Good day, ladies and gentlemen, and welcome to Dexine, Inc., [ph] or Stoneridge Fourth Quarter 2018 Call. At this time all participants are on a listen-only mode. Later we'll conduct a question-and-answer session. Instructions will follow at that time [Operator Instructions].

I would now like to introduce your host for today's conference Matt Horvath, Director of Investor Relations. Sir, you may begin..

Thanks, Justin. Good morning everyone and thank you for joining us to discuss our fourth quarter and full year results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted on our website, at www.stoneridge.com in the Investors section under webcasts & presentations.

Joining me on today's call are Jon DeGaynor, our President and Chief Executive Officer and Bob Krakowiak, 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, which has been 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 appendix for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. After Jon and Bob have finished their formal remarks, we will then open up the call to questions. I would ask you that you keep your question to a single follow-up. With that I will turn the call over to Jon..

Thanks, Matt, and good morning everyone. Let me begin on page three. In 2018, we continued our transformation of the company while delivering strong financial performance. Our 2018 sales of $866 million resulted in an adjusted gross margin of 29.7%, translating to an adjusted operating margin of 8.2%. Adjusted EPS for the year was $1.99.

We also had our fifth consecutive year of business awards in excess of $200 million of peak annual revenue. As a result of our success with our customers, our awarded business backlog grew to $3.4 billion or 5.2 times our 2018 OEM sales.

Some of our largest awards during the year included our first OEM MirrorEye Award, our global OEM Telematics award, the extension of our largest driver information systems program and a key strategic award with a Chinese OEM to build on our global actuation capabilities.

In addition to our first MirrorEye award, we continued to work with our fleet partners on trial programs throughout the year eclipsing 2.2 million miles driven with the MirrorEye systems.

Additionally, the approval of our FMCSA exemption late in Q4 means that MirrorEye is the only product in North America that allows for the renewable of traditional mirrors on commercial vehicles. The fleet trials and FMCSA exemption have set the stage for the rollout of our retrofit solutions this year.

As we look beyond our current product portfolio, we have and will continue to invest in the resources and capabilities that will allow us to develop the technology platforms that drive future growth. Last year we created a CTO position and a small advanced development team focused on leading that development.

Additionally, we made an investment in Autotech Ventures to ensure that we have visibility into cutting-edge technologies in early-stage companies. These activities, coupled with the additional organic investment in 2019 will expand our product roadmap and enable system based solutions to continue to drive outsized growth.

Our consistent financial performance improvement, expanded backlog and success in developing advanced products including MirrorEye keeps us on track to achieve our long-term goals of greater than $1 billion in sales and top quartile EBITDA margin in 2021. This morning, we are issuing our 2019 full-year guidance.

We continue to expect strong performance in 2019 across each of the segments. Bob will provide additional detail on our guidance later in this discussion. Page 4 summarizes our key financial metrics in both quarter-over-quarter and year-over-year periods. Year-over-year sales grew by 5%, while adjusted earnings per share increased by 27%.

Year-over-year gross profit grew by 3% while operating profit grew by 6%. Adjusted EBITDA grew by 8% relative to 2017 with margin expansion of 30 basis points.

As we discussed throughout the year and reiterated at the Deutsche Bank Conference, we experienced higher than expected quality and material costs throughout the year and in the fourth quarter particularly.

In addition to operational inefficiencies, the impacts of additional tariff expenses, material allocations and warranty expenses resulted in adjusted gross and operating margin performance less than our expectations.

More specifically, during our fourth quarter we incurred additional warranty expenses related to products manufactured and sold in prior periods. As we continue to refine our design and development, manufacturing and sourcing operations, we do not expect continued elevated warranty expenses related to these issues going forward.

While we have begun reducing the controllable manufacturing related costs, we do expect some continued headwinds in the first half of 2019. Bob will provide additional detail on the expected cadence of our 2019 earnings later in the call.

Turning to Page 5, we are focused on specific keys to success for each of our segments in order to deliver strong financial performance in 2019 and to achieve our long-term targets. For Control Devices, we will specifically focus on driving operational performance.

This includes a focus on the reduction of quality related expenses including scrap, premium freight and controllable warranty expenses. Along with a favorable product mix, we expect these initiatives to generate gross margin improvement of one basis points to 200 basis points for Control Devices in 2018.

In 2019, we will materially conclude the ramp-down of our legacy Shift-by-Wire programs. However, we expect continued growth in our other actuation products and our global emissions products, partially offsetting the ramp-down in 2019 and setting the stage for growth in future periods.

We are committed to focusing our resources on the technology platforms that will drive future growth. We expect to complete our review of strategic alternatives for our switches and connectors business in the first half of this year, which will allow us to focus on the actuation in sensor technologies that will drive growth.

As we announced previously, we will also manage the exit of our Canton, Massachusetts facility to right size our cost structure and drive margin improvement. We expect to complete the exit by the end of the year.

Moving to Electronics, we are utilizing our strong existing product portfolio as a foundation to build comprehensive systems that address the needs of our customers today and in the future. This year we have committed approximately $5 million of additional R&D spend to further develop those systems.

I'll discuss this activity in more detail on the next slide.

As I mentioned earlier, 2018 was a year of significant milestones for our MirrorEye product, including the advancement of our fleet trial programs with some of the largest fleets in North America and the grants of our FMCSA exemption allowing them removal and replacement of mirrors with our systems.

We will continue that momentum in 2019 as we focus on the broader retrofit rollout. Similar to Control Devices, in order to focus on the technologies that will drive our growth it is essential that we align -- realign our resources accordingly. In 2018, we made a series of footprint refining moves in electronics.

We are currently reviewing strategic alternatives for our non-core products within the segment in order to free up resources and improve our financial performance.

Finally, we will continue to grow our local capabilities in Brazil and leverage our existing engineering footprint to improve the financial performance in PST and provide global resources for our other segments as well.

PST has been rightsized for the current macroeconomic environment and we will focus on maintaining that structure to support our local business as well as our global customers. We expect continued strong financial performance by each segment in 2019.

We remain on track to deliver our long-term financial targets of at least $1 billion in revenue and at least 15.5% EBITDA margin in 2021. Turning to Page 6, our commercial vehicle customer base has a unique set of needs and requirements.

The additional investments in engineering resources in 2019 will expand our product portfolio, extend our product roadmap and enables us to offer more integrated systems to our commercial vehicle and fleet customers. Developing systems that connect the vehicle to the driver, the fleet and the world remains the focus of our Electronics segment.

Looking ahead, we see the opportunity to create even broader system based solutions with the existing core competencies and leverage our competitive advantages to create more value for our customers.

Today, our driver information systems are the primary interface between the vehicle and the driver and our connectivity devices allow for suit-to-vehicle connectivity as well as efficient legal compliance. Our vision and safety systems give drivers the tools they need to operate with confidence and safety in a variety of applications.

Rather than being content with the continued evolution of our existing products, we will invest in the development of systems that bridge our existing capabilities in the broader systems based solutions. Let me provide a few examples.

Our customers are asking for safety systems focused on vision around the exterior of the vehicle like MirrorEye as well as the integration of interior driver monitoring cameras. Our vision and safety capabilities, combined with our driver information systems, provides a strong foundation to address these requests.

Additionally, as our driver information systems continue to evolve and become increasingly software based, we will explore greater integration opportunities with our connectivity and safety systems. More broadly, our technologies and products are aligned with the mega trends influencing the commercial vehicle industry.

The ability to understand what is on the vehicle, connect the vehicle to the environment and the driver and remotely monitor critical vehicle data are key elements in the move toward increasing vehicle automation as well as semi-autonomous and autonomous commercial vehicles.

We are committed to investing the necessary resources to ensure that we refine and expand our core competencies to address the needs of the market. By appointing our CTO, Laurent Borne as the President of Electronics it ensures that there is alignment between the technologies we develop and the needs of the commercial vehicle marketplace.

Turning to Page 7, I'm pleased with our achievements in 2018. As an organization and the leadership team, we delivered another year of improved financial performance and made significant progress toward our long-term goals. We remain on track in the commercialization and the rollout of MirrorEye and we expect that momentum to continue in 2019.

We remain focused on investing the appropriate resources to develop the technology platforms and capabilities that will drive future growth. At Stoneridge, we continue to execute on our long-term strategy, drive continuous improvement and refine our capabilities to deliver shareholder value.

With that, I'll turn it over to Bob to discuss our financial results in more detail..

Thank you, Jon. Turning to slide 9, net sales in the fourth quarter were $210.8 million, an increase of 2% relative to the fourth quarter of 2017. Adjusted operating income was $14.3 million or 6.8% of sales.

More specifically, Control Devices sales of $109.7 million remained approximately flat quarter-over-quarter resulting in an operating income of $13.5 million or 12.3% of sales. Electronics sales of $90.6 million increased by 7%, resulting in adjusted operating income increasing 44% to $7.2 million or 7.9% of sales.

Adjusted operating margin improved by 160 basis points over the same period last year. PST's net sales of $20.4 million resulted in adjusted operating income of $1.8 million, which was approximately flat relative to the same period last year. Adjusted operating margin of 8.9%, improved by 130 basis points over the same period last year.

This morning, we are providing guidance for our 2019 financial performance. We expect relatively flat revenue year-over-year as product launches in our Control Devices and Electronics segments will be offset by the continued ramp-down of Shift-by-Wire and expected unfavorable currency impacts, primarily in Brazil.

We are guiding 2019 revenue to a midpoint of $865 million. As discussed previously, we expect continued margin improvement this year through improved operating performance and favorable product mix in the second half of the year. We are guiding adjusted gross margin to a midpoint of 30.25%, an improvement of approximately 50 basis points versus 2018.

We are guiding 2019 adjusted operating income to a midpoint of 8.25% and adjusted EBITDA margin to a midpoint of 12.25%. As a result of approximately flat revenue and operating margin guidance, we are expecting operating income to remain approximately flat relative to 2018.

Performance improvement initiatives are expected to offset additional tariffs, design and development expenses and annual pricing and inflation. Finally, we are guiding to a midpoint effective tax rate of 22.5% relative to our 2018 adjusted effective rate of 16.5%.

When comparing 2018 to this year the increased tax rate will primarily account for a $0.15 to $0.20 earnings headwind. Adjusting our flat operating income expectations for the increase in our effective tax rate result in midpoint adjusted earnings per share guidance of $1.80.

I will provide additional color on the annual impacts to sales and earnings per share expectations later in the call. Page 10 summarizes our key financial metrics specific to Control Devices.

Control Devices sales declined by $3 million relative to 2017, despite the continued and anticipated ramp-down of Shift-by-Wire, which represented a $33 million headwind during the year.

Adjusted operating margin declined by 120 basis points relative to 2017 due in part to increased launch costs related to our soot sensor product of $1.5 million and tariff related expenses of $2.4 million. These additional expenses accounted for a reduction in operating margin of 85 basis points.

Additionally, we incurred incremental quality and material-related costs. As we have discussed previously, in 2019 we will materially conclude the ramp-down of our legacy Shift-by-Wire programs, creating a revenue headwind of approximately $35 million relative to last year.

We expect that the mix of our product portfolio will improve margin year-over-year, which is a testament to our continued focus on system based smart solutions and less commoditized products.

Launch costs related to the continued ramp-up of our passenger car soot sensor in Europe as well as the launch of our Park-by-Wire program late in the second half of the year are expected to add incremental costs.

Tariffs will remain a headwind in 2019 with an expected year-over-year impact net of mitigating actions of approximately $1 million to $2 million. We are committed -- we are committed to reducing quality and material-related expenses and see significant opportunities to improve margin at Control Devices through controllable cost reduction in 2019.

We have implemented programs to reduce excess manufacturing costs and are beginning to see the benefits of these initiatives during the first quarter. We expect continued improvement throughout the year to drive improved gross margin of 100 basis points to 200 basis points and expansion of our operating margin.

Control Devices continues to deliver growth throughout the product portfolio and strong bottom line performance. Page 11 highlights the substantial year-over-year growth in both revenue and adjusted operating income in our Electronics segment. Electronics sales increased by 19% relative to 2017, an increase of $60 million.

Adjusted operating income increased by 44% and adjusted operating margin increased by 160 basis points relative to 2017, despite increased cost related to electronic component allocations, which accounted for approximately $3 million or 80 basis points of margin during the year.

Adjusted operating margin improved due to favorable product mix, contribution margin on incremental revenue and reduced SG&A. Looking forward to 2019, we expect production volumes to remain robust globally, providing a slight tailwind.

Additionally, as John discussed previously, we expect that the ramp-up of our retrofit MirrorEye programs will drive growth relative to 2018 for the segment in the second half of the year. We expect that our product mix will continue to drive margin improvement offset by additional investment in engineering resources.

This will lead to a slight margin improvement in 2019 for the segment on improved revenue. Electronics continues to deliver solid financial performance led by a strong product portfolio, which will deliver growth above the underlying markets and an improving margin profile.

Turing into Page 12, PST had another successful year in 2018 despite significant macroeconomic challenges, including unfavorable currency movements and volatile demand conditions throughout the year.

Relative to 2017, PST revenue declined by approximately $3 million excluding the impact of foreign currency, which was a headwind of approximately $12 million during the year. PST continues to drive margin improvement.

While sales declined by almost $15 million year-over-year, adjusted operating income remained flat resulting in adjusted operating margin improving by 120 basis points relative to 2017.

Continued success in our track and trace business contributed to a favorable product mix while flexibility and responsiveness in our cost structure allowed the segment to offset reductions in demand. We expect improved macroeconomic stability in 2019 in Brazil.

And despite continued local currency headwinds, we are forecasting a relatively flat year for PST from both the revenue and profitability perspective. Looking beyond 2019, we expect improved revenue opportunities for the segment as our OE business begins to launch in the region, which we expect will lead to cost leverage and improved margin.

PST is growing OE capabilities while driving profitability and margin expansion. We are pleased with this segment's performance in 2018 despite significant macroeconomic challenges and expect to carry that momentum forward to drive performance in 2019.

Turning to Page 13, our effective tax rate during the fourth quarter and for the full year 2018 was significantly lower than expected due to a number of favorable non-recurring items.

These items included adjustments related to US tax reform, the impact of foreign statutory tax rate changes and the impact of our 2018 strategic tax planning initiatives.

We expect our 2019 effective tax rate to return to the previously guided range of 20% to 25% based on our expected geographic earnings mix and a normalization of non-recurring items that occurred in 2018.

Turning to slide 14, as we outlined in detail at the Deutsche Bank Conference in January, we expect some revenue headwind in 2019 due to annual price concessions, the continued ramp-down of our legacy Shift-by-Wire programs and the continued impact of exchange rates.

We expect our OE end markets to grow by approximately 0.7% on a weighted average basis after strong growth in 2018. We expect new product launches, the annualization of previously launched products, growth in our core portfolio and the rollout of our retrofit MirrorEye program to approximately offset these headwinds.

Overall, we expect revenue to remain relatively flat as compared to 2018 with midpoint revenue guidance of $865 million.

The ramp-down of Shift-by-Wire in the second half of the year will be offset by new product launches, including the rollout of our MirrorEye retrofit program resulting in a relatively equal -- resulting in a relatively equal revenue split between the first and second half of the year.

Turning to slide 15, with respect to adjusted earnings per share, we expect incremental net tariff expenses of approximately $1 million to $2 million during the first half of the year. Additionally, as discussed previously, we are planning incremental design and development investment of approximately $5 million.

We expect that favorable product mix, structural cost initiatives and the operational improvements we discussed previously will approximately offset these additional costs in 2019 leading to approximately flat operating profit. We expect an increased tax rate relative to 2018 as some non-recurring tax planning activities reduced our guided tax rate.

We expect our effective tax rate in 2019 to be in line with our previously provided guidance of 20% to 25%. This guidance does not take into account the impact of the $50 million share repurchase program authorized in 2018.

We expect the impact of the increased tax rate in 2019 to be the primary driver of the $0.15 to $0.20 reduction in adjusted EPS relative to 2018. This results in midpoint adjusted EPS guidance of $1.80. Turning to Page 16, this morning, we are providing detailed guidance on our expected 2019 financial performance.

As we outlined, we expect revenue to be in line with 2018 and are guiding to a midpoint of $865 million. We expect operational earnings per share to be approximately in line with 2018 adjusted EPS, with an increased tax rate driving a midpoint adjusted EPS of $1.80 for the year.

Given the operational improvements we have instituted and expect to recognize over the course of the year, as well as the product mix expectations throughout the year, we expect the first half of the year to have a relatively lower adjusted operating margin than the second half.

We expect adjusted operating margin in the first quarter to be approximately equal to our fourth quarter 2018 margin with a first-half margin range of 6.5% to 7.5%. Operating margin should accelerate in the second half of the year to a range of 9% to 10%.

For the full year, we are guiding to a midpoint operating margin of 8.25%, which is approximately flat compared to 2018. The long-term growth opportunities remain strong for the Company, as we continue to expect out-sized growth of two to three times our end markets.

On slide 17, this morning we are reiterating our long-term financial targets for revenue in excess of $1 billion and EBITDA margin in excess of 15.5% in 2021.

Our backlog of awarded business highlighted by the previously announced awards outlined on this slide will generate top line momentum as we launch new programs and add content to our existing products. As we have outlined previously, we expect that the MirrorEye retrofit market in North America is a $100 million annual market opportunity.

Our extensive fleet trials and recently awarded FMCSA exemption, give us the opportunity to capture this market and drive growth, starting with the roll-out of MirrorEye retrofit programs in the second half of 2019.

As a result of our strong backlog awarded business and our ability to capture growth in our advanced technology platforms, including MirrorEye, we expect a compound annual growth rate of at least 8% from 2019 to 2021, resulting in revenue of at least $1 billion in 2021.

In addition to the opportunity we see on the top line, we expect that continued prudent management of our cost structure, contribution margin on incremental revenue and continuous improvement activities will drive additional margin improvement of approximately 325 basis points through 2021.

Moving to slide 18, in closing, I want to reiterate that we are pleased with our performance. We delivered strong results for all of our key financial metrics. Despite external headwinds related to tariffs, material allocations and unfavorable currency exposures, we delivered 5% revenue growth and 27% adjusted earnings per share growth.

Our 2019 guidance suggests flat revenue relative to 2018. Despite incremental tariff expenses of $1 million to $2 million as well as additional design and development costs of $5 million, we expect operating profit to remain in line with 2018 driven by operational performance improvements.

Primarily as a result of a relatively higher tax rate, reducing expected earnings per share by $0.15 to $0.20, we are guiding adjusted earnings per share to a midpoint of $1.80. Stoneridge is committed to driving shareholder value and that focus remains at the forefront of all of our strategic initiatives.

With that, I will open up the call to questions..

Thank you. [Operator Instructions] First question comes from Justin Long from Stephens. Your line is now open..

Thanks and good morning..

Good Morning, Justin..

Good morning, Justin..

So, I wanted to start with a question on MirrorEye. Now that we have the FMCSA approval, I'm just curious if you could give an update on new contract activity and maybe give us some color on when you expect some of those potential contracts to be finalized.

Is it something we could see in the next few months? Is it something you expect later this year? I just wanted to get your thoughts around that..

Yeah, Justin. Thanks for the question. Obviously, with the granting of the FMCSA exemption late in the year, we're seeing the impact of that now. What we've heard from the fleets and while we've talked consistently about the fact that we didn't need the FMCSA exemption in order for MirrorEye to make sense, many of the fleets have been waiting for this.

And so, the feedback that we've gotten parenthetically would be them saying, finally, it's been done.

So our team has been working with both our lead fleets as well as additional fleets to get those fleet trial contracts and the expansion and we'll see more of that in the first half of this year where you would start seeing more of the revenue in the second half of the year..

Okay.

And as we look at these 2021 targets that you've established, could you speak to the impact from MirrorEye in those numbers from both a top line and margin perspective?.

Yes. Justin, hi. It's Bob. Thanks for the questions. Really for 2021 as you see, the only thing that we have in the backlog right now is the -- on the OE side is the award that we've announced. So you see that that award is -- it's a 2020 program with a $12 million peak annual revenue.

If you just look at the buildup of the $865 million that we have on Page 17 with the awards that we've announced, it gets us relatively close to the $1 billion with -- really with upside in terms of additional MirrorEye awards and MirrorEye retrofit revenue.

So in terms of what's baked into the assumptions for the -- in the $1 billion assumptions for MirrorEye, the answer to that is not much..

Okay.

So just to be clear on that, the only thing you are baking in is what you've already outlined?.

It's an upside opportunity for us. Yes, absolutely..

Okay, good. That's great to clarify. And then maybe lastly, just a quick modeling question.

Are you factoring in any buyback in the guidance you provided for 2019?.

So we're not factoring in any buyback in the guidance that we've provided, Justin. So it's not -- and I -- and let me clarify that a little bit. So the first thing that I want to make sure everybody understands a couple of points here. Number one, we are fully committed to completing our $50 million share repurchase program.

Really -- if you look at in the last few months, obviously we've been in a -- we've been in a blackout window. So we have a blackout window a couple of weeks before quarter-end and the windows closed until a couple of days after the earnings call.

But also keep in mind that obviously we are subject to restrictions if we have material non-public information. So to the extent we're having conversations related to some of the non-core businesses that we've discussed that could potentially limit us -- limit our ability to trade as well.

But we remain fully committed to the $50 million share repurchase program. We're very bullish on our stock and we think it's a -- we think it's a great buy..

Okay, great. I'll leave it at that. I appreciate the time..

Thanks, Justin..

Thank you. And our next question comes from Chris Van Horn of B. Riley FBR. Your line now open..

Good morning. Thanks for taking my call..

Thanks Chris..

Good morning..

So, I just had a question on the margins. Pretty meaningful back-half move in the margins based on the cadence you gave on slide 16.

I'm just curious is the -- where majority of that move is coming from? Is it mainly that ramp in the aftermarket, is it some -- or the retrofit, excuse me, or is it some of the new product launches that are happening? Any additional color there would be great..

Thanks for the question, Chris. It's a great question. So for us, the first half-second half story is -- it's a story where -- so for us here the second half is really, it's a combination of basically four items. So the first one is obviously the launch of our MirrorEye retrofit programs.

In addition to that, we have a number of tariff mitigating actions that are kicking in in the second half of the year. So we look to comp favorably on those as well. We're also starting -- we are starting to see some relief on the electronic component shortages. So we have some savings built into some of that in the second half of the year.

And then you have the results of our productivity programs and our improved cost of poor quality. So it's a combination of those four items that's driving the -- that's driving the improvement in the second half of the year..

Okay, great. And then how are the conversations going on with MirrorEye from an OEM perspective? How are they kind of seeing -- it seems like the retrofits not an easy sell, but a very good opportunity and a nice opportunity for the fleet managers. But I'm just curious what the OEM conversations are like..

Chris, this is Jon. Good morning. The OEM conversations continue to move forward. We were really excited about the first award. What you see is there's a lot more movement in the space toward the end of last year and in 2019 with OEs being more aggressive with regard to some of the safety equipment they are putting on their vehicles.

So our feeling is that we'll have more good news in 2019. We expected to have it earlier and we've talked about it in previous calls, but the customers have their own level of timing. But we feel very good about the conversations that we're having and the opportunities that we have with OEs who have not awarded programs yet..

Okay, great. And then last one for me. You kind of talked about pricing as a little bit of a headwind here in 2019.

I'm curious is there any difference in the pricing conversations you're having with your automotive OEMs versus your heavy-duty truck customers? Or is there any one outsized driver in that pricing component ?.

So, Chris, this is Bob and thanks for the question. Really everything we're seeing from a pricing perspective is pretty typical. Pretty typical price downs both on the pass car side as well as the commercial vehicles. So nothing unusual. Just what we normally see on an annual basis..

Okay. Great. Thanks again for the time guys..

Thank you..

Thanks, Chris..

Thank you. Our next question comes from Scott Stember from CL King. Your line is now open..

Good morning, guys..

Good morning, Scott..

Good morning, Scott..

With regards to the $1 billion goal for 2021, could you talk about how the, I guess, the strategic alternatives that you -- that you're talking about for -- I think at the Deutsche Conference you talked about $150 million to $175 million in sales.

Are you including or subtracting those sales or does that assume that nothing happens on that front?.

Yeah, so that basically assumes the existing portfolio of products, Scott..

Okay..

We haven't adjusted out for the non-core products..

Got it. And maybe just with Shift-by-Wire, obviously there is -- you talked about the $35 million hit for this year there or at least the headwinds that you have to go up against. But obviously in 2020 that headwind should become a lot smaller.

Maybe just talk about how that plays out and when do you expect the Shift-by-Wire wind downs to be totally complete?.

Yeah, Scott. It's Jon, good morning. I think it's important and we talked about it earlier that you've got legacy programs and then you've got follow-on programs. So the legacy programs will be materially concluded in 2019. So we won't be talking about Shift-by-Wire ramp-down or headwinds going forward beyond 2019.

But the good news is, we've won additional Shift-by-Wire programs. We talked about one with a Chinese OE. We've got the follow-on programs, which is our integrated Park module. And those will start in production this year and ramp up and we continue to win more business there.

So our global actuation product lines, which is where Shift-by-Wire fits, have been overcoming the headwinds of the ramp-down on the legacy Shift-by-Wire and that'll be materially done in 2019. So we'll be done talking about that going forward..

Got it.

And just lastly, I guess, out of the issues you talked about quality, warranty and a few other items that hit in the fourth quarter that will remain, but it seems like the warranty has (inaudible) a much longer tail to it, correct?.

Yeah.

So what -- Scott, what we talked about and it's important to note that the transformation that Stoneridge has been going through, you got product that started development in 2013 and '14 that started production in 2016 and '17 that the changes that we made to the organization, the changes that we made to the approach only can have limited impact because of the diverse set.

With many of the new products that we're launching today, we get the benefit of the improvements in our systems, the improvements in our process and the improvements in our capabilities that we start to see going forward. So you're right, there is a long tail to warranty.

But as a leadership team, we are very confident that the changes that we've made in the organization and the changes that we've made in our processes and procedures set the stage for much more effective execution going forward..

Got it. That's all I have. Thanks for taking my questions..

Thanks Scott..

Thanks, Scott..

[Operator Instructions] Our next question comes from DeForest Hinman from Walthausen & Company. Your line is now open..

Hi. Thank you. In the past we spoke about some expedited shipping related to the shortage of components. There were some comments you just made that you're seeing some relief on the costs and maybe some better availability of some of electronic components.

Does that also mean we should see less expedited freight in fiscal '19 as well?.

Yeah, DeForest, it's Jon. Good morning. It's part of why we can talk about the difference between Q1 -- the first half and second half performance is there are things that -- the expedites of components in the component shortages, what we call -- what we refer to as allocations. We're still seeing some of that.

But the acuteness of that problem has reduced from where we were last year. So Bob's point on why the first half versus the second half would look different, one of the reasons for that is the reduction of the impact of component allocations. And so, yes, you would see a reduction in premium freight as well..

Okay. And then, I thought what was interesting, the 2019 slide on the cadence with the margins.

But if we're looking at the 9% to 10% in the second half and as it relates to some of our longer-term targets, if we're seeing kind of this ramp towards the back half of 2019 and we start to think about 2020, is some of that cadence removed in 2020 and a margin that's approaching 10% is part of that pathway to the longer-term goal? Is that what we should be thinking about?.

Yeah, DeForest, I think it's a really good question.

And I think if you look at the history of Stoneridge and the transformation that we've been through over the last few years, it's one of the reasons why we talked about we weren't necessarily thrilled with -- while we made progress in 2019, we weren't thrilled with the progress because we had some things that took us backward.

But if you look at the sort of sequential year-over-year progress that we've made on the top line as well as our gross margin and operating margin, which is what we're talking about here, we expect to be able to hold those and move forward with that.

So what we talk about in the second half of 2019 is probably a better basis for how you see the business going forward. It's why we feel confident that our longer-term EBITDA guidance has a foundation to it in business performance..

Yes, DeForest, I just would like to add. So, if you look at -- if you look at our long-term guidance for 2021, you look at the $1 billion and you look at where we're at today, if you look at our contribution margins on incremental volume we talked about before, it's two to three times our EBITDA margins on incremental volume.

So if you scale up to $1 billion and it's a business that scales up extremely well on volume. You look at the incremental EBITDA it generates on the incremental volume. And then this is also a team -- if you just look at the historic track record over the last three years, this is a team that's delivered 500 basis points of EBITDA margin improvement.

And a lot of that has just been a lot of basic blocking and tackling and execution. So if you look at how do we get to the 15.5% plus, it's a combination of the contribution margin on incremental volume and it's really just continuing to execute on what we've executed on over the last three years as a leadership team..

Okay. That's some helpful color. And we spent some time talking about the strategic alternatives. We didn't spent very much time on any type of deals.

Can you give us an update if that's on pause? If it's not, what does the pipeline look like? And then, what are the multiples that we're seeing in the market?.

Yeah, so the -- thanks for the question. We are looking at our options relative to the non-core businesses and we've gone through a rigorous process. Obviously, I can't talk a lot about that, but we've got a great team here.

We're looking at various options and we realize that it's not a core part of our portfolio and that our capital will be better employed in other areas.

And with respect to the M&A opportunities, I would really -- I got to Page 6 of Jon's presentation and on the slide that's titled Leveraging Our Existing Technology Portfolio, these were the types of adjacencies and the types of products on this page that you should expect us to invest our capital in..

And I think, DeForest, just to make sure that we clearly answer one piece of your question, in no way is our M&A on hold. We are active in these areas and we're active in -- so we're active in looking at which things belong in our portfolio from a rotation out as well as an addition in..

And then when we think about share repurchases, is it one or the other or do we feel comfortable that we can do both simultaneously?.

So if you look at where --.

I am cognizant of the blackout -- cognizant of the blackout..

Yeah, of course. So, DeForest just if you look at where we're at, we are 2-tenths (ph) of a turn in that leverage. We've got plenty of dry powder to not only execute our share repurchase programs, but also to execute our M&A strategy as well. I mean really the great news is we really like our portfolio. We like what we have.

So, for us it's going to be logical adjacencies and similar businesses relative to what we're doing today..

Okay, that's helpful.

And then, just to help me better understand, the OE when I was thinking about what's going on with the aftermarket in the sense that you have some major customers out there that you've named are moving forward with pilots, and potentially retrofits and as they always think about adding that product to their options I guess on a truck, could we see a situation I don't know common, the tail wags the dog where you have very large OE customers saying, look, we need this.

They are already moving ahead of the OEs in terms of putting it on the truck as a retrofit.

Does that help us in the negotiations to get this completed at some point in 2019 where we can be announcing some of these OE contract wins?.

So, DeForest, I think the answer is having 2.2 million miles worth of successful road miles with the product and the feedback that we've gotten from the fleets obviously gets back to our OE customers. It adds credibility to our product and it adds credibility to Stoneridge when we're talking to the customers.

It impacts us as we talk about MirrorEye but it impacts us as we talk about the other electronics products that we're offering to those customers. So I don't know that I would use tail wagging the dog but it very much is -- these two things are linked together as why we chose the strategy that we did and you will see more results of this in 2019..

Thank you. And I'm showing no further questions. I would now like to turn the call back to Jon DeGaynor, CEO for any further remarks..

I want to thank everybody for their participation in today's call. In closing, I can assure you that our Company is committed to continue to drive shareholder value through strong operational results, profitable new business and focused deployment of our available resources.

Our management team will respond efficiently and effectively to manage and control the variables that we can impact and continue to drive strong performance. We are confident that our actions will result in continued success for 2019 and beyond. Thanks very much..

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect and everyone have a great day..