Good day, ladies and gentlemen, and welcome to the Stoneridge Third Quarter 2018 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Matt Horvath, Director of Investor Relations. Mr. Horvath, you may begin.

Thank you. Good morning, everyone, and thank you for joining us to discuss our third quarter results. The release and the company presentation was filed with the SEC on Friday evening and is posted on our newly designed and refreshed website at www.stoneridge.com in the Investors section under Webcasts and Presentations. Joining me on today's call are Jon DeGaynor, our President Chief Credit 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 for these non-GAAP financial measures to the most directly comparable GAAP measures. After Jon and Bob will finish their formal remarks, we will then open up the call for questions. I would ask that you keep your question to a single follow-up. With that, I will turn the call over to Jon.

Thanks, Matt, and good morning, everyone. Friday evening, we released our results for the third quarter, in which we delivered another quarter of strong financial performance. Let me begin on Page 3 with a summary of the quarter. Our third quarter sales of approximately $209 million resulted in a gross margin of 30.3% and an adjusted operating margin of 9%. Adjusted EPS for the quarter was $0.47, an increase of $0.11 or 30% relative to the third quarter of last year. Each of our segments contributed to our success during the quarter, delivering adjusted operating margin performance that exceeded the same period last year. More specifically, despite challenging customer production volumes on certain key platforms, Control Devices delivered 2% revenue growth relative to the third quarter of 2017. Quarter-over-quarter, gross margin and adjusted operating margin expanded by 70 basis points and 10 basis points, respectively, despite additional tariff expenses in the quarter of approximately $1.3 million or 1.2% of sales. Electronics revenue increased by 13% quarter-over-quarter as the global commercial vehicle and off-highway markets remained robust, and our recently launched driver information system and connectivity products continue to ramp up. On the cost side, we reduced D&D as a percentage of sales by 60 basis points relative to the third quarter of 2017. Additionally, we were able to reduce SG&A expense by 100 basis points quarter-over-quarter, which contributed to the segment's adjusted operating margin improvement of 190 basis points relative to the third quarter of last year. At PST, unfavorable currency conditions and lower demand for our aftermarket audio and alarm products contributed to revenue decline in the third quarter. Despite reduced revenue, adjusted operating margin improved by 70 basis points quarter-over-quarter. In addition to our strong financial performance, I'd like to highlight a couple of important events that occurred…

Thanks, Jon. Turning to Slide 10. Net sales in the third quarter were $208.9 million, an increase of 3% relative to the third quarter of 2017. Adjusted operating income of $18.7 million or 9% of sales, represented a 20% increase over the same period last year. I will discuss the financial performance of each segment on the subsequent slides. This morning, we are updating our full year 2018 guidance. Our updated full year adjusted EPS guidance of $2.05, reaffirms the low end of our previously provided range. As a result of reduced production forecasts and unfavorable forecasted currency rates, we are revising our full year revenue guidance to a midpoint of $862.5 million. The midpoint implies year-over-year revenue growth of approximately 4.6%. Additionally, due, in part, to incremental tariffs, unfavorable currency exposures and reduced revenue, we are revising our 2018 full year guidance for gross margin and adjusted operating margin to midpoints of 30.5% and 9%, respectively. Finally, we are revising our full year adjusted EBITDA margin range to a midpoint of 12.5%. Our revised margin midpoints align with the lower end of the previously provided guidance ranges that we expected last quarter. Our midpoint guidance implies 90 basis points of EBITDA margin improvement relative to the prior year, resulting in EPS growth of $0.48 or 31%. Page 11 summarizes the key financial metrics in both the quarter-over-quarter and comparable year-to-date periods specific to Control Devices. Control Devices sales increased by 2% relative to the third quarter of last year, driven by continued growth in certain actuation and sensing products, including the continued ramp-up of our soot sensor in Europe. As expected, Shift-By-Wire continued to decline during the quarter. Overall, year-to-date sales of Shift-By-Wire were approximately $52 million as compared to $77 million over the same period in 2017. We…

[Operator Instructions] Our first question comes from Scott Stember from CL King. Your line is now open.

Can you maybe get a little bit more granular on the tariff front? Last quarter, you guys talked about there were some things that you were working on to offset some of the impact. So maybe talk about had any of that actually been able to come on to play in the fourth quarter? And also just give us maybe some broad thoughts about tariffs as for 2019.

Sure, Scott. Absolutely, thanks for the question. We talked about this quite a bit on the second quarter call. So we have gone through the process of communicating with all of our customers relative to the increases that we've seen with respect to the tariffs. There's also a number of other things that we're doing as well looking at changing locations where we're vending product to potentially reduce or eliminate tariffs as well. With respect to the negotiations, the negotiations take time with our OEM customers. We're just beginning to see some of the benefit of those discussions, but nothing really material for the fourth quarter. We continue to work through this. We don't have anything material for the fourth quarter. Generally speaking, the process just -- it just takes longer and we're in the middle of it right now and we'll have more to say about that when we give you guidance for 2019.

And just one last final question on MirrorEye. Can you maybe just talk about the FMCSA exemption process? And if I remember correctly, you guys said that you were going to start looking some -- or start doing some retrofits in the fourth quarter. Maybe just give us an update on that whole MirrorEye process.

Yes, Scott, thanks for the question. With regard to FMCSA, we continue to monitor progress there. We don't have an answer yet out of the FMCSA or a final decision on the FMCSA. But everywhere and every way that we check on it, we are confident in having success in getting that waiver. The one thing I need to remind all investors and everybody on the call is the fact that in order to do the retrofits, we do not need the waiver, because you can still get the safety benefit without replacing the side mirrors. So that's the answer of piece number one. With regards to the second piece, yes, we're continuing to move forward with retrofits. We have approximately 1.6 million miles with the current fleet work that we've done. And I will actually be down at the ATA event in Austin, Texas later this week, meeting with fleet leaders as we look at the next installation. So more news to come on that, particularly in our fourth quarter call.

And our next question comes from Chris Van Horn with B. Riley FBR.

So you continue to see solid execution despite some headwinds here from the top line perspective. So I'm just curious, can we get into more detail on -- I know you said there's some -- there's operational efficiencies and some other things going on. But can you give more detail on exactly what you've been able to do to, kind of -- specifically on Control Devices and PST to keep those margins higher?

Yes, Chris, thanks for the question. I think I'd say -- I think if you look at the way the organization thinks about cost and thinks about performance, we look at every line of the income statement and we are actively managing that -- each of those lines, so whether it's at our -- in our supply chain and with our supplies at the top of the income statement, or whether it's down at what do we do to optimize our structures from a tax perspective at the lower levels. So the entire organization is really focused on driving performance. And what we see is within the plants, within the supply chain, within the engineering organization, all aspects of the company, particularly with the leadership team that's been assembled are really generating very positive results, and you see it in the financial results.

Yes, so Chris, I talked about this quite a bit on the calls, but the way we run the business is we're very focused on run rates and we're very focused on really what is the best that the individual business has performed and how is that comparing to the current performance. So the continuous improvement philosophy here at Stoneridge, it's definitely -- it's running deeper and deeper every quarter as we continue to build that culture with the team and you're really seeing the -- you're seeing the benefit of it.

And on that tachograph realignment, could you give us a sense of how that came about? When you started looking at that? And what was the final decision points to kind of -- to make that move? And then I imagine the portfolio is constantly under review. But just kind of the timing of how this one came about and then is there anything else you're looking at?

Yes. So Chris, it's come about over the last year, and really the activity has been, as we talk about, providing these systems-based solutions. We've been spending more and more time looking at -- as opposed to looking at things by product, looking at by what are the -- what's the value that they produce, what are the customers looking for and how do we do the best job of optimizing that. As we went through that process, what we realized is that there were overlaps between what we're doing it in Dundee and what we're doing in other places, and we took the opportunity to drive that refinement while strengthening the overall product. And answer to your second piece of the question, expect to see more of these. We this -- the portfolio review is something that's ongoing. The addition of Laurent Borne brings us another perspective in that view and expect to see continued refinement as we look at both additions and changes in our portfolio.

Yes, I would just add to that Chris, so you shouldn't expect us to wait for any kind of downturn or any kind of change in the macroeconomic environment for us to take action in terms of continuing -- continually improving our business. It really goes along the lines of the exact same conversation I had before on continuous improvement. This is just another phase of continuous improvement where we looked at the structure of the tachograph business and how it was operating globally. And when we got a deep dive on it, we saw that there are opportunities and inefficiencies that we could -- and things that we could do to continue to improve the business. And those are the same steps that we take with really throughout every line of P&L just as another example for the overall tachograph business.

And our next question comes from Justin Long with Stephens.

So to start on the guidance, is there any way to size up the volume reduction impact within the 2018 guidance, and think about the lingering impact we would see in 2019? And as you think about that margin question earlier, I just wanted to follow up on that as well. If we see your end markets moderate next year, do you still think there's an opportunity to keep improving margin from some of the company-specific initiatives you have in the pipeline and the focus on continuous improvement?

So Justin, let me answer your first question. So your first question, with respect to -- if you look at the Slide 16 where we do the walk from the second quarter guidance to the third quarter guidance, the way that I would characterize it in terms of -- the way to think about it -- so we talked about the tariffs and the impact that the tariffs had and really the tariffs and the tax rate. So the cost of the tariffs and the improvement in the tax rate in the fourth quarter are basically going to offset each other. And then when you look at the volume productions in the currency that will be partially offset by operating margin expansion. So we've talked a little bit before around our contribution margins on incremental revenue. So you've seen what we -- you can see what we've done with our guidance quarter-over-quarter in terms of reducing the revenue, so the revenue did have a significant impact, currency was a couple of pennies, and then really operating margin expansion thing that we're doing to improve the overall performance of businesses is offsetting most of those -- the negatives from currency and income volume. In terms of next year and run rates for next year, I'm going to wait to comment on that until we release guidance for 2019. I did -- one of the things that I did mention in my script, I think, is important to note is that Shift-by-Wire was down $25 million year-over-year. So if you look at Control Devices, we have talked about Control Devices all year being relatively flat. If you adjusted out that -- the change in Shift-by-Wire, the rest of the product portfolio in Control Devices is up 7%, 8%, just to give you a little bit of an idea.

Okay. That's helpful. And on the fourth quarter, how much of a decline are you assuming in Shift-by-Wire?

You know what, I don't have those numbers in front of me and really -- so Justin, what I would say on that is, you would -- the product lines we've talked about the Shift-by-Wire product lines and we're just using the -- we're using the current IHS data. So it's the current IHS data for the Lincoln products, for the -- it's the Taurus in China, it's the Buick LaCrosse, and it's the Fusion. Those are the product lines.

But Justin, we don't expect any additional acceleration of that ramp-down. The other point that I'll make here is, we should -- we know that throughout our entire value stream, there are still opportunities for improvement. So the performance that we drove in PST even with down revenue is the perfect proxy for the way in which Stoneridge will continue to drive even in a flat revenue environment. There is opportunities throughout our income statement to drive performance and we'll continue to do it.

Understood. That's helpful. And then following back up on the MirrorEye question, thinking about that opportunity longer term, has anything changed as it relates to the addressable market you see for both OE and retrofits, as we've gotten, I guess, to the final stages of launching?

Yes, what I would say and one of the things that we didn't talk about in the script was the at IAA -- or right before IAA, Daimler Truck showed their Actros truck and what they're doing with the mirror replacement activity. We actually believe that the addressable market that we've talked about in previous calls, actually is going to expand as the other OEs are reacting or will react to the announcement by Daimler. We don't see changes yet in their product plans, but most of our customer visits during IAA were focused on MirrorEye, and how we accelerated this and other technologies.

Yes, so just to add to that, Justin, for folks on the phone that aren't aware, so Daimler announced at IAA that they're going to make the camera mirror systems standard in their 2019 truck. And we have assumed in all of our backlog information that we've provided relative to MirrorEye awards a 10% to 15% take rate.

And our next question comes from Gary Prestopino with Barrington Research. Your line is now open.

If nothing changes on the tariff side, is the range that you're providing for Q4, is that what it would, kind of, be in the range on an annualized basis?

So Gary, I still think it's too early to say right now, so we talked about this on the last quarter call that there's things -- if we felt that the tariffs were permanent, there is things that we would do differently in terms of changes we would make to the supply chain and there would be cost associated with doing that. We're still taking a little bit of a wait-and-see approach to see where the dust settles. So there's still more work that needs to be done. These negotiations with customers, they're one component at a time. So lots of work that needs to be done, it's preliminary, it's -- obviously, that's the worst-case scenario in terms of the numbers that we've provided for the second half of the year if you analyze it. There's a lot of work that needs to be done, and I would say that, that would be extremely conservative position to take at this point in time.

And then in terms of in your guidance, continued volume reductions on platforms in China and North America, in the North American market, some of those reductions -- is that a function of that the Shift-by-Wire is attritting much quicker than you had anticipated?

No, no. Gary. This is about some of our customers and some of the decisions they've made as to which platforms and where they're focusing their time, and those reductions are the result of announcements that have happened by them in preceding quarters. And as I said earlier, we don't see any acceleration of that ramp-down. So we're pretty confident as to what the fourth quarter looks like.

Could you maybe just break out, if you could, what your percentage of your products are going to passenger cars versus light trucks or SUVs?

Yes. So Gary, in total, if you look at just North America pass car, it's slightly under 50% and half of that is with the SUV, CUV and light truck.

[Operator Instructions] Our next question comes from DeForest Hinman with Walthausen & Company. Your line is now open.

I've been bouncing around this morning, I don't know if that's been addressed. But can you talk about the margin cadence in terms of where some of that strength is coming? Is it a function of more products ramping become more profitable versus stuff -- work reaching end of life, less investment or any other miscellaneous things?

DeForest Thanks for your question. What I would say is as we've talked historically on these calls, our new products give us the opportunity, one to add content per vehicle and also in some situations we see a margin expansion on old products versus new products. But the majority of what you're seeing with the -- to use your phrase, the margin cadence, really is execution inside the company. So as the supply chain team continues to work with our suppliers and drive refinement there, the operations team and the engineering team drive not only improvements within our plants, but also reduction in other cost and we improve how we launch new product. So it really is -- it is top to bottom within the organization and all of the functions are contributing to drive that margin expansion. It isn't just one thing, and it isn't a rotation from old to new.

And once again I apologize if this was asked. But on the MirrorEye, we were talking about a decision from a regulatory body in the U.S. on the last call. Is that still something we're waiting on? Or do we have any way to clarify what's going on there?

Yes. Well, I think all of us would love it if the -- if governments were a little bit -- if the government is a little bit more transparent with regard to its decision-making. We have continued to follow up, we have no reason to believe anything other than a positive result based on all the feedback. But they're timing has moved from what they told us originally of September timing now to -- we're going to have an answer before the end of the year. But I think it's critically important for everybody to understand that, that is not a gating item with regard to getting the safety benefit and being able to move forward with retrofits.

And I was one of the -- maybe the few people that read the public comments. There wasn't a lot of comments, pretty strongly worded releases from a lot of the major carriers on that. And then the tractors there were, kind of, almost laughable. I mean, is the -- I mean, anything you can give us that would be a reason why people would be worried about this system from a regulatory perspective? I mean, it's amazing the stuff that Tesla has been able to do with automated driving and the issues that they've had where this seems to, kind to, be universally saying, okay, this can improve safety.

Right. It's -- and DeForest your synopsis about the public comment, what we've heard from our large fleets, who we've done the trials with, the first 1.6 million miles worth of trials, what we're hearing from the next levels of fleets that we'll be working in the retrofits with, all of them have been consistently positive, including the drivers who are driving these trucks. The only thing that we can think of as a reason not to do it is the people who are afraid of adding complexity to the truck. But those who drive it and the fleets, and the reason why we've done the 1.6 million miles and continue to do these fleet trials, is to make sure that we demonstrate the robustness of the product where we're getting very positive feedback from fleets, we're getting very positive feedback from OEMs. We have no reason to believe that there's a regulatory reason not to do this.

And then on the MirrorEye itself, obviously, Orlaco seems to just be really doing well and that's turning out to be a very good acquisition, but when do you think we're going to see MirrorEye revenues in the segment results? Is it next year or is it in six months?

So, no it will be next year for retrofit activities, and that will be in 2020 and beyond for OE activities. As we've talked about, the OE programs are 2020 and beyond unless the customers change their time lines. But we look at retrofit revenue -- some small revenue in the balance of this year, but really more retrofit revenue in next year. And you won't -- we don't break out Orlaco, you will see that in the Electronics activity.

And then as the world moves towards last mile, and I know we've talked about a lot of OEM stuff with looks like more long-haul focus. But if we have more smaller trucks driving around in urban areas, is that a market that is interesting for MirrorEye, or is it still preliminary?

Well, so the answer -- I think the better way to think about it is if you look a little more closely at the total capabilities within the Electronics segment, it's not just about MirrorEye, it's about our connectivity activities and it's about our driver information system activities. And these last mile, the last-mile fleets, and what they're doing from a fleet management perspective, people may not understand that the tachograph also gives the ability to understand where the truck is. So as we start combining our MirrorEye capability, our connectivity capabilities and our data management capabilities into more holistic systems, we actually look at that -- at those fleets in that last mile activity is another place where we will continue to work.

Thank you. And our next question comes from Justin Long with Stephens. Your line is open once again.

Bob, just wanted to ask about the tax rate given updated guidance for the fourth quarter. How should we be thinking about the tax rate as we get into 2019 and longer term? Any change to your expectation there?

Yes. So there is no change to the expectation and with respect to the fourth quarter, we've said that we're expecting the tax rate to be in the 15% to 20% range.

And I believe longer term, you've talked about our 20% to 25% tax rate, so that's...

That's correct.

Just wanted to get that squared away. And then on the buyback, I know that you've -- that you have this 18-month time frame. But how should we think about the allocation of this capital over that time frame? Is it something that you expect to do ratably or be more opportunistic?

Yes. So Justin, so we're very pleased to be able to announce the $50 million share repurchase. We feel like -- looking at where our stock is trading, we feel like it's a tremendous value, and we're very excited about the opportunity to return capital to shareholders through a repurchase program. So we're going to be opportunistic and we put that 18-month time window out there just to give us some flexibility. But we plan on being opportunistic we like where -- well, from a value perspective, it's compelling at the current levels, and we'll be opportunistic and do the -- do what we need to do to execute our program.

Well, thank you. Thank you all for participating in today's call. In closing, I can assure you that our company is committed to continue to drive shareholder value through our strong operating results, through profitable new business and focused deployment of our available capital. Our management team will respond efficiently and effectively to manage and control the variables that we can impact and continue to drive strong financial performance despite some challenging macroeconomic conditions. We're confident that our actions will result in continued success for the remainder of 2018 and beyond. Thanks a lot.

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