Stoneridge, Inc. (SRI) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Stoneridge second quarter 2017 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to turn the conference over to Matt Horvath, Director of Investor Relations. Sir, you may begin.

Great. Thank you, Ashley. Good morning, everyone, and thank you for joining us to discuss our second quarter. The release and accompanying presentation, as well as our 10-Q, was filed with the SEC yesterday evening and is posted on our website at www.stoneridge.com in the Investors section under Webcast and 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-Q 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 then open up the call to questions. If would ask that you please keep your questions to a single follow-up. With that, I will turn the call over to Jon.

Thanks, Matt. And good morning, everyone. Yesterday evening, we released our results for the second quarter. We continue to drive financial performance through top line growth and operational execution, which has resulted in another successful quarter for Stoneridge. On page three, our financial performance resulted in record quarterly sales, gross profit and operating income for current operations. Our second quarter sales of $209.1 million resulted in an adjusted gross margin of 30.6%, translating to an adjusted operating margin of 8.9%. Adjusted EPS for the quarter was $0.42. Gross margin, operating income and EPS have been adjusted to account for costs related to the acquisition of Orlaco and the acquisition of the remaining PST minority interest, which we completed during the quarter. Each of our segments exceeded expectations for the quarter, including PST, where we achieved our fourth consecutive quarter of operating profit. This morning, we are increasing our 2017 full-year outlook for each of our guidance metrics. Bob will provide additional detail on our guidance later in this discussion. Page four summarizes the improvement in our key financial metrics in both the quarter-to-quarter period as well as year-to-date. In the second quarter, sales increased by 12% relative to the second quarter of 2016. Adjusted gross profit increased by 21%, with an adjusted gross margin increasing by 240 basis points. Adjusted operating income increased by 37% or 160 basis points. Adjusted EBITDA margin of 12.3% improved by 160 basis points, resulting in a second quarter increase of 28% relative to the second quarter of 2016. For the year-to-date period, sales have increased by 18% over the same period in 2016. Adjusted EBITDA has increased by 47%, with an adjusted EBITDA margin improving by 230 basis points, resulting in a margin of 12% of sales. We continue to see improvements in both our gross and operating margins, with increases of 250 basis points and 240 basis points, respectively. I also want to specifically highlight the tremendous year-over-year growth our updated guidance suggests relative to 2016. As you may recall, we previously guided to an annual GAAP tax rate of 30% to 35% for 2017. While EPS comparability is difficult between this year and last year due to differences in the tax rate, it is important to put into context our significant earnings growth. Utilizing the comparable 35% tax rate for our 2016 earnings, our adjusted EPS guidance suggest a year-over-year adjusted EPS improvement of more than 40%. We continue to deliver on our commitment to drive financial performance through consistent execution, cost reduction and implementation of our long-term growth strategy. Turning to page five, as I have discussed in previous calls, we expect revenue growth to exceed our underlying markets by 2 to 3 times, driven by our focus on intelligence, emissions, safety and security, and fuel efficiency. We view our growth as a long-term target. However, I want to point out that we achieved double-digit growth in both quarterly and year-to-date periods in an environment where North American passenger car volume had been declining. Stoneridge sales are diversified through various global end markets, including passenger car, commercial vehicle and other transportation products, through both OEM and aftermarket channels. Sales to the North American passenger car and light truck segments represent less than 45% of our year-to-date sales. Of that, more than half of our sales are related to light trucks and SUVs, markets that are both generally stable or growing as compared to the generally declining passenger car platforms. Bob will discuss each of our segments and the drivers of their growth in additional detail later in the call. Our product portfolio comprises the basic elements of every vehicle's electrical system and control architecture. I'm excited about the solutions that Stoneridge offers to our customers in each of these areas. Moving to slide six, electronic content and embedded intelligence in our products has been a primary driver of our ability to migrate from a build-to-print manufacturer to the Stoneridge of today that is focused on delivering engineered solutions to our customers. Focusing on products that address the industry megatrends will have an impact on both our top line growth, as well as our underlying margin through increased content per vehicle and higher value-added solutions. This slide illustrates the evolution of our product portfolio to smart products, which we define as those with electronic content and/or embedded intelligence. You will note that smart products, as a percentage of sales, have moved from approximately 45% in 2013 to 70% year-to-date. Smart products accounted for more than 80% of awarded business in 2016. Our 2016 awards contributed to more than $900 million to our total five-year backlog of approximately $3 billion. As our product portfolio continues to evolve, our customers are recognizing our ability to develop and execute highly engineered technical systems and are awarding us with business in categories that will drive our future growth. Moving to slide seven, Shift-By-Wire is an example of a smart product that will continue to drive growth opportunities in the future and is an example of our customers recognizing our capabilities to execute on highly technical applications. During the second quarter, we were recognized by Ford with a Supplier of the Year Award for achieving excellence in quality, cost, performance and delivery related to actuation and sensors, including our Shift-By-Wire program. The success of this product continues to draw interest from other OEMs as we pursue market opportunities related to Shift-By-Wire. The next iteration of this technology is the Park-By-Wire application that is powertrain agnostic and can be utilized across all propulsion platforms, including hybrid and hybrid electric platforms. We currently provide this technology to General Motors for utilization in Chevrolet Bolt, the 2017 Motor Trend Car of the Year. Park-by-Wire is an example of a smart product and one for which, to date, we have received global awards totaling more than $30 million in peak annual revenue. The hybrid markets are forecasted to grow at a compound annual growth rate of approximately 40% over the next five years, according to IHS. Park-By-Wire will help our customers seamlessly transition from conventional powertrains to the electrified powertrains of the future. It's important to understand the relationship between our Shift-By-Wire product and the development of Park-By-Wire. We were selected by our customers as a development partner for Park-By-Wire due to the product capabilities of our Shift-By-Wire product and our engineering and execution credibility generated through the Shift-By-Wire program developments and ramp-up. This positions us well to capitalize on growth opportunities as our customers transform their propulsion systems and find additional functionality needs. Park-By-Wire is one of the many exciting examples of adjacent products or extensions of current technologies, setting the stage for future growth at Stoneridge. Turning to page eight. I'm pleased with our achievements during the quarter. As an organization, we continue to deliver on our commitments. The second quarter of 2017 was a record quarter for our current operations from both a top line and a bottom line perspective. Our focus on smart products and industry megatrends is driving an evolution of our product portfolio. We will continue to execute on our long-term strategy and drive shareholder value through strong financial performance. With that, I'll turn it over to Bob to discuss our financial results in more detail. Robert Krakowiak Thanks, Jon. Turning to slide ten, net sales in the first quarter were $209 million, with adjusted operating income of $18.7 million or 8.9% of sales. More specifically, Control Devices net sales of $115 million increased by 5.5% quarter-over-quarter, resulting in operating income of $19.9 million or 17% of sales, which is an increase of 8.9% relative to the second quarter of 2016. Electronics net sales of $81.8 million increased by 24%, resulting in adjusted operating income of $5.6 million or 6.8% of sales. PST net sales of $23.5 million, increased by 16%, resulting in operating income of $1.1 million or 4.8% of sales, which is an increase of more than $2 million relative to the same period last year. This morning, we are providing revised guidance on our 2017 financial performance, considering our first half performance and revised view for the remainder of 2017. We are increasing the midpoint of our sales guidance by 2.5% or $20 million and increasing the midpoint of our adjusted EPS guidance by $0.24 or 20%. This quarter, I would like to highlight each of our segment's financial performance and discuss some of the specific drivers of both sales and profitability for each segment. Turning to slide 11, we have driven tremendous sales growth in our Control Devices segment over the past two years, demonstrated by our 16.5% compound annual growth rate. The successful launch of our Shift-By-Wire product in the first quarter of 2016 on global platforms for multiple customers has contributed to our top line growth over the period. Shift-By-Wire results exceeded expectations in the first half of the year as actual volumes for our platforms, specifically in the Chinese market, exceeded IHS expectations. We continue to consider IHS volumes in our guidance, both in the Chinese market and globally. In addition to Shift-By-Wire, there are other key drivers of growth for our Control Devices segment such as continued expansion in Asia and increasing global demand for our emissions products. Our soot sensor product, for example, continues to generate growth opportunities globally as emission requirements become more stringent. As we have discussed in previous calls, we were recently awarded over $20 million of peak annual revenue business related to our soot sensor product for passenger car applications. Additionally, our front axle disconnect actuator on four-wheel-drive light trucks and SUVs continues to drive growth in North America as the market shifts toward these platforms. From an operating income perspective, the Control Devices segment has done an excellent job converting revenue growth to operating profit, returning a 28.9% two-year compound annual growth rate. As our product portfolio has continued to evolve, the Control Devices segment has benefited from a more favorable product mix. In order to facilitate continuous improvement, not only at Control Devices, but throughout the organization, we have restructured our procurement and operations teams to have a more global focus rather than operating at the segment level. The result of these changes has increased operating efficiency, reduced material and quality costs and has resulted in more productive manufacturing processes. We continue to invest organically as our design and development spend at Control Devices has been focused on ensuring strong product launches and developing new and adjacent technologies around our core competencies. Overall, Control Devices has outpaced the underlying market over the last two years and is well positioned to continue to grow with our existing product portfolio and through adjacent technologies. On slide 12, our Electronics segment has contributed a 13% two-year compound annual sales growth rate, despite a relatively weak North America commercial vehicle market and the recent roll-off of certain programs. New product launches for awarded business will begin to ramp up and replace these programs during the second half of 2017 and into 2018. Additionally, we expect continued growth from Orlaco, which has substantially outperformed expectations since the acquisition. We continue to receive positive feedback from our MirrorEye fleet trials in North America and believe there may be more retrofit opportunities in the near term than were assumed at the time of the Orlaco acquisition. OEM discussions are ongoing for product launches targeting a 2020 time frame. In addition to the retrofit opportunity, we estimate the OEM market to be approximately $250 million annually. We have driven a 31.5% compound annual growth rate in adjusted operating income over the last two years. Orlaco has contributed a favorable product mix, while continued fixed-cost leverage is driving operating margin improvement. The margin expansion has been offset over the past two years by increased design and development costs, with a focus on future technologies, such as MirrorEye, our fully configurable instrument clusters, and connectivity products which will drive future growth. Moving to slide 13, although we are seeing signs of improved macroeconomic conditions recently, this has not been the case historically. And as such, the PST business has experienced a relatively flat sales CAGR over the last two years. We are cautiously optimistic that modest macroeconomic improvements will continue. That said, we have taken the recent downturn as an opportunity to right-size the business and return PST to operating profit. Over the last two years, we have reduced the breakeven point of PST by almost 30% by reducing costs throughout each area of the business. This has led to a leaner, more responsive, more customer-focused organization. It is important to recognize that PST''s product portfolio is comprised of smart products, such as our driver and cargo tracking, that are leading to exciting market opportunities and product extensions in Brazil as well as our global markets. One such example is our Electronic Logging Device, or ELD, which we were able to deliver to the market efficiently and timely due to PST's existing technology portfolio and engineering and manufacturing capabilities. ELD is just one example of how PST's technology portfolio has broad global applications. PST's leadership deserves a tremendous amount of credit for the turnaround effort and continuous improvement. Since the first quarter of 2016, PST has improved their operating margin by more than 2,200 basis points, leading to improved quarterly profitability of $4.2 million. In the second quarter, we acquired the remaining minority interest in PST, which will allow Stoneridge to fully capture the opportunities we see going forward. PST is well positioned to take advantage of improving macroeconomic conditions to drive sales growth and margin expansion. Moving to slide 14, this morning, we are increasing our full-year outlook on all of our guidance metrics. We are revising our sales guidance to a midpoint of $805 million, implying a midpoint-to-midpoint increase in our guidance of 2.5% or $20 million. It is important to note we have incorporated the typical seasonality that we see in all of our end markets into our latest guidance for 2017. Our midpoint guidance suggests approximately a 51%/49% split between first and second half revenue, which considers the most recent outlooks from IHS and LMC. Current IHS data suggests North American passenger car volumes will be down 4% in the second half versus the second half of last year. It should also be noted that due to our customers' production schedules and timing of engineering recoveries, we are forecasting fourth quarter performance to exceed the third quarter. The impact of seasonality has been reflected in the midpoint of our revised guidance. In addition to increasing our sales estimate, we have improved our midpoint adjusted gross margin, adjusted operating margin and adjusted EBITDA margin for the full year by 100 basis points. Our revised guidance includes revised midpoint adjusted EPS guidance of $1.44, representing an increase in the midpoint guidance of 20% or $0.24. Overall, we expect continued strong financial performance across the business for the remainder of the year. Moving to slide 15, in closing, I want to reiterate that we are proud of our second quarter. We delivered strong financial performance, resulting in a record quarter for current operations. We continue to drive growth and profitability across each segment. We have increased our 2017 guidance for each financial metric, considering our strong first half of the year and our revised view for the remainder of 2017. We are confident that we will continue to deliver on our commitments, resulting in profitable growth at each segment and value creation for our shareholders. Thank you for joining us today. Now, I would like to open up the call for any questions.

[Operator Instructions] Thank you. Our first question comes from Christopher Van Hore of FBR Capital Markets. Your line is open.

This is Dan Drawbaugh on the line for Chris. Congratulations on a solid quarter.

Good morning, Dan.

Thank you, Dan. Good morning.

Thank you.

So, I'd just like to start on Orlaco. I think you mentioned that it was outperforming expectations a bit. Could you help us dive into that? Is that going to be specific to a certain product category? Is there a certain geography where they're doing better than expected? Just provide a little more detail there.

Sure, Dan. And thank you so much for the question. So, the first thing that I would like to mention is we do not break out Orlaco specifically. It is part of our Electronics business. But I can tell you that in terms of Orlaco's outperformance, it has generally been really just across the board. You can get a little bit of an idea relative to the outperformance of Orlaco by looking at – if you look at the earn-out and one of the adjustments that we made to our EPS, Orlaco is performing substantially better than we had forecasted when we acquired the company, and that is one of the reasons that we had to make that adjustment because the probability of the earn-out has increased due to their outperformance relative to our plan expectations.

The other thing, Dan, just from a product perspective, recognize that all of the outperformance that we are talking about is really before we consider anything from a MirrorEye or an advanced technology perspective. So, this is with their freight handling. This is with all of their different – their off-highway markets. All of the markets that they currently support and where they're seeing outperformance in each of those markets.

Got it. That's very helpful. Thank you. And then, if I could turn to the Park-By-Wire technology that you've got in the slides here and that you mentioned earlier, just to clarify, is that awarded after you're awarded a Shift-By-Wire program on the program and then you're extended to Park-By-Wire or could this be awarded separately?

Both. The answer is both.

Okay.

Some of them – for example, the bulk is a concurrent award, but what we're seeing with other customers is what they see as some of the capabilities that we've demonstrated with Shift-By-Wire and they want those capabilities applied to their hybrid vehicles. So, the answer is it's both.

Okay, understood. Thank you. And to follow up on that Park-By-Wire, when you look at the opportunity set as that compares to Shift-By-Wire, is this in more early stages? And how do you size up the addressable markets going forward?

Dan, thanks for that question. And the answer is, we actually see it as a bigger opportunity. As we've talked with Shift-By-Wire, Shift-By-Wire was a bridge product that allowed our customers to do some things inside their vehicle, reduce weight, package more electronic content without having to redo their powertrains. So, we knew that was a bridge technology. Park-By-Wire is actually more exciting because it's part of future technologies – future powertrain technologies, future drivetrain technologies. So, we see the opportunity as greater. We see it applying across a more diverse set of propulsion platforms and we're just really touching the surface of where we think this could go.

All right, terrific. Thanks for the clarification. I’ll leave it there.

Thank you, Dan.

Our next question comes from Brian Colley of Stephens.

Hey, good morning, guys. And congratulations on a strong quarter.

Thank you, Brian.

Thank you, Brian.

So, just looking at your guidance, I was curious if you guys could kind of break out how much of the guidance raise was the result of the strength in year-to-date results versus kind of your improvement in the outlook over the back half of the year? And then in terms of the improved outlook in the back half, kind of where are you seeing the most improved outlook? If you want to speak to it by end market or geography.

Sure. Yes, Brian. Thanks so much for the question. So, in terms of the guidance improvement for the full year, what we're seeing is we're seeing it both in our first half performance as well as our outlook for the remainder of the year. So, again, the environment that we're building here at Stoneridge – and you see it on the slides – we're building the mentality of a continuous improvement environment, and you're seeing that materialize throughout the business. So, in terms of our first-half performance, first-half performance, again, exceeding expectations because we're getting leaner, we're getting – the manufacturing facilities are performing better, our sourcing group is finding more efficiencies, and you're seeing that materialize through the results. With respect to the balance of the year, again, the favorability that we see, again, building an organization based on continuous improvement, we expect that to continue. We also – as Jon mentioned in the call, one thing that I think that is very important, 45% of our volume is tied to North America passenger car – less than 45% of our volume is tied to North America passenger car and more than half of that is SUV and – light truck and SUV related. So, we do see – again, we did – we used IHS in our projections. And if you look at IHS, the outlook – even though the outlook for passenger car has become relatively weaker in the second half of the year, the outlook for SUVs is pretty strong. So, we have a very well-diversified portfolio within North America, gives us confidence in our outlook both because of the underlying performance of the business as well as the volume projections and our vehicle mix for the balance of the year.

And I think it's also important, just to note as we look at performance, Brian, that all four of the businesses are performing very well. We've gotten the opportunity to now talk about forward-looking performance and talk about continuous improvement in all of them as opposed to talking about fixing something. And that's given us the confidence to increase the guidance for the full year. And we're really excited about what the balance of the year looks like for all the businesses.

Great. That's really helpful. And then you guys talked about your expectation to outgrow your underlying markets by 2 to 3 times over the next five years. I mean, just given some of the weakness we are seeing in the US auto market, maybe you guys could just speak to your confidence about growing the top line in 2018 and what products or end markets you see as kind of being the biggest growth drivers from here and how the Shift-By-Wire sales have kind of leveled off. I’m not asking for specific guidance or anything like that, but I think comfort around 2018 given some of the auto weakness we're seeing would be helpful.

Sure. Well, Brian, let me try to address that, and I'm sure Bob will add color where I miss anything. It's one of the reasons why it's important to understand that for Stoneridge's revenue, and year-to-date, that the North American auto market is less than 45% of our total sales, and of that, more than 50% of it is SUV and light trucks. So, while the overall North American market is showing some softness, one, it's not the dominant market that we support. And the specific programs, platforms and customers that we're supporting, many of those are winning. So that's part number one. We're not exposed to the totality of the market and doesn't represent the majority of our sales. That's piece number one. Secondly, with the discussion on smart products, so that's not just things like Shift-By-Wire and Park-By-Wire, but it goes across all of our platforms. So, we start talking about instrumentation and connectivity systems, our MirrorEye systems as well as what we do at PST. All of those give us the opportunity to drive content in – on a vehicle-by-vehicle basis. So, even if you have some sequential softness in one end market, one, because we're diversified, but, secondly, because we're driving additional content, where an instrument cluster in the past may have been $150 and now an instrument cluster going forward in a commercial vehicle is between $250 and $400, we get a chance to drive content even where there might be end market volume softness. So, we aren't just a volume play. Yes, it's true that Shift-By-Wire for the current applications has somewhat flattened off, but – be very clear – we continue to pursue end customer opportunities, we expect to have more news to talk about that in the future and we see the opportunities with regard to Park-By-Wire as things to build on top of the core competencies that we have from Shift-By-Wire and to extend that sector of our business further, both with the number of customers that we support and the products that we make.

The one thing I would add to what Jon said, again, it's very important to emphasize, again, less than 45% of our exposure is tied to North America passenger car and light trucks. So, again, we have a number of other markets. And if you look at the other markets that we're exposed to, North American commercial vehicle, European commercial vehicle and our PST businesses, again, those are all markets that – when we look at on balance, those are all on the plus side. So, you've got to look at the entire portfolio of Stoneridge in totality, and not just isolated to the North American passenger vehicle market.

Absolutely. That makes sense. And then, you guys mentioned MirrorEye and the retrofit opportunity being bigger than you guys initially expected potentially. Could you just give an update on where we stand there in terms of signing any type of retrofit agreements, how meaningful those could be or what sort of the time frame we are looking at now? Any color would be helpful.

Yeah, okay. No problem, Brian. As we've talked in previous calls, what we've seen, MirrorEye originally started as a European-based product that would be an OE-only product. We continue to see interest from the OEs both in Europe and in North America. We're very confident in where those customer development activities are going. But what we see in North America is that there is an ever-stronger pull from the fleets to do things, particularly with regard to safety improvements, and providing tools to their drivers to be safer. And so, we have a series of fleet trials ongoing right now. We can't name fleet names because of the NDA process between ourselves and those fleets. But there are a series of fleet trials that are ongoing right now. The first feedback is extremely positive. All of the drivers appreciate the expanded field of view, the visibility enhancement, particularly in inclement weather, the fact that our night vision with the camera system and the display is much better than the base mirrors and what it allows them to do with regard to trailer panning and seeing the vehicle. So, what we're seeing base on the trials, as we're continuing to iterate the product, is that there will be a desire from these fleets to retrofit existing product and not wait until they fill the OE pipeline with new product. And that's why we believe we could see some revenue in 2018, but more likely into the second half of 2018 and 2019 before OE programs would start. So, we're very excited about this opportunity. And we think it's bigger than what we had planned previously.

Great. I’ll leave it at that. And I appreciate the time today.

Thanks, Brian. Appreciate it.

Our next question comes from Irina Hodakovsky from KeyBanc. Your line is open.

Thank you. Good morning, everyone. On for Brett Hoselton. Congratulations on a good quarter.

Thank you, Irina.

I wanted to ask you guys about your margin increase. If you could point out, maybe one or two major factors contributing to the majority of your revision.

Yes. Thanks, Irina. Thanks for the question. And we've talked multiple times over the last couple of years about the opportunities for improving margin just from a content perspective, but really from execution within the plants. And I want to recognize that we haven't made a lot of headlines with regard to our investors, but the changes that we've made in our operations organization and our procurement organization led by Tony Moore and Dan Kusiak, respectively, to drive quality levels up which lowers our costs, to make sure that we execute on new product launches in a much better way, and that we also drive our capital efficiency in the plants. And with procurement, again, making sure that we're improving the quality of our suppliers, making sure that we're getting global leverage. So, we're acting as one company as opposed to multiple companies as we go to suppliers, as we negotiate and as we drive our supply chain. Those things that we talked about – that you and I talked about many quarters ago are coming into play and we're seeing the results of that in our plants. On top of that, the engineering organization, on both sides, in Electronics and at Control Devices, is doing great work in improving our launches through program management, through the product engineering activities. And again, if we launch well, our costs are better, it reduces our warranty costs going forward. So, what we're seeing is less one-offs, better execution within the organization. And that translates into operational performance within the organization. The other aspect of it is the growth in China and the performance of that business and what that is delivering over the last two years. So, all of those factors contribute to expanding margins within Stoneridge.

Thank you. A follow-up on growth in China comment. Is the margin there improving because you're building on volume from very low levels or is that improving because the margin in China is higher than the overall company?

It's improving because we're building on volume from low levels. So, obviously, you get a chance to [indiscernible]. It's also improving because the leadership team in China, led by Toomas Papstel, is doing a great job of making that business more efficient. And the ramp-up in volumes is generating performance throughout the income statement. And what we're seeing is – and this is something that Bob referenced. What we see is, as the Chinese market, as they're doing a more clear job of enforcing emissions regulations, our sales are getting driven because the customers are just pulling it. And so, they're able to convert those opportunities into very profitable sales. So, it's both – top line growth, it's operational execution and it's having the right products, all three of them.

Thank you very much.

Thank you, Irina.

[Operator Instructions]. Our next question comes from Brian Sponheimer of Gabelli. Your line is open.

Hi, Jon. Hi, Bob.

Good morning.

Hi, Brian. How are you?

I’m excellent. Congratulations. Great quarter.

Thank you.

Thank you very much, Brian.

If we're thinking about this business, you basically turned it into its own acquisition by just improving the broader profitability. If I were thinking about your product portfolio going forward, how much inorganic growth do you think can exist for this company by finding more Orlacos out there? The balance sheet is in great shape. And, obviously, your strategic vision is very clear. How are you thinking about – now that you've got the house in order, looking more for our targets.

Thanks for the question and thanks also for the compliments. As you know, this team has worked really hard to try to get the business to this point. What we see is we continue to look at both – where are the inorganic – the organic and the inorganic opportunities and what can we do. And Orlaco is a perfect example of that sort of bolt-on acquisition that helps us from a technology standpoint, it helps us from an end market or a customer diversification perspective, and really is – with the right financial metrics – to try to drive value for the company. We believe that we have a leadership team and an organization that can execute those on a regular basis. And the key challenge right now is to make sure that we have the right next opportunity. As you said, we have the dry powder from a balance sheet perspective to be able to do it. We have the leadership team that is demonstrating the execution on the first one. And we look at trying to do these on a sequential basis going forward.

I appreciate the color. And just, Bob, if I'm thinking about the guidance, at the end of the first quarter, you all didn't decide to bump guide after a very good first quarter. What, as we look towards the back half of the year, can go even more right for Stoneridge to potentially drive your profitability even higher

Well, so, Brian, again, when we look at our guidance for the balance of the year, again, we're very, very pleased about the base business and about the improvements that we're driving in the underlying business. So, I want to make sure – people don't understand that there's still a lot more there in terms of improvements of the base business going forward. There's still a lot of things for us to focus on going forward. In terms of the things that could help us in the second half relative to our guidance is, obviously, capability in IHS volumes, especially if it's related to SUV, light truck volume, favorable volumes in China as well. And then, we've assumed basically pretty flat macroeconomic assumptions with respect to the market in Brazil. So, any improvement in Brazil will be a benefit for us as well in the second half.

All right, great. Appreciate it. And best wishes for another great quarter.

Thank you, Brian.

And we have a follow-up question from Brian Colley of Stephens. Your line is open.

Hey, guys. Just had a quick…

Good morning again.

Morning. I had a quick modeling couple of questions I wanted to ask. Just looking at the Control Devices segment directionally over the back half of the year, are you guys looking for continued year-over-year growth in the back half or should we be thinking about that as more flattish? And then, from a margin perspective, you guys think you can keep up the margin performance that you put this quarter?

So, Brian, thanks for your question. We don't give specific guidance, obviously, by segment. So, I can't really comment on that. But, again, Control Devices, again, think in terms of Control Devices, some of the numbers that we talked about in terms of second half in the passenger car exposure and the SUV exposure, and you can think about the Control Devices business specifically when you think about that guidance, I think that could probably help you frame out kind of first half, second half and think about the contribution margin that we've talked about historically as well.

Okay, that’s helpful. And just lastly on corporate unallocated costs going forward, it looks like that was a – helped out a couple million bucks sequentially or improved couple million dollars sequentially. What's a good run rate to think about going forward for the rest of the year for that line item

In terms of the first half run rate relative to corporate and unallocated is, I would say, is a reasonable proxy for the balance of the year.

Okay.

Okay.

I appreciate the time.

Thank you so much.

And I'm showing no further questions at this time. I would now like to turn the call back to Jon DeGaynor for any further remarks.

I want to thank you all for your participation in today's call. I want to remind everyone that our next investor event will be our presentation at the JP Morgan conference in New York on Wednesday, August 9. In closing, I can assure you that our company is committed to continue to driving shareholder value through strong operating results, profitable new business and focused deployment of our available capital. We are confident that our actions will result in continued success in 2017 and beyond. Thank you all and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.