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…

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.…

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.