to expand our capabilities there and support customers both in North America and in Europe with development vehicles, demonstrators and then also working with fleets.

And you will see some announcements from us with regard to what we’re doing at trade shows and tech shows to get the word out, particularly with a large fleet, so we believe that there will probably be an OEM award sometime toward the end of 2016 and hopefully some lead fleet adoption in, if not by 2016, early 2017..

Okay. Sounds great. I appreciate the time..

Thanks, Justin..

You’re welcome, Justin..

Thank you. Our next question comes from the line of Jimmy Baker with B. Riley & Company. Your line is now open. Please go ahead..

Hello, good morning guys. Thanks for taking my questions..

Hi, Jimmy..

Just first wanted to stick on the new program award. So could you just talk about how you expect those to impact your gross margins and operating margins once they ramp. And then it looks like the material changes to your new business backlog are really focused on 2019 and 2020.

Is that just the timing of the majority of these new awards or are there any pushouts to be aware of in the existing backlog?.

Jimmy, let me answer the first piece of the question first. These are not pushouts. These are just the typical program timing where in 2016, we’re talking about primarily programs that would be 2018 or 2019.

But I can tell you, we mentioned in our discussion earlier about a European electronics award, that award will start to impact us toward the end of 2017 and in the 2018. It is a vehicle refresh that the customer is doing. So we typically think about at least two years if not three years for most of our control devices and electronics awards.

But we are seeing a couple that are going faster than that. So you’re right that the primary impact is 19 and beyond, but we are seeing some things that we fill in toward the end of next year and early into 2018..

And we did have some fill-in in 2017 and you’re right is that we have a little bit, still we work on 2018 and that’s where our focus has been and can we get something in that area. So but overall Jimmy, it is going across the whole five year period, but it’s mostly 2017 through 2020 and 2018 is still little bit light from our perspective..

Okay. Sure, very helpful. And then just, I guess, we previously only gotten this from you annually in annual update. I mean, Jon, is it a practice that you’re intending to adopt that will give these updates quarterly now or I guess, periodically as material changes occur in the backlog.

How should we just think about this update going forward?.

Yeah. Jimmy, I think the point here is we want to make sure when there is some material item to discuss that we’re providing clarity on that as rapidly as practical. And so we made the decision that it make sense, because the change in that new business was so material that it make sense to talk about it now.

So hopefully, this is that will have the ability and the need to talk about this every quarter, but our commitment from our side is that we will update you as there is a material change.

And certainly with the discussions that we had on MirrorEye, the discussions that we had on shift-by-wire, anytime that we have an update on one of those specific programs, we’ll make sure that we’ve communicated appropriately..

Okay. I appreciate that. And then lastly, just when you look at the reduction in operating expenses, how much of that would you say is headcount reduction versus a currency impact. And I guess comparing your guidance today to when it was last updated, exchange rates have become a bit more favorable for you.

So I guess going back to your response with Justin’s question you’re maintaining the earnings guidance.

But could you just talk about the tailwind on a full year basis versus the prior assumptions that you see if FX rates hold at current levels?.

Jimmy, we - and we talked a little about this. And some of the currency tailwinds we’re now seeing is, we’re truly trying to evaluate are they sustainable or is this separateable [ph]. In fact, lot of this has been driven by the oil prices. It’s been the dollar weakness and that seems to have stalled at least from the oil standpoint.

Jon and I both have both been in Brazil over the last three weeks and they’ve got unique situation going on with Congress is now elected to make a change at the Presidency and the top four cabinet positions. And as a result of that the currency and the real is now down to R$3.43.

I haven’t checked this morning, but it was running around R$3.98, R$3.80 that’s been a significant benefit for us. Now, one of the issues with PST and why we haven’t really talked about or looking forward is that we’ve had some inventory build in some of the audio lines in terms of what the consumer is buying. So it’s delayed some of our purchases.

And so, that will have an effect that I would venture guess, in Brazil, we’ll talk more of that on the second quarter, because I think we’ll have a much better idea.

Just to give you some of the current consensus in Brazil, that if the change in the Presidency does not happen, they’re talking about change rate potentially going back to R$4.20 or R$4.50. In the case where it does happen, they’re saying it’ll probably settle out around R$3.20, so that will be a nice tailwind for us.

In Europe, the euro has gradually gone up with the prices of oil stabilizing. The euros sitting at about $1.15 now, our budget was $1.10. That will help us in two aspects, as we’ll have a higher conversion of dollars in the European business.

And it will also reduce our impact of raw material cost, because 70% of our materials are imported and dollar-based. And then, in the case of our other key exposure is Mexico peso. We had a rate in there of MXN 15.80 for the year. It’s been running between MXN 17.20 and MXN 17.40. We’ve hedged about half that position.

We locked into an average rate of little over MXN 17. So a lot of that was built into the guidance already. So depending on where the peso goes, we may have a little more benefit, but at least compared to what our guidance was, we had already considered that.

So if anything though, overall, as you suggested we will have - it’s been 2.5 years, we’ve been fighting headwinds of currencies. And now we should have - if these rates stabilize, we should have a tailwind on currencies.

But we’ll give you a little more detail on the second quarter as we evaluate the positions in the changing conditions of where it is. And I think the biggest one where the most uncertainty is in Brazil..

Sure, sure, that’s helpful, George.

Just the first part of my question, can you help quantify the operating expense reduction between headcount versus currency impact?.

The most of the - and you’re talking about the restructuring cost?.

Well, I’m actually talking about it in aggregate the SG&A and D&D reduction on a year-over-year basis or even sequentially whichever you actually think are more appropriate for this?.

We’ve actually taken - the restructuring cost, to give you an insight into that, we realigned our engineering workforce and that was really to improve skill-sets and capabilities. At the same time, we took out 19 engineers in that process. We’ve taken out 165 people in Brazil.

That was - many of those people were in the Manaus manufacturing facility, but we went across-the-board in engineering, SG&A and all the support services. So there has been significant headcount reduction, probably in the range of 180 people in the first quarter.

So lot of it was not driven by currency other than in Brazil where you do get the significant influence of the currency there. But for the most part, we are gaining on efficiency. And as you see in our SG&A it is flat compared to what it was last year. And we estimate that we’ll continue to manage that level..

Okay. Very helpful. Thanks for the color..

You’re welcome, Jimmy..

Thank you. [Operator Instructions] Our next question comes from the line of Tristan Thomas with Sidoti & Company. Your line is now open. Please go ahead..

Good morning..

Good morning..

Good morning..

Just two quick follow-on questions regarding MirrorEye, first as you alluded to different pass-cycle [ph] in market in North America as opposed to Europe, could you maybe provide a little more color on that, and then, also maybe a potential timeframe what your expectations are? And then the second question is regarding the OEM sourcing decision.

Can we assume that’s a European OEM?.

So let me answer the question with regard to the aftermarket. Because the way vehicles are designed and certified in Europe, you don’t see a retrofit play for this activity. And because the legislation, the vehicle legislation allows for the replacement of a mirror with a camera in Europe, that’s why we believe it’ll go through the OEMs.

And, yes, it’s European OEM that will make that sourcing decision toward the end of this year that we believe. So that’s point number one. The second point is, in the U.S. legislation still requires a 50 square inch mirror on the vehicle. That legislation has not been changed.

So we look at it as - now the value proposition is more from a safety standpoint than it is from an aerodynamic standpoint. And we’ve been working with OEMs to demonstrate what the product looks like and how their vehicles would look. And we got a demonstrator truck that is running around all of the U.S. to get feedback both from OEMs and from fleets.

But what we believe here is that there will probably be a fleet adoption for the safety benefit before there is an OEM that would make the change, because there is not a legislative drive to make the change here..

Okay. Perfect. Thanks, guys, a great quarter..

Thank you..

Thanks, Tristan..

Thank you. There are no further questions. I will now hand the floor back to Jon DeGaynor, Chief Executive Officer of Stoneridge for closing comments..

Well, I want to thank everybody for their time today. And just to reiterate George’s point, we’re really excited about the momentum that the organization has and how the quarter has looked and what we have going forward into 2016. Thanks all for your time..

Ladies and gentlemen, this does conclude today’s program and you may all disconnect. Everybody have a wonderful day..