Good day, ladies and gentlemen and welcome to the Stoneridge third quarter 2015 conference call. At this time, all participants are in a listen-only mode. Later, we e will be conducting a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference maybe being recorded. I would now to turn your conference over to Ken Kure, Corporate Treasurer and Director of Finance. Sir, please go ahead.

Good morning, everyone and thank you for joining us on today's call. By now, you should have received our third quarter earnings release. The release and the accompanying presentation has been or will shortly be filed with the SEC and has been posted to our website at www.stoneridge.com. Joining me on today's call are Jon DeGaynor, our President and Chief Executive Officer and George Strickler, 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 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 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 Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. As a result of the sale of the wiring business starting in the second quarter of 2014, our Control Devices Electronics and PST segments has been reported as continuing operations, while the wiring business reported as a single line called discontinued operation. In addition, our balance sheet and income statements and cash flows included the wiring business through July 31, 2014. Our forward projections for 2015 are for our three remaining segments as our financial results including the wiring business are not indicative of our future performance. Jon will begin the call by addressing the strategies discussed during our third quarter earnings calla and our progress to address the near-term challenges and longer term value enhancements for Stoneridge. George will discuss the financial and operational aspects of the third quarter. George will also review our revised sales and earnings guidance based on the trends that we have seen through the third quarter and what we expect for the fourth quarter. We have prepared and published an earnings presentation to provide more detailed schedules to help your understanding of our third quarter results, trends for our continued improvement and update you on key initiatives to improve financial performance. A copy of these items can be found in our website at www.stoneridge.com in the Investor Relations section. After John and George have finished their formal remarks, we will open up the call to questions. With that, I will turn the call over to John.

Thank you, Ken and good morning. I am pleased to report that we recorded a strong third quarter. The organization was able to overcome the headwinds caused by currency changes in Europe and Brazil, as well as continued deterioration in the economic situation in Brazil. This performance by the team is a reflection of the capability of Stoneridge to perform in the face of challenges, consistently deliver improving results as we have in the first three quarters of 2015. George will provide more detail in his section on the performance of the third quarter. During last quarter's call, I outlined for you my initial assessment as to where we are in our journey to generate sustainable earnings and sales growth. I described the themes that are providing focus for the organization. I would like provide a short update on those themes. The first theme, predictability. We have applied analytical tools to reduce variation in our business results and prioritize both capital and human resource deployment. In conjunction with in-depth business reviews, the tools have allowed us to better control discretionary cost, reduce inventory levels and reduce or postpone capital expenditures. The impact of this effort can be seen in the changes in utilization of our global manufacturing footprint, thus lowering our cost by leveraging our global capability and in the utilization of our capital, increasing production on existing equipment and eliminating redundant assets wherever possible. Let me provide a couple of specific examples. In our control devices business, we are moving a portion of our EGT production from a U.S. facility to our China facility to support sales growth globally and in the use of Pacific region, specifically. This action allows us to expand our overall business, improve profitability and optimize existing capacity utilization. In addition, we have undertaken productivity…

Thank you, Jon. In spite of currency headwinds in a difficult Brazilian economy, Stoneridge reported a strong earnings per share from continuing operations of $0.27 per share in the third quarter of this year compared to adjusted earnings per share from continuing operations of $0.16 per share in the third quarter of last year, an improvement of $0.11 per share, an increase of 69%. Our third quarter results show the strength of our combined businesses and the ability of our PST management team to react quickly to a deteriorating economic situation. In spite of severely unfavorable economic conditions, PST has managed to turn operating profit excluding non-cash purchase accounting charges in the third quarter and record a sales increase in local currency compared to last year. They are also expected to generate a modest operating profit excluding non-cash purchase accounting charges in the fourth quarter. This is a direct result of PST's management focusing on sales opportunities in a tough market, adjusting prices to partially offset the Brazilian real devaluation, taking additional headcount reductions in July and implementing other cost actions taken during the third quarter to size the cost structure to match the market demand, at the same time reducing inventory to pay down expensive local currency debt. Our plans are focused on reducing inventory by 30 million reais by December 31 of this year from the high of June 30, 2015. And in spite of the negative trends of currency for the euro and the Brazilian real and the difficult economy in Brazil, Stoneridge continues to perform well. Our control devices, electronics businesses continue to perform better in spite of currency headwinds and helped to offset some of the unfavorable effects of PST's performance. Stoneridge's consolidated revenues in the third quarter were $162.1 million, a decrease of $8.2…

[Operator Instructions]. Our first question comes from the line of Justin Long with Stephens. Your line is now open. Please go ahead.

Thanks. Good morning and congrats on the quarter.

Thanks Justin.

Thank you, Justin.

So first question I had was looking into next year, you have spoken about the potential for somewhere around an $85 million $90 million revenue uplift from Shift-By-Wire. First of all, is that still your expectation? And second, can you help us think about the timing of that impact over the course of next year as we update our model?

Well, Justin, as Jon mentioned, we see the launch of Shift-By-Wire pretty much as planned. There has been a little bit of slight push out from our original forecast, but nothing material. We will be ramping through the first quarter. It will pick up roughly in the second quarter and start to run stronger at that level and then be at a full level of that annualized amount of $85 million to $90 million through the third and the fourth quarter. So you are going to see roughly a pretty significant uplift in the second quarter, some about halfway through the first quarter and then third and fourth quarter will be running at those full levels.

Okay. Great. That's helpful. And is there is still an opportunity for the Shift-By-Wire product to be included on additional platforms beyond the contracts you previously discussed? I am just curious how you are thinking about the addressable market and any potential runway beyond what you have already announced?

Justin, as have discussed before, we continue to speak not only with our current customers about additional applications or on the basis of the technology and in some ways where it might be able to apply it even to hybrid vehicles, but also with additional customers, particularly in the Asia-Pacific region. So we do believe that there is growth potential beyond the current booked programs.

And even with one of our current customers, they have an extension in Asia beyond the original forecast. So it clearly has an implementation in the Asia market. Specifically, because it's a bolt-on products, so you can take existing powertrains and transmission platforms and apply our technology to it.

And maybe how should we think about the sales cycle on that? Are these opportunities that could materialize in terms of revenue over the next couple of years? Or would this be something longer-term?

Justin, the way we are looking at it right now is, that answer is, it's probably some of both. When you start talking about on to existing vehicles, you could see it in the next couple of years, but as we start thinking about hybrid and future programs, it's probably further out.

Okay. Great. I will leave it at that. Thanks so much for the time.

Welcome.

We are always adjusting.

Thank you. Our next question comes from the line of Jimmy Baker with B Riley and Company. Your line is now open. Please go ahead

Hi. Good morning and congrats on the quarter.

Thanks, Jimmy.

Thank you, Jimmy.

Just a few questions on the guidance first. So first if I look at the top line and adjusted for FX, it looks like you actually raised that guidance slightly from your initial expectation. So can you just talk about where the upside is coming from? And then I guess conversely, what triggered the gross margin guidance reduction and PST is tracking in line or better than what you outlined them in second quarter call. So just want to understand where that margin pressure is coming from?

Well, we have seen the continuing impact of the currency, especially in Europe, Jimmy and also in PST. So we have had some influence at the gross margin level, really more because of the currency impact on imported dollars. But as Jon mentioned, we are starting to drive efficiency through our manufacturing process to increase productivity. We look at the machine utilization. So I think we believe that moving into 2016 that we can begin to address some of the issues and also the key position that Jon talked about bringing a permanent individual, a Vice President, to really begin to focus on better sourcing alternatives on a global basis. The real impact on the sales is that it is primarily almost all driven by PST and the currency. If you look at it on a local currency basis, in fact, Jon and I have been there three times in the last four months and we are driving hard, not only the cost side, but just as importantly what we do on the revenue side. But as we start the year, as you know and I mentioned is that the currency was at 2.70. We said it has been bouncing right around 3.90 to 4.00. So we have had an impact clearly from that, but we track our local currency sales pretty closely and the markets are starting to respond a little bit in the track and trace side of the business, which were encouraging. Alarm systems seem to be inching up a little bit. We have had some positive feedback on the OES channel. But we are somewhat cautious. Because we have seen this before and I don't think, we do believe we are in the trough now and we have seen some improvement in the third quarter but nothing that we would say that we really have seen a significant turn in Brazil. But the sales guidance change is almost entirely driven by the currency impacts at PST.

Right. I guess if I do the math on the currency, it seems like that would have been a more severe headwind than what you guided to. In other words, adjusted for currency, it actually looks like you raised the guide slightly. And I think the real, in and of itself, would have been close to $30 million headwind to the top line. So I was just wondering if you are seeing volume above expectations in maybe electronics or control device or where the incremental upside is coming from?

Yes. You know, it's been a mixed market in the electronic side. There have been reductions in the North America market. But we are not as highly exposed as we were before. When we had wiring, we had a significant exposure to both the ag and the commercial market. We have seen a robust market in Europe and it's been driven both in Western Europe and even the exports into Brazil have continued with two of our key customers. So even though the euro has gone from 1.24 on average down to around 1.10, in fact, it's bounced between 1.10 and 1.14. We, in local currency, have seen a nice increase. Especially the first half, we were up over 10%. This quarter , wee were up about 6%. So we have seen a slight downturn in Europe at least in the converted side in local currency, but the markets have been very strong for us in Europe over the course of the year. And then one of the things we are working on, that I think we alluded to in the talk today, is that a discipline we brought in the organization is how we look at our capabilities in manufacturing across the globe and Jon mentioned that we were moving EGT into China. Well, that's looking at capacities worldwide, so rather than installing any new increase in capacities, we are looking at machine uptime and efficiency in productivity to drive more installed capacity and get our volume up and secondly using existing floor space for better capacity. So I think you are going to see that will control our capital a little bit stronger over the course of the next year that we will be utilizing the existing capacity and machine equipment.

But on that, Jimmy, just to expand a little bit on EGT. The fact that we made some of those transfers in this calendar year allowed us to follow a customer in places where we were already stretched and working overtime and working on the weekend. So by making the move to China, we actually captured some additional revenue that we wouldn't otherwise have had based on our North American installed base.

Okay. That's helpful. And then I just had a follow-up on some of your commentary regarding the market opportunity for Shift-By-Wire. So maybe just to help frame this, if you were to look at your penetration, let's say, mid-2016, once your book business has ramped, what percentage of your two customers' vehicles would you say would have Shift-By-Wire as standard content? And then what would your market share be with inside those two customers?

That's a hard question to answer. But I think the best way to answer it, Jimmy is that we are going to be across three major platforms. The one key customer, all pass car applications and so there potentially is room for extension into SUV or light vehicle. We have one SUV application they are looking at now, but nothing definitive. The other major customer is really only on seven platforms. So we are at a very small percentage there and if they expand similar to what the other customer did, that could have a major uplift. And then as Jon mentioned, we will start to see some real interest in the Asian market because it fits those powertrain and transmission of existing platforms, especially on the broad-based vehicles and those are customers like Nissan and Hyundai and Honda and Toyota. They are all driving major volume platforms that this technology would fit very nicely on those large volume passenger car applications. How that translates to our market share, I think it's hard for us to really say that, but I think looking at it the way I just explained, it will give you a rough idea of sort of where we are at looking at platforms. And I think inherent in this and I know it might be subtle a little bit, but I think Jon mentioned Steve Fox: his whole role and that is all about identifying product families and product lines that we are going across the globe and how we address those by markets and customers is really starting to penetrate things just like the question you asked on Shift-By-Wire, is that's a significant product line for us how do we penetrate global markets and customers that we don't have a presence today to sell those application. So you are going to see us much more active in that kind of thought process in dealing with our customers. And another important thing is on the commercial side, Jon has visited four key customers the last two months. And so we will be after the same activity in the pass car side as we begin to elevate our presence in these key customers as it relates to our product lines and our technologies.

Very helpful. Just lastly, if I could. Looking at your backlog, just want to understand the cadence in the net new business wins and also your opportunity to add to that. So when you are bidding today, are you bidding 2019, 2020? In other words, is 2018 fairly solidified at this point? And just helping us understand of why that's looking flattish every year versus 2017. It was as a function of you been resource constrained due to Shift-By-Wire when 2018 was more active?

Well, Jimmy, one thing that I think you should recognize is, we don't really update that platform for future growth. We are going through our product and our budget process right now. I can tell you very clearly that that number will be upgraded. We are starting to back fill some of 2017, 2018, 2019 now that we are aware of. But we generally do not update that until probably when we come out with our guidance around early February or March, probably early February, late January, I meant to say. So it's clear to me that we have back filled some of that number that if you compare it over the two years and it's starting to fill in. The other thing that we changed very dramatically in the company is every future quote that we do globally, Jon and I are personally involved in now. So we know what activity is going on. We know what the quotes are. We know what customers we are directing it to. And we have set certain thresholds on returns and profitability. So because those decisions influence what we are doing in 2017, 2018, 2019 and 2020. And so we have taken a much more active role in that in any quote of any subset of size, we see and this is how we are getting to the heart of some of the issues, is we are replacing capacities and we are doing forward planning of our capacity levels and where we want to position products in certain plants and markets to address customers.

And Jimmy, just to be clear, 2016 is probably pretty well set. But we have the ability to impact the back end of 2017 and particularly 2018. So as we are continuing to, as we talk in future calls, we will update that, but we are confident about our ability to still impact 2018.

Okay. Very helpful. And again, very impressive performance in the face of the Brazil headwinds. Thanks for the time.

Appreciate it. Thanks, Jimmy.

[Operator Instructions]. Our next question comes from the line of Tristan Thomas with Sidoti. Your line is now open. Please go ahead.

Hi. How is everyone?

Great, Tristan, how are you doing?

Good morning.

Not too bad. Thanks for the insight you provided to the previous question. It was very helpful. I just had two questions. First, regarding PST, are we seeing any uptick in some of the new products, just track and traces in some new markets?

Tristan, we are watching. We watch it a couple different ways. We are watching how some of our new product introductions are working, whether it's in track and trace or in audio. And one of the advantages that we are seeing right now by the economic crisis is, there are some OEMs who are decontenting, which is giving us an opportunity with our aftermarket channel to actually seeing some additional volumes. But we are watching this down at a granular level to try to get a sense for what's really going on economically and we are seeing opportunities in track and trace, some better penetration with regard to specific audio lines and what we are watching is down almost at the SKU level and deciding which things we are going to focus on and which things we are not. So because it's not just a currency issue, but because it's also an economic issue there in Brazil, we are refining our portfolio and targeting where we can win and where we can't. And we are moving resources to react that way.

In fact, there is some strong indication, Tristan, that in one of the key channels of distribution they are going to narrow the supply base. And it appears that we are one of two of the leading suppliers within the audio line within the mass merchandiser. So I think those companies that maintain quality and positioning of brands, which we have a very strong brand in Brazil with the Positron brand, we are becoming a preferred supplier even in a tough market.

Okay. Shifting gears a little bit, pun unintentional. I know you mentioned you won some business in China. We are also seeing increases, maybe you are being a little more proactive trying to get on some the global passenger car platforms leveraging that footprint. Maybe you can provide an update on that?

Are you talking specifically on Shift-By-Wire or in general?

Probably both.

Well, let's talk more generically because I think it applies in both places. We are looking at the product offerings that we have, both current technology and future technology and pursuing those positions regardless of where in the world the customers are and then utilizing our global footprint to supply that. So in previous years, you may have heard certain plants talked about as electronics plants or control devices plant. That's no longer a portion of the conversation. So today we are quoting business out of our very capable Tallinn, Estonia facility for control devices. And we are staying growth opportunities with current and future products in the European market. In the same way, we are looking at both growth activities in China with global programs like the EGT transfer that we talked about as well as looking at where the emissions legislation is going to go in China and making sure that we have capabilities that are in place there before those are needed. So the answer is, we are looking at where the customers are moving, what the emissions regulations or other regulations or other market trends would be and then making sure that our footprint is prepared in all of the regions to be able to respond.

Yes. Just two modeling questions. On the tax rate, is there a good way for us to look at it moving forward? I know it has jumped around quite a bit. Do you expect it to continue to be a lower aggregate tax rate in 2016? So maybe a little more color you can provide on that and a little more insight?

On the overall tax situation?

Yes.

Well, in sort of a unique dilemma, we have a tax loss carryforward of about $108 million and that still goes back to the acquisition we made in 1997 as part of the control device business. It was in Lexington, Ohio. In addition to that, as you know and many of you have asked about it, is that we have established valuation reserve against our deferred tax asset when we had the downturn of the economy in 2099 and 2005. And so there is a deferred valuation allowance that was established against those. I guess the challenge we have there, as our U.S. earnings continue to improvement, it raises issues in terms of, do you have the ability to predict forward earnings? And clearly what you are seeing, Tristan, as a result of this is that our U.S. income has been improving significantly. So when we started the year, our effective tax rate was roughly between 13%, 16%. That's what we guided to. As a consequence of the improved earnings, our effective rate has dropped. It continually has dropped over the course of the year and is down to 0.4% this quarter. It was 6% to 7% last quarter. There is an accounting guideline. It says, if your earnings continue improving, when you can improve your forecasting in terms of your probability of success, which I think were clearly showing that there are certain guidelines that they follow. But I think the most rational thing to think about it, is that we will continue to generate significant earnings in the U.S., which will continue to shield a lot of the income we have. We will not utilize our tax loss carryforward of $108 million until roughly about 2018 from what we see in our current forecast. So our cash taxes,…

Okay. That was great. Thank you.

You are welcome.

Thank you. Our next question comes from Rhem Wood with BB&T Capital Markets. Your line is now open. Please go ahead.

Hi. Good morning.

Good morning, Rhem.

Good morning.

Nice quarter. I like this pattern you have established here. First question. It seems like in the last couple of days, VW has, with this the emissions issue, have widened it to now Audi and Porsche. Can you just give us maybe a little bit of an update on that and how that could impact you guys?

Yes. Rhem, thanks for your question. When the first announcements came out, it was very clear. We had no content on the four-cylinder vehicles from VW. With regard to the six cylinders, the ones the most recent possible announcement, we do have content on the Audi 3.0 L, but it's with the SCR. And as you look at the problem that are getting into and where they are needing to go as well as where the other OEMs are, they will be transitioning from a lean NOx trap to the SCR. So while they are having problems, the vehicles that were on with our products are actually where VW will need to go and where the technology will need to go and that's with SCR.

Okay. Great. Yes, that's what I thought. Okay. That's good. And then can you comment on just inventory levels in general, but especially PST? Seems like you guys have gotten pretty lean now. How are the inventory levels across the organization?

Yes. We watch inventory levels pretty closely and specifically as we are ramping up Shift-By-Wire to make sure that we are watching that. But again let's just use the PST example. George talked about the reduction. We are talking about a 22% reduction in inventory from October timeframe till the end of the year and a even larger reduction in our debt because what we are focused on is sizing that business appropriately, setting the supply chain appropriately and then making sure that the savings that we drive out of that or the cash that we generate out of that, we are using to pay down debt. So throughout the entire organization, we are looking at our inventory levels. Probably the best example of that today is what we are doing in PST. But it's one of the reasons why our operations organization needs to be complemented with a head of supply chain and it's not just the purchasing activity because we need to look at wall-to-wall from suppliers all the way into how we deliver to our customers and how do we optimize that and that's how we think about it from a supply chain perspective.

Great. Thanks for the time. Keep up the good work.

Thank you, Rhem.

Thanks for your questions.

Thank you. This does conclude our question-and-answer session for today. I would now like to turn the call back to Jon DeGaynor, Chief Executive Officer for closing remarks.

Well, I want to thank all of you for your time, your interest and your questions today. We believe that our third quarter results are a continued demonstration of the ability of Stoneridge to overcome challenges and to deliver. One measure of progress that is emerging and will be a topic in future calls is the quality of our earnings. As we simplify the organization and remove distractions, we are able to focus on performance driven via fundamental improvement at the operating income line. When you compare our Q3 results with those of Q3 2014, excluding goodwill impairment gains, you will see approximately $1 million improvement in operating income. That improvement is driven by performance within our business fundamental improvements. The organization is focused on fundamental improvement and is becoming more acutely focused on every day. I am excited to see the way the team is embracing this challenge and I look forward to updating those of you on this call regarding our progress in forthcoming calls. Thank you and have a great day.