Ladies and gentlemen, thank you for standing by, and welcome to the Stoneridge Fourth Quarter 2019 earnings call. [Operator instructions] I would now like to hand the conference over to your speaker, Matt Horvath, Director of Investor Relations..

Great. Thank you. 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 and is posted on our website at www.stoneridge.com in the investors section under webcasts and presentations.

Joining me on this 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 will be 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 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 open the call up to questions. I would ask 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 3. In 2019, we continued our transformation and positioning of the Company for strong future growth. Our 2019 adjusted sales of $830 million resulted in an adjusted gross margin of 26.5%, translating to an adjusted operating margin of 5.8%. Adjusted EPS for the year was $1.47.

Excluding the impact of divested product lines, our 2019 sales were $793 million with an adjusted gross margin of 27.2% and an adjusted operating margin of 5.6%. Divested product lines contributed approximately 37 and $0.09 to our 2019 adjusted EPS.

We are announcing that we have been awarded two additional OEM MirrorEye programs with peak annual revenue of $50 million at relatively modest take rates. With these awards, the customer platforms on which we have been awarded MirrorEye programs represent approximately 75% of the North American OEM Class 8 production volume.

In Europe, we have received approximately half of the business that has been awarded to date, which represents approximately one-third of the European OEM production volume, with a couple of OEMs yet to make sourcing decisions.

These additional awards solidify our position as the global market leader in camera mirror systems for the commercial vehicle industry. As a result of our success with our customers, our awarded business backlog, excluding the impact of external factors, grew by over 6%, driven by another year of strong business awards.

As a tangible signal of our confidence in the transformation of the Company, we are announcing an additional $50 million share repurchase, and this morning, we are providing guidance for our expected performance in 2020.

Despite reduced volume expectations due to production declines in our end markets and continued investments in advanced technologies, we expect operating margin to remain relatively stable in 2020.

Bob will provide additional detail on our revenue and adjusted EPS guidance, and I will discuss some of the operational improvements we expect later in the call. Turning to Page 4, I want to take a few minutes to reflect on the breadth and depth of the transformation within the organization in 2019.

During the year, we took actions to rationalize our portfolio and optimize our manufacturing footprint in order to focus our management and technical resources to drive future performance. For example, we announced the divestiture of our noncore switches and connectors business and the subsequent closure of our Canton manufacturing facility.

Additionally, we completed our strategic review of the switches and controls business within our electronics segment, culminating in the decision to move that product line to trend. We expect this move to drive 50 basis points to 100 basis points of consolidated margin improvement for the Company.

These activities will streamline our operations, right size our cost structure, and focus our resources on areas of future growth. In 2019, we continued to invest in technologies and systems that will improve our total supply chain.

We expect these investments will lead to improved efficiencies in our manufacturing facilities, as Stoneridge transformation and performance actions have been the foundation for growth. Our business awards in 2019 demonstrate the progress we are making.

We will continue to make investments in the necessary resources to take advantage of the opportunities these awards represent. Finally, as we will discuss later in the call, we continue to transform our leadership team to drive our long-term strategic goals.

The initiatives that we undertook challenged the organization in 2019, and contributed to financial performance that was below our expectations.

However, because of the actions we took in 2019 and the continued investments we will make in 2020, we are strengthening the foundation of the Company and transforming our product portfolio and technical capabilities to position the Company for strong profitable growth for years to come.

Page 5 summarizes our key financial metrics in both the quarter-to-quarter and year-over-year periods. Before we discuss the metrics in detail, it should be noted that for comparison purposes, we have removed the estimated financial impact of the businesses we divested earlier this year from both the current and comparable periods.

Year-over-year sales declined by approximately 3.5%, due in part to the negative impacts of the GM strike, foreign currency exchange rate, and reduced production volumes, particularly in European commercial vehicle market.

Adjusted operating margin declined by approximately 200 basis points, driven by these externalities, as well as increased tariffs, premium electronic component costs, and some increased operating costs, particularly in the second half of the year.

I will provide additional detail on the call regarding our expectations to reduce the impact of tariffs and component costs, and drive improvement in our facilities. Page 6 provides additional detail on our quarter-over-quarter results from both the sales and operating income perspective.

Revenue in the fourth quarter was negatively impacted by declines in production in some of our key end markets, as well as the impact of the GM strike, which began at the end of the third quarter and continued into the fourth. In addition, our Shift-by-Wire programs continued to ramp down in the fourth quarter.

Excluding the impact of the GM strike, Shift-by-Wire program reductions, and the negative impact of foreign currency, our core portfolio sales increased by 1.3% quarter-over-quarter. Quarter-over-quarter adjusted operating margin declined by 330 basis points.

The continued ramp down of Shift-by-Wire resulted in reduced operating income of approximately 140 basis points or $2.8 million versus to the fourth quarter of 2018. The impact of the GM strike, as well as the negative impact of foreign currency movements, reduced operating margin by 110 basis points or $2.2 million in the quarter.

Manufacturing costs related to the closure of our Canton facility reduced operating margin by 100 basis points or $2.1 million in the quarter.

In contrast to prior quarters, we are starting to recognize the impact of our initiatives to reduce tariff costs and electronic component premiums, as we reduced those expenses by almost $1 million relative to the comparable quarter last year.

In addition, due to external factors and non-recurring costs, our fourth-quarter results underperformed expectations, due to increased overtime and indirect labor cost versus the comparable quarter.

As a management team, we are committed to managing the factors that we can control, and efficiently and effectively responding to externalities to appropriate cost reduction actions. Turning to Page 7. We expect reductions in component costs and tariffs to continue as we move into 2020.

In these areas, we are forecasting $2 million to $3 million and $1 million to $2 million of improvement, respectively. We continue to focus on improving our overall supply chain to reduce premium freight expediting cost and quality related costs.

As a result of the actions we have taken in 2019 and the initiatives in place in 2020, we expect significant improvement in these areas, driving $3 million to $4 million of reduced costs in 2020.

We expect these specific actions to drive $8 million to $12 million of operating improvement in 2020, resulting in approximately flat gross profit on reduced sales, which translates to gross margin improvement of approximately 130 basis points, based on the midpoint of our [Audio gap].

We remain committed to driving top quartile financial performance, and the first step in achieving that target is improving our facilities to drive gross margin improvement across the Company.

As I discussed previously, we will continue to invest in the necessary resources to develop the products that will drive our growth and support the significant number of new programs in our long-range plan. As a result of those incremental DNB and SG&A costs, we are guiding to a midpoint of approximately flat operating margin relative to 2019.

Bob will provide additional detail on our revenue and adjusted EPS guidance later in the call. Turning to Page 8. We recently welcomed Kevin Heigel to the team as vice president of operations.

Kevin's background aligns well with our strategic plan, as he brings experience developing and implementing operations and supply chain strategies for companies of our size. Kevin is responsible for continuing to improve our operational efficiency and manufacturing processes.

In less than two months at Stoneridge, Kevin has already instituted programs and actions that are driving the $8 million to $12 million of gross margin improvement I just outlined. Turning to Page 9. Shifting our focus to one of the several opportunities that will drive future growth. This morning I want to provide an update on our MirrorEye program.

I'm pleased to announce our third and fourth OEM MirrorEye awards with a combined estimated $50 million of peak annual revenue, based on relatively low penetration rates. Both programs are expected to launch in 2023.

To expand on each of the programs, the first award is the largest MirrorEye program to date, and the largest single program award in company history at an estimated $46 million of peak annual revenue. This award for a global OEM has assumed take rates of 10% in North America and 25% in Europe.

The second award is focused in North America and assumes a much smaller take rate with peak annual revenue of $4 million. With these awards, the customer platforms in which we have been awarded MirrorEye programs represent approximately 75 %of the North American OEM Class 8 production volume.

In addition, we have won approximately half of the business that has been awarded in Europe, which represents approximately one-third of the European OEM production volume, with a couple of OEMs yet to make sourcing decisions. We invested in MirrorEye because we believe it will be transformational for the industry.

Industry dynamics, including expected government regulations around fuel economy and safety in both North America and Europe, are leading our customers to suggest take rates may be higher than originally thought and quoted.

Based on the changing market dynamics, one of the OEMs that has awarded us a MirrorEye program believes that take rates could approach 100% by 2025. Over the past couple of months, I have met with a number of our fleet partners.

Their feedback has been favorable to the technology platform, and has provided important recommendations for complementary capabilities. The fleets with whom we are working are disciplined in their approach to adoption of new technologies, but each is suggesting that the longer-term plan concludes full penetration of their fleets.

In response to the feedback from the fleets, we continue to work with a major global OEM for pre-wire vehicles from MirrorEye systems.

With multiple fleets interested in pre-wired vehicles, we have begun negotiations with other OEMs to give them the ability to offer this feature and bridge the gap between current production and the start of OEM production.

Finally, it was announced yesterday that we were awarded the 2019 Truck Writers of America Technical Achievement Award from MirrorEye. This is a significant achievement that further validates how important and transformational MirrorEye will be for the commercial vehicle industry.

MirrorEye will change the commercial vehicle industry, and Stoneridge is driving that change with our OEM and fleet partners. Turning to Page 10. This morning we are updating our long-term revenue targets to reflect current market conditions and improved long-term expectations for MirrorEye.

Reduced production forecasts, as well as the negative impact of movement in exchange rates, reduces our previously provided 2021 revenue target by almost $100 million. Additionally, the continued momentum in OEM MirrorEye awards has shifted some of our expectations for retrofit sales to OEM applications, including pre-wire options.

As a result, we expect that some of our existing fleet partners will offer an OEM solution, which may delay some of the MirrorEye retrofit revenue previously included in our 2021 target. The expected shift from retrofit applications to OEM applications does not change our expectations for the total market opportunity for MirrorEye.

In fact, based on the feedback we are getting from our fleet and OEM partners, we've increased our expectations for MirrorEye opportunities in the future. Relative to our midpoint of $760 million of revenue in 2020, our 2021 target would represent approximately 12% revenue growth next year. Turning to Page 11.

I want to expand on the overall opportunity that we see for MirrorEye. Beginning with the launch of our first OEM program in late 2020, we expect a significant increase in OEM MirrorEye revenues, as we launch subsequent awarded programs. At quoted penetration rates, our awarded programs represent $76 million of peak annual revenue.

However, given the recent comments by our customers, market dynamics could drive penetration of up to 100%. Our expectation is that penetration rates will exceed quoted rates in the medium to long term. Should penetration rates improve to double current quoted rates or just 30%, peak annual revenue would be approximately $150 million.

Should camera mirror systems become standard equipment, similar to backup cameras in the U.S. passenger car market, peak annual revenue would be approximately $0.5 billion on the programs that we have already been awarded. Retrofit opportunities would be incremental to the OEM business, outlined in this slide.

We began ramping up our investment in the capabilities, resources, and technologies to capture the growth opportunity we saw in the vision and safety space, starting in 2017. We continued to invest over the last several years, and expect approximately $15 million of investment in advanced technologies and related capabilities in 2020.

Unlike prior years where these investments were a bet on the future, we will begin to see the return on our investments in 2020 as MirrorEye and other advanced technology programs begin to ramp up. 2020 is an inflection point for MirrorEye, and thus for Stoneridge.

In addition to MirrorEye and awarded programs we have discussed, we are investing our advanced resources in technologies and products that are complementary to the MirrorEye platform. Turning to Slide 12.

Part of the transformation of the Company over the last years has been the holistic review of products, systems, and services from around the Company. We seek to combine capabilities in ways that have never before been considered within Stoneridge.

Our connectivity solutions are paving the way for conversations around B2X solutions, and when combined with MirrorEye, our video and connectivity capabilities are introducing opportunities for video recording and transmission as a way to help our fleet partners collect and manage critical information.

We expect that our full suite of in-cabin commercial vehicle electronics will enable us to develop advanced user interface devices, help drivers detect and avoid vulnerable road users, and provide driver monitoring capabilities to improve driver awareness and enable smart, active safety systems.

Our commercial vehicle products give us the ability to work with our customers to develop and define the solutions that will drive future growth for the Company and be transformational within the commercial vehicle industry. Turning to page 13. I'm pleased with the transformational initiatives we took in 2019 to drive the Company forward.

As an organization, in the leadership team, we made significant progress toward our long-term goals and strengthened the foundation for profitable growth. At Stoneridge, we will 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..

Thanks, Jon. Turning to Slide 15. Sales in the fourth quarter, excluding divested product lines, were $183.9 million, a decrease of 8% relative to the fourth quarter of 2018. Excluding divested product lines, adjusted operating income was $5.1 million or 2.8% of sales.

More specifically, control devices sales, excluding divested product lines, was $93.5 million, which was a decrease of approximately 6%, compared to the fourth quarter of 2018, resulting in adjusted operating income of $10 million or 10.7% of sales.

Electronics sales of $80.5 million decreased by 11%, resulting in adjusted operating income of $1 million or 1.3% of sales. As we continue to integrate our global business, going forward, we will refer to PST as Stoneridge Brazil. Stoneridge Brazil sales of $17 million resulted in adjusted operating income of $400,000 or 2.1% of sales.

This morning, we are providing guidance for our 2020 financial performance. We are guiding 2020 revenue to a midpoint of $760 million, implying a decline of approximately $33 million versus our 2019 revenue, excluding the impact of divested product lines.

As discussed previously, we expect gross margin expansion this year through continued reductions in component costs and tariffs, as well as operational improvements. Despite improved expectations for gross margin, we are expecting operating margin to be approximately flat, due to incremental investments in engineering resources and SG&A.

We are guiding adjusted gross margin to a midpoint of 28.5%, an improvement of approximately 130 basis points versus 2019. We are guiding 2019 adjusted operating income to a midpoint of 5.5%, and adjusted EBITDA margin to a midpoint of 9.5%, which are both approximately in line with 2019 adjusted results, excluding divested product lines.

Finally, we are guiding to a midpoint effective tax rate of 22.5% relative to our 2019 adjusted effective rate of 8.4%, compared to the midpoint of our 2020 tax rate to our 2019 adjusted effective tax rate results in a $0.23 headwind to adjusted EPS in 2020.

Through our expectations of a flat operating margin and reduced revenue along with the increase in our effective tax rate, we are guiding to a midpoint adjusted earnings per share of $1.05 for 2020. I will provide additional color on the drivers of the expected sales and adjusted earnings per share performance later in the call.

Page 16 summarizes our key financial metrics, specific to control devices excluding the impact of the divested product lines.

Excluding the impact of the GM strike and the continued ramp down of our legacy Shift by Wire programs control devices core portfolio grew by 7.2% due to growth in our emissions sensing products, as well as non-Shift by Wire actuation products.

Adjusted operating income decreased by $7.4 million relative to 2018, due in part to increased tariff expenses and the GM strike which each reduced operating income by approximately$2.2 million.

As we have discussed previously, we expect the continued ramp down of our legacy Shift by Wire programs this year to create a revenue headwind of approximately $20 million to $25 million relative to last year.

We expect control devices to offset this decline with continued growth in our emissions and non-Shift by Wire actuation products, leading to approximately flat revenue in 2020.

Excluding the ramp down of our legacy Shift by Wire programs, we expect revenue growth of 3% to 5% in our core product portfolio versus planned expectations for growth in our weighted average end markets.

We expect that reduce tariff expenses of $1 million or $2 million, as well as the actions that Jon outlined previously to drive operational efficiencies will be to operating margin expansion of 125 to 175 basis points in 2020 for control devices. Page 17 summarizes electronics performance over the past year versus 2018.

Excluding the impact of currency, sales increased by approximately $1.8 million versus the prior year. Adjusted operating income decreased by $6.5 million relative to 2018, primarily due to the negative impact of currency of $3 million, as well as increased costs related to electronic component allocations, which accounted for $2.6 million.

Looking ahead to 2020, we expect production volumes to decline electronics due to lower commercial vehicle production forecasts in Europe and North America.

However, we expect that a large driver information system program launch at the end of 2020, as well as the launch of our first OEM MirrorEye program later in the year, we will drive substantial revenue growth opportunities in this segment into 2021 and beyond.

In order to support the growth that we expect Electronics, we will need to maintain our existing capabilities and invest in additional resources to support future product development and program launches.

Despite our expectations for improved gross margin in 2020 as a result of reduced material costs in more specifically reduced electronic component related premiums. We expect our operating margin to decline slightly as a result of additional SG&A and engineering investments.

We are committed to driving long-term value for our shareholders by investing in the resources to support the opportunities we outlined from your I and our core portfolio. Turning to Page 18 storage Brazil had a challenging year primarily driven by adverse macroeconomic conditions and declines in our aftermarket audio in alarm business.

Revenue declined by $12.7 million resulting in an adjusted operating margin decline of 280 basis points. In response to market conditions into right-size the cost structure of the business, we reduced SG&A and D&D expenses by more than $5 million relative to 2018.

We continue to shift our product portfolio to more closely aligned with the electronic segment in support of in region OEM customers.

Looking forward as we launched our first OEM programs in Brazil in 2020 we expect stable topline performance in operating margin improvement of 100, 250 basis points, primarily driven by improved gross margin as a result of increased labor utilization and efficiency. Moving to Slide 19 based on IHS and LMC forecasts.

Our primary end markets are expected to decline in 2020. Generally speaking, we expect passenger car markets to remain relatively flat, while production in our commercial vehicle end markets is expected to moderately decline relative to last year.

As we have noted previously, our end-market exposure on the passenger car side is more weighted toward SUVs, CUVs and light trucks versus traditional passenger cars. Overall, we expect our weighted average OEM end-markets to decline by approximately 2.2%. Moving to Slide 20, given recent news and concerns surrounding the Coronavirus in China.

I'd like to provide a brief update on our overall exposure to potential risks in China and provide clarity on the current expected impact of Stoneridge. As a reminder, early last year. We relocated our existing Chinese operations to a fully owned world-class facility in Suzhou.

In 2019 China accounted for approximately 6% of Stoneridge of sales and approximately 20% of our direct material purchases, of those material purchases, the majority of our suppliers are in Shenzhen or Suzhou, which are currently less impacted by the virus and post-less risk for supply chain disruption.

At this point in time, we do not have any significant supply chain disruption in China, as a result of the virus. Our current guidance includes a minimal impact of the virus continuing in the first half of the year as we are experiencing some reduction in customer orders.

We will continue to monitor the situation carefully and provide updates as necessary should our expectations differ materially. Turning to Page 21. Excluding divested product lines, our adjusted sales for 2019 were approximately $793 million.

As I outlined previously, during 2020, we expect our weighted average end markets to decline by approximately 2.2%. Additionally, we expect contracted price downs in line with prior years, which typically average 1% to 2% year-over-year.

We expect the continued ramp down of our legacy Shift-by-Wire products to impact revenue by $20 million to $25 million in 2020.

Finally, we expect the prior reductions to be partially offset by a mere I retrofit sales in the European bus in North American fleet markets, as well as the launch of new programs, including a large driver information system program at the end of this year. We have included a modest amount of MirrorEye retrofit sales in our guidance.

We will continue to evaluate this as the year progresses. As a result of these factors, we are guiding our 2020 revenue to a midpoint of $716 million, which represents an approximate 4% decline in revenue excluding the impact of divested products versus 2019.

From a timing perspective, we expect an approximate 51%, 49% split in revenue for the first half versus the second half, driven by reduced production volume expectations in the second half of the year.

We expect that the third quarter will be our lowest revenue quarter of this year prior to the launch of our large driver information system program in the fourth quarter. Page 22 summarizes our full-year adjusted earnings per share guidance for 2020. Our adjusted EPS, excluding the impact of divested products was approximately $1.38.

We expect to return to a more normalized tax rate in 2020 and are expecting a rate of 20% to 25%, which resulted in a $0.23 headwind, relative to the 8.4% rate in 2019. Adjusting for the midpoint of our 2020 guided tax rate resulted in an adjusted 2019 EPS of approximately $1.15 for comparison purposes.

As I just discussed, the midpoint of our revenue guidance implies a reduction of $33 million of sales excluding the impact of divested products. As we have outlined in prior calls, we expect incremental and decrementals contribution margins of approximately two and a half to three times our EBITDA margin.

This translates into an adjusted EPS impact of approximately $0.23 to $0.27 in 2020 versus 2019. We expect that the operating improvements Jon outlined earlier will improve performance by $0.22 to $0.33, offsetting the revenue reductions.

Finally, we expect to make incremental investments in engineering resources and SG&A to support product development and future program launches, resulting in an additional $0.10 of EPS headwinds in 2020. This results in a midpoint adjusted EPS guidance of $1.05 for 2020.

So for the timing perspective to our expected revenue cadence for the year and expectations for a relatively even spread of SG&A and D&D expenses throughout the year. We expect our adjusted EPS performance to be weighted approximately 60% of the first half of the year and 40% in the second half of the year. Turning to Page 23.

We continue to grow our backlog in 2019 with another year of strong business awards performance, excluding divested product lines, the unfavorable impacts of foreign currency and the estimated impact of changes in production forecast by IHS and LMC, our backlog grew by 6.7%.

I want to point out the potential opportunity in our backlog related to MirrorEye considering different penetration rates.

As Jon outlined previously while our currently awarded MirrorEye business represents $76 million of peak annual revenue at quarter penetration rates that number improves $150 million should peak rates double in approximately $500 million should MirrorEye become standard equipment.

Not only are we excited about the continued growth in our five-year backlog, we are becoming increasingly optimistic about the potential for significant upside of this backlog as MirrorEye penetration rates could improve over the program life cycles.

Turning to Page 24 as we have discussed previously, we continuously evaluate opportunities to put our capital use to drive shareholder return, including investment in our existing business, inorganic growth opportunities and returning capital to our shareholders.

We continue to pursue and evaluate inorganic targets to accelerate our long-term strategy and our focus on complementary technologies that will enable and accelerate the advanced technology development activities that Jon outlined previously.

While we continue to pursue M&A candidates, we believe that given the significant potential for revenue growth and margin expansion for the Company, continued share repurchases should provide strong returns for our shareholders.

As a result, this morning we are announcing an incremental share repurchase program that would allow us to buy an additional $50 million of our stock over the next 18 months. We are committed to maintaining a strong balance sheet and utilizing our balance sheet to maximize shareholder returns. Moving to Slide 25.

In closing, I want to reiterate that we are pleased with the transformational initiatives that we took in 2019 and move our company forward and the positive reaction we have received in the marketplace for our new technologies.

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 for questions..

[Operator Instructions]. And our first question comes from Justin Long with Stephens. Your line is open..

Thanks, and good morning..

Good morning, Justin..

So maybe to start with the guidance for 2020.

So you gave the full-year outlook for operating margins to be 5% to 6%, but could you give us a rough sense for your expectations for the quarterly cadence of those operating margins throughout the year? And as you answer that, specifically within Electronics, how long do you think it will take for margins to recover back to the levels that you saw prior to the fourth quarter?.

Thanks for the question, Justin. Yes. So in terms of the cadence, we have seen some encouraging signs in January in terms of our performance. And that gives us confidence with respect to the guidance with the annual guidance that we've provided. We have talked about the revenue split, the 51-49 revenue split.

The revenue for us in the performance is more first-half weighted versus second half. A number of the initiatives and the things that impacted our fourth-quarter performance we're more one time in nature around exiting the Canton facility, the GM strike and some of the operational performance issues that we had in one of our facilities.

So we're seeing the beginning of the year start out really within our expectations and gives us comfort in the guidance in terms of the rollout of the operating margin. It's more first-half weighted versus second half..

Okay. And then next question I had was on that 2021 guidance. So just taking the midpoint of the revenue outlook for this year and kind of looking ahead to 2021. You're assuming about a $90 million revenue increase.

Can you just talk about your level of visibility to that number and help us just kind of build a bridge, how much of that business is secured in the backlog and maybe how much of that is MirrorEye versus other products?.

Yes, Justin. Thanks for the question. So, as you know, most of our businesses is OE business and it's a blessing and a curse, because we have a really great line of sight to what our sales are going to be over the next few years But generally speaking, we win programs, two to three years in advance of production.

So on the OE side, there's really not a lot we can do in terms of moving the needle over the next couple of years. So in terms of line of sight to that $850 million, if you look at what we do is we take the IHS and LMC projections and we take our awarded business at those levels and layer in the new program launches.

So with respect to the new program launches, as I mentioned earlier on the call, we've got the instrument cluster. Our largest cluster award has been launched late this year, we've got MirrorEye launching this year as well and we have our Park by Wire launch as well.

So, basically, what we do is the vast majority of that of that $850 million is basically in the backlog and as long as volumes materialized per IHS and LMC data then that constitutes, as I said, really over the majority of our total backlog. Jon, if you want to add to that..

And Justin, as clearly, we have portions of the business that are not backlogable. So our lack of business, our Stoneridge Brazil business and some of our other miscellaneous aftermarket business is not backlogable. So that doesn't -- we have confidence in the year-over-year progress there, but it's not in the backlog.

So we're very confident with regard to the increase year-over-year..

Yes, Justin. I think what I would add is just wasn't the IHS assumptions. Right? So if you look at our primary end markets, we don't have -- really, if you look at the IHS data, so the IHS data in terms of what was built on the $850 million of revenues.

If you look at North America pass car, the IHS data is up 1.1% this year and down six tenths of a percent next year. For commercial vehicle, it's down 24.6% this year, up 3% next year. If you look at Europe commercial vehicle, if you focus on Western Europe.

So Western Europe commercial vehicle, if you look at the LMC data down 5% this year and up 5% next year. So basically flat over the next two years, but down five this year. So we don't have kind of lackluster assumptions built into get to the $850 million..

Okay. Great. That's really helpful. And then last one and then I'll hop back in the queue, but there is a lot of talk about MirrorEye and the positive developments there.

Have you kind of thought, again, about what you view as the addressable market for MirrorEye? Historically you've talked about $250 million on the OE side, 100 million on the retrofit side, 350 million in total.

I know you threw out that number of $500 million assuming that it became standard on all equipment, but obviously that would be a pretty bullish scenario.

So do you just have any thoughts on a realistic addressable market for MirrorEye going forward?.

Well, it's one of the reasons why we provided that Slide with the regular range. We actually think that the addressable market is greater. The more work we do with both the fleets and OEMs we have higher -- stronger and stronger confidence with regard to the penetration of this product and how people will use it.

I'm also incredibly pleased with the feedback that we've gotten from both the fleets in the OEMs with regard to our specific product and that manifest itself in the business that we want.

So I would say to you that we think the addressable market is actually grown from the numbers that you gave, that you just stated, and that's why we showed the slide that we did..

Okay. I'll leave it at that. Thanks for the time..

Thank you, Justin..

Thank you. And our next question comes from Chris Van Horn with B. Riley. Your line is open..

Good morning. Thanks for taking my questions..

Good morning, Chris..

So you talked a lot about take rate and the upside opportunity and, obviously, that looks attractive. Could you talk about what specifically the decision points were for the different take rates that you decided for your recent awards? And then maybe your thoughts on what could get that take rate higher.

Is it just success of the product? Is it price? Is it something? Some other factor?.

So, Chris, what we try to give you a couple of interim points between as we've always said we give you a backlog number based on what our customers tell us with regard to take rates. The feedback that we've gotten in the last months both from the fleets, as well as from a couple of OEs, is that are quoted take rates are likely understated.

So what we're trying to show to you is what would that look like. So the 15% versus the 30% isn't because somebody has changed it 30% or we would have changed the backlog, but what we're trying to show you is a range and we have had at least one OE tell us that they believe it will go to 100%.

We haven't changed our program with them, but that's where we see it going. And just as a reminder, we know that there is at least one OE in Europe that's making CMS system standard equipment.

So what we see is as people get more and more comfortable with the technology, and that's one of the reasons why our fleet trial activities have been so important and our demonstration programs have been so important, as our OEs see both the fuel economy and the safety benefits, we expect to see, one, the adoption accelerate, and the take rates expand..

Chris, just to add onto what Jon said. I think one of the things that we talked about on the call that I think is important to understand is we announced almost $200 million of peak annual revenue awards.

But if MirrorEye went to standard equipment with the awards that we've already won, that peak annual revenue would be somewhere in the $450 million to $500 million. So the impact of this has to the Company is absolutely transformational.

And the take rate is something that, we haven't sold a lot of products that are subject to a take rate, and this is a new product. So what we're trying to do when we provide sensitivities is we just give you, as Jon said earlier, here's what's been quoted.

And because a lot of investors have asked what would happen if this became standard equipment, what will be the impact of the overall take rates for the Company, so that's the reason that we provide the range, and we'll give you some additional information based upon the fee that we're hearing from the fleets.

But, ultimately, at this stage of the game with the product not being in production, we provide the range to allow investors to make a determination of where they think this is ultimately going to go and allows them room for sensitivities..

Okay. Great. Thanks for that color. And then you talked about $8 million to $12 million of savings in '20. Yes, that's a really solid number there.

Do you see additional saving opportunities? I imagine it's an ongoing initiative to look at the cost savings, but do you see those savings or additional savings as you had 2021, or how should we think about that?.

Yes, of course. So, Chris, we continue to reiterate our goal to get to top quartile financial performance, and operational efficiencies are part of that.

Obviously, as we start to see revenue growth, I think it's important for everybody to understand that we're balancing, scaling our organization in a down market with the need to make investments in new technology, so therefore, D&D and SG&A investments to support future growth.

So, expanding our gross margin and maintaining our operating margin in a significantly down market is a demonstration of that. And as we see the market come back, as we see revenue growth between 2020 and 2021 at 12%, you wouldn't see the fixed cost and you wouldn't see the structural costs move with it.

You'd see gross margin move, but you wouldn't see some of the other costs. So we will continue to work to get to that top quartile financial performance and adjust the business for the externalities as well..

And then I'll just squeeze one more in, if you don't mind. Your other products, I think, are interesting as well around driver information systems, digital clusters, etcetera. Could you maybe update us on the pipeline for those and maybe what you saw? I know you have a big launch in Q4, I believe you said of '20, and how that market is going..

Yes. So, if you look at our overall backlog and our business wins, Bob mentioned that we had over $200 million of peak annual revenue business wins in 2019, and only a small portion of that, only roughly a quarter of it, was MirrorEye.

We continue to win in other spaces, and our overall goal is deepening those relationships with our customers and continuing to win. We're not just being a one-product company, but offering integrated systems and capabilities. So, we see good opportunities with regard to our driver information systems.

We see good opportunities with regard to our connectivity products. We also see very good opportunities in the control devices business. We didn't spend a lot of time on this call with regard to that, but we see good opportunities there.

So, while MirrorEye becomes a large portion of our conversation, just because of the magnitude of the opportunity, there are -- the foundational business continues to see growth and additional business wins. And then if that weren't true, we wouldn't have had the $200 million in business awards that we talked about in 2019..

[Operator instructions] Our next question comes from Scott Stember. Your line is now open..

Jon, you had mentioned that, I guess given the rapid acceptance on the OEM side for MirrorEye, that you were going to start to see probably some decisions shifting from retrofit to OEM, I guess beginning of life.

Can you maybe just talk about how that being the contract that you start in the fourth quarter, I guess it's in the $10 million or $12 million range.

Could that turn into $15 million to $20 million just because of increased take rates because of the shift in demand from retrofit to OEM?.

So, Scott, thanks for your question. And, yes, absolutely. It's one of the reasons why we provided the chart range that we did with regard to the possible take rates.

The fleet trials that we have done and the conversations that we've had in the marketplace and the conversations that we have with the OEs, have continued to reinforce the impact of this technology. As we said during the presentation, that fleets are very measured in how they do these sort of things to make sure that they have robustness.

Trucks are a piece of production equipment. Commercial vehicles are piece of production equipment. So making sure that they have appropriate uptime and that they don't create undue downtime, both in the install or in the quality of the system, so they're conservative in how fast they retrofit, how fast they move.

But as they learn more and as we do more with the OEs, we're going to see pre-wire, which is effectively a retrofit activity, and then also OE business ramp up..

Got it. And moving over to Shift-by-Wire, I know we've been talking about the wind down for a while, and we're expecting another $20 million to $25 million impact in 2020.

Once we get through this for this year, are we still looking at an impact in 2021? And I guess a follow-up to that would be do you expect to maintain permanently any Shift-by-Wire business outside of what you've announced in China?.

Yes. Thanks for the question, Scott. So after this year, we'll basically have about $15 million of Shift-by-Wire business remaining. There is a ramp up with a couple of awarded programs in China.

But that particular piece of the Shift-by-Wire portfolio will be at about $15 million with the current portfolio of customers next year, and that will just wind itself down over the next couple of years after that..

Okay. If I could just sneak one last one in. You guys talked about a $500 million opportunity if it becomes standard equipment, again this is for the MirrorEye.

Are we talking North America exclusively?.

No, that's global..

That was just based upon business that we've been awarded to date..

Okay. Got it. Well, obviously, it would be a lot bigger and more contracts. I got it..

Correct. Yes..

That's all I have. Thanks..

Thanks, Scott..

Thank you. And our next question comes from the line of Glenn Chin with Buckingham Research. Your line is open..

Good morning, gentlemen, and thanks for all the information on the slides, as usual..

Good morning, Glenn..

Good morning, Glenn..

Good morning. So just a quick follow-up on one of the prior questions. I just want to make sure I heard it correctly, and I think you may have addressed in your prepared remarks.

The higher SG&A and D&D expenses, those should be spread evenly throughout the year, the cadence?.

Yes, that's correct..

Okay. Very good. And then going back to MirrorEye, so these North American program wins, presumably, they will incorporate mirrors, since that is still required by Mitzna.

Is that correct?.

We've seen a couple of different mechanizations with regard to the quotes for different OEs. Some had chosen to integrate the CMS system into a reduced size mirror, others have chosen to quote it separately, which gives them the flexibility as to whether they're able to get the regulations changed by 2023 or not.

So the additional quotes that the additional awards that we have in 2023 are for stand-alone systems, not for a hybrid system with a mirror..

Okay. And then, Jon, in your slides you talk about, I guess, OEM customers suggesting that a change in regulations may be coming.

Do you guys sense that there's movement on that end?.

Well, what we sense is that -- two things. One, both in Europe and in North America, the OEMs are trying to address both market issues and regulatory issues to find ways to drive fuel economy and find ways to drive safety. And what we're learning more and more is the impact of MirrorEye, and therefore, why they would want to use that.

So that is a response to regulations that are already out there and things like the vulnerable road user regulations in Europe.

In addition, what you're seeing is you're seeing the OEs get more confident in the technology and thus go back to Mitzna and start the process with Mitzna with regard to the elimination of mirrors, in line with what's happened in Europe. And, obviously, as they get more data and more confidence, you would see that accelerate..

Okay. Very good. And then sort of a related question. Your program number three win, the take rate in Europe is 25% versus North America, I guess, 10 percent-ish.

Just out of curiosity, what is the reason for that discrepancy in take rate? Is it because it's legal in Europe? And are they assuming hybrid in North America, straight MirrorEye in Europe?.

No. So it's -- you've got the Daimler Actros that's been out there for a year. You've got just an adoption curve. Neither North America nor in Europe is it a hybrid. In both situations, it's a stand-alone activity. And I think just the adoption rate is from an OE perspective, one, the laws allow it. And secondly, you're seeing more market pull for it..

Thank you. And we have a follow-up question from Justin Long with Stephens. Your line is open..

Thanks for taking the follow up. Just had a quick question on the buyback authorization.

Bob, I was wondering if you could give us any thoughts about the timing of the buyback going forward? And also just clarify, is any impact from that buyback factored into the guidance?.

Thanks for the question, Justin. So nothing is factored in the guidance relative to the share repurchase. And we're evaluating options, and just like we did on the prior repurchase in terms of accelerated programs versus 10B51 grid-based programs, they're still open market repurchases.

And we've basically -- we're comfortable that we'll be able to complete the program within the 18-month time window that we've announced today..

Thank you. And I'm not showing any further questions at this time. I'd like to turn the call back to Jon DeGaynor for any closing remarks..

Well, thank you all for your participation in today's call. In closing, I can assure you that our company is committed to continue to drive shareholder value through our strong operating results, profitable new business, and focused deployment of our available resources.

This management team will respond effectively and efficiently to manage and control the variables that we can impact, and continue to drive strong financial performance. We're confident that our actions will result in continued success in 2020 and beyond, and I look forward to talking to you on the next call..