Stoneridge, Inc. (SRI) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Stoneridge Third Quarter 2019 Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] I would like to hand the conference over Matt Horvath, your speaker for today. Thank you. Sir, you may begin.

All right. Thank you. Good morning, everyone, and thank you for joining us to discuss our third quarter results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted on our Web site at www.stoneridge.com in the Investor section under webcasts 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, which has been 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. I would ask you that you keep your question to a single follow-up. With that, I'll turn the call over to Jon.

Thanks, Matt, and good morning, everyone. Let me begin on Page 3. In the third quarter, we continued to drive financial performance through operational improvements, and reduced costs to offset the macroeconomic headwinds we have seen during the quarter and expect to continue throughout the remainder of the year. More specifically, reduced production volumes, the GM strike, and continued currency impacts reduced revenue in the quarter by $6.9 million and operating income by $2.5 million. Our second quarter sales of $203 million resulted in an adjusted gross margin of 26.7%, translating to an adjusted operating margin of 6.7%. Adjusted EPS for the quarter was $0.37. This quarter, we continued to make significant progress in the commercialization of MirrorEye. We received our second OEM award, which is estimated to be $10 million of peak annual revenue at a 10% to 15% penetration rate, with a start of production in 2021. Additionally, I'm pleased to announce that we expect a major global commercial vehicle OEM to start prewiring our MirrorEye systems early next year. I'll provide additional detail regarding new developments later in the call. In addition to the progress we're making with systems like MirrorEye, we continue to work to ensure that our overall product portfolio aligns with both our long-term strategic goals and our targeted financial performance. We have completed our strategic review of the switches and controls business within electronics, and this morning, we will provide an update on our plans for the business. Finally, this morning we are updating our full-year adjusted EPS guidance to a midpoint of $1.55 to reflect current macroeconomic and market conditions, as well as the actions we have put in place to offset these headwinds. Bob will provide additional detail regarding our third quarter financial performance and guidance for the remainder of 2019 later in the call. Page 4 summarizes our key financial metrics relative to the third quarter of 2018. Before we discuss the metrics in detail, it should be noted that for comparison purposes, we have removed the estimated financial impact of the business we divested earlier this year from both this quarter and the comparable quarter last year. This includes the benefit of any revenue from margin associated with the transition and manufacturing services agreed to with the acquirer over the transition period. Revenue in the third quarter was negatively impacted by declines in production in some of our key end markets, as well as the unexpected impact of the GM strike at the end of the quarter. Our legacy shift-by-wire programs continued to ramp down in the third quarter as well. Excluding the impact of the GM strike and our shift-by-wire program reductions, core portfolio sales increased by 1.4% quarter-over-quarter versus end-market contraction of 1.3% during the same period. Quarter-over-quarter, adjusted gross margin declined by 270 basis points, while adjusted operating margin declined by 180 basis points. Several external factors drove the reduction in quarter-over-quarter profitability, including currency, tariff expenses and continued elevated costs related to electronic component shortages. In total, these factors reduced operating income by approximately $1.6 million in the quarter or approximately 80 basis points. We remain committed to align our supply chain strategies for the current business environment. We have continued to reduce our electronic component-related costs. For comparison purposes, in the first quarter of the year, we incurred incremental expenses of approximately $1.8 million. This quarter, we incurred incremental costs of approximately $1.3 million, reducing these expenses by almost 30% in two quarters. We expect continued improvement in the fourth quarter and are forecasting incremental costs of less than $1 million. Year-to-date, we have incurred $4.6 million of incremental electronic component-related costs. As we have discussed previously, next year we expect continued reduction in these costs, as we have visibility to at least $2 million in savings versus the current year. In addition to external factors, this quarter we experienced higher than expected costs related to expediting products at our Juarez facility. This issue was related to a few specific product lines and due in part to our implementation of new manufacturing planning software during the quarter. We have contained the issue, and we are already seeing reduced run rates for these expenses in the fourth quarter. During the third quarter, we incurred approximately $1.2 million of additional costs related to these issues, which adversely impacted our adjusted operating margin by approximately 60 basis points. With the completion of this software implementation, all of the major control devices and electronics facilities will be on the same ERP system. We continue to focus on operational efficiency to drive margin performance going forward. Turning to Page 5. As I mentioned previously, updated forecasts are suggesting significant declines in production volumes in a couple of our key markets for the remainder of the year relative to prior expectations. More specifically, relative to our previously provided guidance, we have seen, and continue to see, sharp declines in forecasted commercial vehicle volumes in Europe, as well as reductions in the North American passenger car market. Each of these end markets represents approximately 30% of our sales for the year. During the third quarter, these markets declined relative to our prior expectations by 1.8% and 2.4% respectively. Looking forward, production forecasts continue to decline, as European commercial vehicle production is forecasted to decline 8.3% and North America passenger car production is expected to be down 5% in the fourth quarter relative to prior expectations. As a result of the decline in forecasted production volumes, third quarter revenue was reduced by approximately $3 million, while fourth quarter revenue is expected to be reduced by over $9 million versus our prior guidance. Turning to Page 6, in summary, we are expecting reduced production forecast, excluding the impact of the GM strike to have an unfavorable impact on revenue of over $12 million in the second half of the year. This translates to an expected reduction in operating income of approximately $5 million or $0.15 per share. In addition to the reduction to forecast production volumes, the GM strike had an adverse impact during the third quarter, which continued into the fourth quarter. The strike, which began in the middle of September, reduced revenue in the quarter by $1.8 million and operating income by $600,000. Included in our updated guidance is the net impact of the GM strike in the fourth quarter, which is forecasted to reduce revenue by almost $5 million and operating income by $1.6 million. In total, our results in the third quarter and guidance for the remainder of the year, consider a $6.6 million reduction in revenue and a $0.07 EPS reduction as a result of the GM strike. Finally, as we have discussed in prior quarters, we continue to experience unfavorable currency exchange rates, particularly in Europe, which reduced third-quarter revenue by $2 million and operating income by $400,000. Based on current forecasts, we estimate that the continued impact of foreign currency will reduce revenue by $5 million and operating income by $1.2 million in the fourth quarter relative to prior expectations. In total, currency is expected to reduce revenue by $7 million and EPS by $0.04 in the second half of the year versus our prior guidance. Based on these external factors, we are expecting revenue and EPS headwinds of $26.2 million and $0.26 respectively in the second half of the year versus our prior guidance. In response to the external factors, during the third quarter, we took aggressive actions to reduce costs and offset the reduced production forecast. We expect to be able to materially offset the impact of reduced production volumes this year. That said, the adverse impact of the GM strike and continued currency headwinds are more difficult to offset in the short-term. As a result, this morning we are reducing the midpoint of our adjusted EPS guidance by $0.11 to account for these factors in the second half of the year. As a company, we are committed to working to offset external headwinds to ensure continued strong financial performance without sacrificing future growth or our long-term strategy. As a result, we have implemented both short and mid-term cost-cutting measures to ensure that we are properly structured for current market conditions and continue to review other actions to eliminate unnecessary cost and drive financial performance even in a difficult macroeconomic environment. Page 7 outlines one of the portfolio actions that we plan to institute in order to drive continued financial performance. As we've discussed previously, we have been evaluating strategic alternatives for our switches and controls business within the electronics segment. These products include body control electronics and other ECUs for commercial vehicle applications. This portfolio of products represents approximately $85 million to $95 million of revenue, or just over 10% of total revenue, currently operating at a margin significantly lower than our corporate targets. We evaluated the portfolio for strategic fit, future opportunities and potential financial improvements. We determined that the product portfolio provides a basis for future solutions for our customers and technical competencies that will be valuable as we build the system-based solutions that will drive future growth. As such, we evaluated potential structures for the portfolio that allow us to retain it and ensure that they will generate the financial returns we expect going forward. To deploy the engineering required to maintain and grow the portfolio and manufacture the products with a competitive cost structure, we plan to move the business to our fully owned facility in China. We plan to move the manufacturing assets in two phases beginning next year. The first phase, which comprises a majority of the revenue in the portfolio, is planned for completion by mid-2021 with a second phase planned to begin in 2021, with a targeted completion by mid-2022. Once complete, we estimate that the planned move will result in 50 basis points to 100 basis points of margin improvement for the consolidated company. This decision is a testament to our leadership's ability to balance the needs of our customers, trends in our end markets and expected financial performance. We continue to evaluate our product portfolio and utilize our global footprint to better serve our customers. We will also continue to reduce our structural costs to improve our margin profile. Finally, turning to Page 8, this morning I want to provide an update on our MirrorEye progress for both the OEM and retrofit applications, as well as some new developments related to prewiring vehicles from the factory. During the quarter, we announced our second OEM MirrorEye award with an estimated $10 million of peak annual revenue based on a 10% to 15% penetration rate and a start-up production in 2021. As we have mentioned previously, this decision was one of three OEM sourcing decisions we expect over the next year. Our continued success with global OEM customers ensures that MirrorEye will be the leading global OEM installed camera mirror system for years to come. We continue to work with our global OEMs to display our technology and show them and their customers the benefit of our MirrorEye system. As a result of that work, we are proudly being featured on one of Freightliner's customer demonstration trucks. In addition to the progress we're making with global OEMs, we continue to expand our fleet evaluations through our retrofit program. These fleet evaluations provide a tremendous platform to refine our system to meet the needs of drivers and fleet owners. In addition to refining the product offering, we are continuously working to improve the robustness of the system and reduce the downtime caused by system installation. We are partnering with one of the large global OEMs to introduce a prewire option for the system, which they expect to be available early next year. The prewire option will be specific to the MirrorEye system, meaning that the end customer will not be able to utilize the prewired option to install a competitor's system. We believe that this option greatly reduces downtime, reduces system integration complexity and should accelerate the penetration of the product before our OEM programs ramp up in late 2020. Finally, during the quarter, we announced that we have been named a finalist for the 2020 Automotive News Pace Award for MirrorEye. This is a significant achievement that further validates how important and transformational MirrorEye will be for the commercial vehicle industry. Turning to Page 9. Despite some significant macroeconomic headwinds, I'm pleased with the team's ability to respond rapidly and drive continued strong financial performance. We continue to take the appropriate portfolio and footprint actions in order to position the company for future profitable growth aligned with our customers' needs. MirrorEye continues to move forward with fleets and OEMs. We expect that the prewire activity we discussed this morning will accelerate the path to market and overall penetration of the system. 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.

Thank you, Jon. Turning to Slide 11. Sales in the third quarter were $203.4 million, while sales, excluding divested product lines were $192.6 million, a decrease of 3% relative to the third quarter of 2018. Excluding divested product lines, adjusted operating income was $12.6 million or six and a half percent of sales. More specifically, control devices' sales, excluding divested product lines was $99.1 million, which was approximately equal to the third quarter of 2018. Resulting in adjusted operating income, excluding divested product lines, of $12.3 million or 12.4% of sales. Electronics sales of $87 million decreased by 4%, resulting in adjusted operating income of $6.9 million or 8% of sales. PST sales of $16.5 million resulted in adjusted operating income of $500,000 or 3% of sales. As a result of reduced production forecasts, unfavorable forecasted currency rates and the GM strike, we are revising our full-year revenue guidance to a midpoint of $817.5 million. Due to our reduced revenue expectations, we are forecasting continued gross margin pressure and have reduced the midpoint of our gross margin guidance by 175 basis points. With that said, we expect to partially offset the reduced gross margin through continued cost-cutting measures, and therefore, have only reduced the midpoint of our adjusted operating margin by 62.5 basis points. Finally, we are expecting a reduced tax rate in the fourth quarter as a result of the continued evaluation of our tax position relative to the current U.S. tax environment. And as such, we have reduced the midpoint of our full-year adjusted tax rate by 375 basis points. Due to the GM strike, reduced production forecasts and the impact of currency, offset partially by our continued cost reduction measures and more expected effective tax rate for the year, we are reducing our 2019 full-year adjusted EPS guidance by $0.11 to a midpoint of $1.55. I will discuss our updated guidance and drivers of the adjustments in more detail later in the call. Page 12 summarizes our key financial metrics for 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 8.3% due to growth in our Emission Sensing products, particularly in China, as well as our non- shift-by-wire actuation products. Adjusted operating margin decreased $1.7 million relative to the third quarter of 2018, driven primarily by additional tariff expenses of $500,000 and increased expediting costs of $1.2 million relative to the same period last year. Compared to the second quarter of 2019, we were able to reduce tariff related expenses by approximately $400,000. As Jon discussed, the increased expediting costs were related to a few specific lines in our Juarez facility. The issues that drove the additional costs were addressed during the quarter. We are already seeing a reduced run rate for those expenses in the fourth quarter and although we expect some residual impact, we do not expect this issue to be a recurring one. Finally, the GM strike reduced operating income by approximately $600,000 in the quarter. In total, additional tariff expenses increased expediting costs and the GM strike reduced operating income by $2.3 million or approximately 2.3% of sales during the quarter. Control devices is delivering growth throughout the product portfolio while focusing on operating margin expansion through continuous improvement. Page 13 summarizes performance, in our electronics segment quarter-over-quarter as well as over the last 12 months. During the quarter, electronics sales declined $3.7 million compared to the third quarter of 2018 primarily due to a headwind of $2.7 million related to currency, as well as reduced production volumes in the European commercial vehicle market. Adjusted operating income decreased by 22% and adjusted operating margin declined by 180 basis points relative to the third quarter of 2018. Cost increases related to electronics component shortages and the unfavorable impact of currency reduced operating income by approximately $1 million relative to the comparable period in the prior year. Additionally, the inability to reduce overhead costs in the short-term in response to production volume changes also adversely impacted margin during the quarter. As Jon outlined previously, we expect continued headwinds related to production volumes, particularly in Europe, and are focused on reducing structural costs. Turning to Page 14. PST had a challenging quarter, primarily driven by adverse macroeconomic conditions and declines in our aftermarket audio and alarm business. Revenue declined by $2.4 million, resulting in adjusted operating margin decline of 320 basis points. We expect continued volatility in Brazil for the remainder of the year. Longer term, we remain focused on developing our in-region OE capabilities to position the segment for growth and margin expansion, as we begin launching new OE product in Brazil as early as the first half of next year. Turning to Page 15. Last quarter, we provided an outlook for the second half of the year that implied an adjusted EPS range of approximately $0.38 to $0.40 for the third quarter. During the quarter, we experienced a number of unexpected headwinds that negatively impacted our performance. The GM strike, reduced production volumes and the continued negative impact of currency reduced third quarter EPS by approximately $0.07. Partially offsetting those factors were a favorable tax rate, which contributed $0.02 to the quarter, as well as reduced SG&A and engineering-related expenses, which contributed approximately $0.03 to the quarter. During the quarter, we capitalized certain software development expenses related primarily to our vision and safety products. These costs were incurred in the third quarter as well as the first and second quarter of 2019. Our adjusted earnings per share of $0.37 for the quarter only includes the capitalization of third quarter expenses. The capitalization of expenses in prior quarters added approximately $0.02 to our year-to-date adjusted EPS, which we have accounted for in our updated guidance. As we migrate to more of a software-based model, we expect to continue to capitalize a higher percentage of software development costs going forward. Finally, in response to reduced production volumes, we took necessary actions to reduce SG&A to right-size the cost structure of the business going forward. We will continue to ensure that we respond to changing market conditions to not only deliver continued strong financial performance, but also drive our long-term strategy and position the company for future success. On Page 16, we are updating our full-year guidance to reflect current market conditions, as well as actions taken by management. Relative to our previously provided guidance, we are forecasting $0.07 of headwind from the GM strike, $0.04 from the forecasted continued unfavorable impact of currency and $0.15 related to reduced production volumes in the second half of the year. In total, we are forecasting $0.26 of unexpected external headwinds relative to our prior guidance. As a management team, we were quick to respond when production forecasts were reduced in the third and fourth quarters and took aggressive cost reduction actions to help offset the expected headwinds. We expect to offset $0.15 of the $0.26 of headwinds through cost reduction measures in response to market conditions, year-to-date capitalized engineering expenses and a reduced effective tax rate. Conversely, due to the uncertainty surrounding the timing and duration of the GM strike, as well as continued unfavorable currency movements relative to forecasts, we do not expect to be able to offset these externalities for the remainder of the year. As such, we are reducing the midpoint of our guidance by $0.11, which is approximately equal to the estimated impact of the GM strike and the impact of currency. As a management team, we remain committed to delivering strong financial performance through any market condition. We continuously focus on impacting the factors within our control and taking swift and effective actions to offset the externalities in the marketplace. Moving to Slide 17, in closing, I would like to reiterate that we are pleased with our team's response to significant external headwinds, as we continue to position the company for long-term success. Stoneridge is committed to driving shareholder value and that focus remains at the forefront of all of our strategic initiatives. With that, I will open up the call to your questions.

[Operator instructions] And your first question comes from the line of Justin Long with Stephens.

Thanks.

Justin? I think we may have lost Justin.

And his line is open.

Okay.

Hey, guys. Can you hear me?

Yes.

Okay. Sorry about that. I'm not sure what happened. But good morning and thanks for taking the questions.

Good morning.

Good morning. I wanted to start with the production commentary around the second half and fourth quarter, and maybe look into next year. And I know you're not giving 2020 guidance, but could you maybe comment on what you see as the weighted average end-market expectation in 2020? And then, also add in some commentary about your ability to outperform the end markets next year and what can drive that.

Sure, Justin, I'm happy to talk about that. What you see in the summary in terms of third quarter, fourth quarter that we outlined on Page 5, with respect to next year, so we use IHS and LMC really for all of our projections. You are correct. We are not going to provide specific guidance around next year. But, what I can tell you is if you look at the IHS and LMC projections for our various end markets, so North America pass car right now, if you look at the IHS data, it's down about a tenth of a percent. It goes from 16.6 million to 16.5 million. China passenger car next year is down about 12%. North America commercial vehicle goes from basically -- it was 524 million units in the first quarter, was the third quarter projection; the current projection is 502. And then Europe has gone from 620 to 597, so obviously, significant changes in our various end markets, which is a basis for what we use to pull together our outlook for 2020. But there's a number of -- obviously, there's a number of other factors as well. You've got price-downs, currency, new business awards and then obviously our end market. And then you'd add onto that the MirrorEye retrofit opportunity, that's basically the way to think about 2020.

Justin, with regard to the question on our ability to outperform, we've got a couple of things, which is a whole series of launches that are happening in 2019 and 2020, as well as 2021 in all three of our business segments, as well as the retrofit opportunity, which isn't in any of our backlog. So what you see is content growth, which should give us the ability to outperform, but certainly, we've got some significant headwinds in the base markets.

Yes. And the two primary programs that we talked about for next year, Justin, in terms of what's launching, we've got the park-by-wire program, which is a 2019 launch, which is a peak annual revenue of $31 million; our telematics program for 2019 with peak annual revenue of $24 million. And then in 2020, we have a global driver information system launch with a peak annual revenue of $38 million, and then the MirrorEye program launches late next year and that's peak annual revenue of $12 million as well.

Okay. That's helpful. And I don't think you mentioned the 2021 targets on this call, but you do have that guidance out there for $1 billion of revenue and 15.5% EBITDA margins. Are those targets still achievable in the current environment that we're seeing and based on the current production forecasts the next couple of years?

Yes. So Justin, we're going through our -- basically, through our process right now in terms of updating our outlook. So we're not commenting on the 2021. We'll have more information in the next several weeks and just from our perspective, we just haven't -- we haven't finished going through our process. So I don't have any additional information versus what we've said before.

Okay. And I guess last quick one on MirrorEye. I know there are two other OE awards that you're expecting. I think previously, you had talked about one of those may be occurring before the end of this year and the other one sometime in early 2020. Has the timing around those awards changed at all?

No.

Okay.

We still see it the same way.

Okay. Easy enough. Well, I appreciate the time. Thank you.

Thank you, Justin.

And your next question comes from the line of Chris Van Horn with B. Riley FBR.

Good morning. Thanks for taking my call.

Good morning, Chris.

I just wanted to ask about -- I think you mentioned 50 basis points to 100 basis points margin potential from the electronics switches moving to China. And does that get you closer to kind of a company average margin, or and use the additional upside from that, or is that kind of the end goal?

So Chris, if you look at it, what we talked about, is that the 1,500 basis points on the entire company. So if you look at the revenue size of that business, it tells you how much the sort of magnitude of financial performance that it changes for that business. What I'd say to you is these are the sort of actions -- when we talk about getting to top-quartile financial performance, these are the sort of actions that we have to take in all places. So we look at every one of our product lines and we make judgments on how to drive the performance, and here's an example of it.

Okay. Got it. Now moving to the MirrorEye, you said it kind of continues to increase fleet evaluation. Would you be able to quantify at all how those evaluations have evolved since earlier in the year, are you seeing that ramp up considerably and if you could disclose kind of your quantification of that.

Well, a couple of things, Chris. I mean, we talked about the number of fleets on the last call, but just from an overall mileage perspective, we're approaching now -- as we have more fleets in the field utilizing MirrorEye, we have almost 6 million miles tested right now on our MirrorEye system. So you're seeing that number growing pretty exponentially as more trucks are in the field evaluating our technology.

Okay. And just to follow on that, so it sounds like the prewire option is interesting, and it sounds like it may have been a retrofit kind of driven decision possibly, you can clarify it for me there. But when the OEMs are going to prewire those, do you see that as a similar take rate in terms of what you've cited before, in that kind of 10% to 15% level, or do you think they might raise that up in the hopes that there's more adoption?

So one thing you need to understand, Chris, this isn't a take rate situation then. This is an option that effectively, the fleets are pulling and saying they want to be able to install a CMS system and the OEs are responding to it. So what I think what we view it as is we view it as a very strong step that our fleet trials are generating pull and that the fleets are pushing the OEs to make it easier for them to install the CMS system.

Yes. I would say, Chris, I think it's important that the fact that the OEs are installing our wire harness in their vehicles at the factory is a testament to the value proposition that the fleets are seeing with MirrorEye and the conversations that they're having with their OE partners relative to the importance of this technology in their vehicles.

Okay. And so they're effectively -- they're going to pay you for the wiring, and then if they decide to go with the MirrorEye, that'll just be an additional revenue component as you move forward?

Yes. We're not talking about how that revenue is getting split, but the way to think about it is that it's an installation of the activities that would require opening up of the interior of the truck will be done in the factory, which makes a post-factory install much, much more efficient.

Okay. Thank you so much for your time guys.

And your next question comes from the line of Scott Stember with CL King.

Good morning, guys.

Good morning.

Could you talk about your expectations of potentially recapturing the business that you anticipate losing in the back half of the year with GM?

Sure, I'm happy to do that, Scott. Thanks for the question. So this is something that we have spent a great deal of time looking at, obviously. So one of the things that's important to mention, anytime one of your customers goes on a labor strike, it's obviously challenging for us, because generally speaking, you incur higher decrementals, because you largely maintain your direct labor on those specific lines, and given the abruptness of the volume fallout and you also want to make sure that you get a smooth ramp-up when once the labor disagreement has been settled. So, that was a drag for us during the quarter and continue to be a bit of a drag in the fourth. So the answer to this obviously is, Scott, it depends, right? There are certain platforms that GM will pretty much running nonstop. So their ability to ramp up and basically, order more was limited because they were pretty much running at full capacity. So there's going to be, depending upon the product line and the number of shifts they were running, it's not a catch-up because a number of the -- for example, a number of the truck products were running at basically at full production prior to the strike. So their ability to make up is relatively limited. But on some of the other platforms, on some of the other pass car platforms and SUV, CUB platforms, they weren't running at full capacity. There's an opportunity to make some of that volume up over time.

Got it. And with regards to shift-by-wire, I know we've been talking about this for a while and park-by-wire is coming on. When do we start to see, I guess, the park-by-wire meaningfully start to replace what we've lost in shift-by-wire?

It's at start of production this year and a ramp-up throughout the end of 2019 and into 2020, so really, on a run rate basis, 2020.

Okay. And back to MirrorEye, I know last quarter, we had pushed out the -- or you were -- I won't say pushed out, but there was a reason for pushing or doing the retrofits on MirrorEye later than expected, as you guys were getting all the necessary feedback. Are we still on track...

Yes.

All right. And one -- And lastly on the prewiring opportunity here, you guys have talked about how an OEM installation, while it is definitely nice and accretive to you, the margins are better on the retrofit side. So, if we were to start to see potential OEM or OEM-award types of business coming through the back door, so to speak, through a prewiring situation, could you talk about how the margin -- net-net how the margin situation for you guys could be a lot better than initially expected on MirrorEye and...

Yes. And I don't think that's necessarily the way to think about it. I think what you look at is this gives us the ability to accelerate the retrofit planning in 2020, as they do the prewire, it takes one of the barriers, or one of the considerations that the fleet would have, away. It reduces the risk from an install perspective; it reduces the downtime. And so we look at it as an opportunity to accelerate retrofits with the support of an OE doing the prewire.

All right. That's all I have for now. Thanks.

Thanks, Scott.

And your final question comes from the line of Gary Prestopino with Barrington Research.

Yes. Good morning, everyone.

Good morning, Gary.

Hey, the churn of the electronics switch and control business, was your decision to keep it more or less based on the fact that you couldn't find a buyer, or as your customers heard that you were thinking of jettisoning the product, or the division -- they came back to you and said, no, hey, there's potential here, we like what we're doing, we like what you're doing. And you get your costs down to make it a viable part of your product portfolio?

Gary, it's somewhere in between those two. It wasn't that we couldn't find a buyer. It was the fact that as we went deeper into the evaluation, and as we had conversations with customers, what we saw is there was a growth profile to that business. Secondly, as you see, the continued trends in the space, the core competencies there with that product are additive to what we see as the needs going forward. And with the launch of our new facility in Suzhou, we had the capability and the capacity to make a move and have this impact two years ago when or even a year ago, when we weren't in the new facility, we didn't have the ability to do it.

Okay. And then, this is your second MirrorEye program, right, that you signed with an OEM. Could you just refresh my memory on the first one? What's the annual revenue run rate there, and when does it start?

Yeah, the first one is peak annual revenue of $12 million and it will launch at the end of 2020.

Okay. And then, this prewire program that you've announced, did I heard you say, Jon, that it really does effectively close out a competitive product from coming in once a fleet rewires, is that correct?

Well, so a couple of things. First, with the FMCSA exemption, we're the only ones where it's legal to do a retrofit and pull the mirrors off the truck. So there's a block in that already, the question that many people ask is if you do the prewire, does it actually open a competitive threat. And the answer is no, because it's a Stoneridge-specific wiring system.

Okay. That's great. Thank you very much.

Thanks, Gary.

Our next question comes from the line of Glenn Chin with Buckingham Research.

Good morning, gentlemen. Thanks for taking the question.

Good morning, Glenn.

Just a quick question around the regulatory environment. There's chatter that, or news that, the regulatory wheels around cameras for both passenger cars and commercial vehicles may be in motion. NHTSA is supposedly soliciting public comment as to whether or not they should permit cameras to replace mirrors on both of those. What can you share with us as far as what the timing might be like, or what the regulatory path or process might be like?

Predicting timing in a regulatory activity is difficult. NHTSA has gone on for comment. They're seeking comment for both pass car and for commercial vehicle. I was down at the North American Commercial Vehicle Show earlier this week and had conversations with various OEs, as well as various industry organizations about what's the best way to support this activity and to approach both the DOT and NHTSA. This is something that obviously, we'll be in support of, but it's not something that we at Stoneridge believe will work in partnership with the fleets with industry associations and with the OEs.

All right. Thanks, Jon. And then do you know is the process or the path much different from what it was as far as the FMCSA exemption? Is new legislation much more -- is it much different from getting the exemption?

My guess is, Glenn, there's probably more to it. As you start talking about with vehicle regulations as opposed to a retrofit regulation, let's be honest, that's not an area where we have extensive experience. And it's part of the reason why we work with OEs to do this.

Okay. And then with this prewire option, so it reduces downtime. But other than the downtime that will translate to cost savings for fleets, will it inherently make it -- instead of doing it when the truck is built, will it be cheaper overall to install it into typical retrofit option?

Well, it would be faster, so by definition, it would be less expensive to do the install because it'll be faster. You don't have to do that wiring at the time when you take the truck down. It's already done.

Okay.

I think the important thing to take away here is, one, it will give many fleets more comfort because again, trucks are a piece of production equipment. So any time you make a change on a truck, they're worried about what it could do from a durability standpoint; they're worried about what any change could do from a downtime perspective. So, the fact that it's wired in advance reduces that perceived risk. The second thing is, if we can reduce the -- if we can make the install more efficient, that's going to certainly drive an additional level of comfort. And the third thing is the fact that it's in partnership with the OE to send the signal.

Okay. Very good. That's it for me. Thank you.

Thanks, Glenn. Operator [Operator Instructions] And your next question comes from the line as a follow-up from Justin Long with Stephens.

Thanks for taking the follow-up. I just wanted to circle back on a couple of things that might help from a modeling perspective next year. Bob, if I kind of piece together your answer on the end markets for 2020 that you gave me earlier, is it fair to say that your weighted average end markets will be down high single digits next year? And then, also I wanted to ask about tax rate expectations into 2020.

So Justin, we're obviously going through our guidance process for next year, so I'm not going to comment on it. But we're very transparent in terms of what we use. You know that we use IHS for pass car and we use LMC for commercial vehicle and that's the basis for the guidance that we provide on a regular basis. So, every year at the Deutsche Bank conference, we give you our various end-market exposures and the percentages. Now, we do something at a much more granular level of detail, so the back of the envelope in terms of here's our weighted average market exposure based on the IHS- LMC data. We go to obviously a lot more detail than that. We build it up by platform. We build it up by region. And generally speaking, our platform has been outperforming the underlying market by a pretty substantial amount for several quarters now. So it's not as simple as just taking those end markets and multiplying by the percentages. So it's a process that we go through. This is the normal time that we go through it in terms of putting a plan together. And it wouldn't be appropriate for me to comment on it, given the fact that we're in the middle of it right now.

Okay. That's fair enough. And then on the tax rate for next year, any initial thoughts?

Yes. The tax rate is the same, Justin. We're still going through -- the tax team is still going through that, and we continue to look for opportunities on the tax side. We've found them this year. And it's been a benefit to our shareholders. We will continue to do that and we'll be in a position to provide some more guidance on taxes later in the year, early next year.

Okay. And I guess just last question is on capital deployment. Obviously, the balance sheet is still in pretty good shape, generating a good amount of cash. So, could you just talk about where you stand in terms of capital allocation toward buybacks versus acquisitions and maybe what that acquisition pipeline looks like right now?

Sure. So, we are still going through a $50 million share repurchase program that's outstanding, still a share repurchase program. So that's still in process right now with our counterparty. We stand at all times, this is a company with a really strong capital structure right now if you look at where we're at in terms of our leverage levels, given our cash flow profile. So, really for us, we continue to evaluate that. And obviously, we're very active in looking in the M&A space as well. We're still seeing valuations are pretty high in the space, so, Justin, as you and I have talked about this on several occasions, we really like our portfolio. So, there's nothing out there that we have to do. And we're not going to go and have another like this and do something that we don't know extremely well. So, we're looking for similar businesses that give us either geographic or customer diversification. And we want to pay the right price, just like we did with Orlaco. And Orlaco has been an absolute grand-slam for our shareholders. Those are the types of transactions that we're looking at. And to the extent that we don't find those, we'll do what we did back in the second quarter and return capital via share repurchases.

Okay, great. Thanks again for the time.

Thanks, Justin.

As there are no further calls in queue, I would now like to turn the call back over to Jon DeGaynor for closing remarks.

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 strong operating results, profitable new business and focused deployment of our available resources. This management team will respond efficiently and effectively to manage and control the variables that we can impact and will continue to drive strong financial performance. We're confident that our actions will result in continued success for the balance of 2019 and beyond. Thank you.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect. Thank you. And have a great day.