Good morning, ladies and gentlemen, and welcome to the Stoneridge First Quarter 2019 Conference Call [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Matt Horvath, Director of Investor Relations.

Thank you, Crystal. Good morning, everyone, and thank you for joining us to discuss our first quarter results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted on our website at www.stoneridge.com in the investors section under webcasts 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 SEC under the heading forward-looking statements. During today's call, we are 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. Good morning, everyone. Let me begin on Page 3. In the first quarter, we continued our transformation of the company while delivering strong financial performance. Our first quarter sales of $218 million resulted in an adjusted gross margin of 28.4%, translating to an adjusted operating margin of 7.4%. This was an improvement of 60 basis points relative to the fourth quarter of 2018, as we continued our focus on driving operational efficiency. Adjusted EPS for the quarter was $0.44. In addition to focusing on our operating efficiency, we continuously review strategic alternatives within the business. During the quarter, we announced the divestiture of noncore switches and connectors business within Control Devices. This transaction will allow us to focus resources on the technology platforms that would drive future growth. It will also facilitate the closure of our Canton facility, and reduce complexity in our manufacturing operations and supply chain. This morning, we're adjusting our full year guidance only to reflect the impact of that divestiture, which we estimate to impact EPS by $0.15 to $0.20 for the year. We are maintaining our guidance as it relates to the remaining business as we are confident in our ability to deliver on our 2019 plan. Going forward, we expect that the divestiture will reduce revenue by approximately $45 million annually. But that divestiture and closure of our Canton facility will be margin accretive in 2020. With this divestiture, we remain on track to complete our Stoneridge 2020 initiatives. Finally, this morning I'll provide an update on our progress on both MirrorEye retrofit and OEM opportunities. We remain well positioned to commercialize MirrorEye in the retrofit market with broader rollouts with our freight partners expected in the second and third quarters of this year. Additionally, we are expecting an OEM sourcing decision…

Thanks, Jon. Turning to Slide 10. Sales in the first quarter were $218.3 million, a decrease of 3% relative to the first quarter of 2018. Adjusted operating income was $16.1 million or 7.4% of sales. More specifically, Control Devices sales of $112 million decreased 5% quarter-over-quarter, resulting in operating income of $14.7 million or 13.1% of sales. Electronics sales of $100 million decreased by 1%, while adjusted operating income increased 12% to $9.2 million or 9.3% of sales. Adjusted operating margin improved by 110 basis points over the same period last here. PST sales of $17.3 million resulted in adjusted operating income of $1.1 million, which was an increase of 26% relative to the same period last year. Adjusted operating margin of 6.6% improved by 220 basis points over the same period last year. This morning, we are adjusting our 2019 guidance. We expect our guidance to be in line with our previously provided guidance less the impact of recently announced divestiture. As discussed previously, we expect the divestiture to reduce our adjusted EPS by $0.15 to $0.20 in 2019. I will provide additional detail to our guidance and expect cadence of revenue and earnings later in the call. Page 11 summarizes our key financial metrics for Control Devices. As has been the case in prior quarters, Control Devices base portfolio continues to grow excluding the impact of Shift-by-Wire. Control Devices sales declined by $5.5 million relative to the first quarter of 2018 due to the continued and anticipated ramp down of Shift-by-Wire, which represented a $6.7 million headwind. The decline in Shift-by-Wire was partially offset by growth in our emission sensing products in China, as we continue to see strong demand in the local market. Adjusted operating margin increased by 140 basis points relative to the fourth quarter of…

[Operator Instructions] Your first question comes from the line of Justin Long with Stephens.

Congrats on the quarter. So I wanted to start with MirrorEye. Could you expand a little bit more about what a fleet evaluation entails? And do you have any initial thoughts on the number of retrofits you can see just based on these 100,000 plus vehicles that are evaluating the product today?

The initial fleet evaluations are an expansion of what we've already done with our leading fleets. So in any of these situations, the fleets want to trial it, and understand the technology a little bit more and make sure that they get their driver's reaction. So it's a necessary and logical first step before the retrofit activity expands more extensively. With regards to overall volumes and what we assume in the balance of the year going forward, we don't give specific guidance with regards to that. But what we're signaling is we're working with the right fleets and we're continuing to expand our trials, which gives us confidence that this retrofit will move forward as we planned.

And then based on what you said about the potential timing for the MirrorEye awards from the 3 global OEs, any updated thoughts around the timing of your MirrorEye OE launch? And what's your confidence and visibility that the timing of that launch will materialize as planned?

Well, the 1 program that we've announced, we're so confident with the timing of that launch. And that's a 2020 program. Obviously, we have talked before, Justin, on any OE program, there's a lag between customer award and a start of production. So these subsequent awards would launch post that. And we're still, and we're having conversations with all the OEs, we are still of the belief, that actually, they may want to accelerate the penetration of the product. And we're prepared to support them at that time but at this point, the penetrations that we've talked about and we've talked about in the scripter where we see it right now. But it's still, from an OE standpoint, it's a 2020 and beyond.

Okay. And then just lastly, I wanted to clarify something on the operating margin guidance. Bob, it seems to imply that 2Q operating margins could be somewhere around that 5.5% level at the midpoint when I just look at what that first half guidance implies. When you think about that sequential step down of 200 basis points or so from the first quarter, if my math is right, how much of that would you say is just the timing of engineering expense versus other items?

Well, Justin, let me walk you through. There's really just four primary variances when you go from the first quarter to the second quarter with respect to the walk. The first one is the continued roll of the Shift by Wire. So, as I mentioned, on the call that Q2 will be our lowest revenue quarter of the year. So basically, bottom out and stabilizes with Shift by Wire during Q2. And, keep in mind, that our contribution margins are 2.5 to 3 times our EBITDA margin so that work's on the way up and on the way down as well. So that's the first component of it. The second component is the revenue impacted divestiture. So we had said you take the 17.5% midpoint and you basically equally spread it throughout the year. So that's the next piece of the upper walk. And then the third piece that you mentioned earlier was timing the engineering spend. So part of the beat for us this year was, this quarter, I apologize, was the fact that we didn't spend as much as we planned but we plan on recouping some of that during the second quarter. And then the last piece of the puzzle, Justin, if you look at our tax rates, our tax rate was around 19% in the first quarter. We guided to a midpoint, 22.5% so that we had a one-time good guide in the first quarter, relating to an R&D credit that's not going to recur. So that was a $0.01 to $0.02, good news as well. So that's basically the walk. And then, Justin, just in terms of just looking at the overall year and how we thought about the guidance, I think, if you start with the customers in the market. So overall the market…

And just to clarify on that margin walk, the engineering expense step up was a piece of that. How much do you expect engineering expense to be up on a sequential basis first quarter to second quarter?

Yes. We, its $0.02, $0.03…

$0.02, $0.03. Okay. Perfect. That's helpful and congrats again.

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

Jon, maybe just talk about going back to MirrorEye in the retrofit side. I'm just trying to frame up the 15th fleet evaluation versus prior to this quarter we were talking about and I don't know if you talked about the number of vehicles within these fleets of the 100,000 or frame that out previously, but just maybe give us an indication of how big or how much the increase with the evaluations from the fleets, how much of an increase you're seeing?

Yes. Scott, thanks for your question. I think we've talked maybe we haven't been specific on the exact fleet evaluations. We had three absolute lead fleets and those were the ones that were supporting of us, even through the FMCSA process. But it was really five fleets that were involved in the fleet evaluations and we've expanded that now to 15. And of the first three, they probably represented somewhere on the order of roughly 35,000 vehicles. So this fleet of evaluation is now 15 fleets with a 100,000 vehicles in the fleets that they control. So it's a fairly material expansion. So what we're trying to do as we said before is, this fleet trial is about generating feedback, it's continuing to refine our product and making sure that we have something that the drivers appreciate and can use, and that the fleets are comfortable with. And by doing this in a stepwise manner, we think it's the right approach for us to take. And we're really pleased with progress that we're making here.

And then next question, I guess, on the OEM side and maybe for the retrofits as well with MirrorEye. But when you guys have talked about your expected take rates 10% to 15%, I think, that was originally before the FMCSA exemption and there's been a tremendous amount of ground support that has built up across the industry since then. Can you just maybe talk about, without getting too specific, how conservative those take rates that you initially thought could be?

Yes. Scott, you have to remember that we don't control that. That's controlled by the OEs and it's controlled in North America, it's really controlled by the fleets and the OEs working together. So what we're trying to do is we're trying to make sure that our product is the most robust that we're taking the feedback from the fleets and that we're in constant communication with the OEs to make sure that we're meeting their expectations and requirements. But that take rate isn't controlled by us. We're prepared to respond as the take rate changes and for right now all we have is visibility that we've been given by the OEs. Do we think that it could go higher? Sure. But we're not going to give you a different number because we don't know anything different from the OEs.

And just lastly, maybe just dig into some of the transition again related to the divestiture to Standard Motor Products. You've done a pretty good job here of explaining, I guess, through the quarters how things are going to work. But just from a higher level perspective. Just during the transition period how many -- is it going to be any transitory inefficiencies that you guys have to incur on your end? And if there are, is this going to be something that it gets excluded from the operating numbers?

So, I think, probably, the most important thing for me to point out from a transaction perspective is, if you look at the cash flow statements, so some of the things that, one of the things that you'll notice is that there's a little bit of a, there's a movement in the cash flow statement around inventories and buildup of inventories. So we think about the facts, Scott, that we're selling this business, but we are maintaining the, we're keeping the building so we're transferring the assets. So anytime you get into a transaction where you are transferring equipment you need to build part banks. So we started that process in the first quarter where we're building inventory and we will continue to build inventory because you've got to move the equipment, they've got to install at the new location, and they got to test it, and they got to go through a process before it's approved where they can begin shipping product. So we've got to have a bank in place in order to facilitate that. So you will see a little bit of a blip from an inventory perspective on the cash flow statement over the next couple of quarters. And then other than that, just in terms of the cost associated with the transition we will adjust that out of our results.

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

I was hoping to, you'd mentioned the reduction in Electronics component cost, I imagine they have to do with some alternate sourcing or some changes. Can you just get into a little bit more detail there? Are you expecting a different supplier? Or shift in production, what do you think in there?

It's very similar if you look at, so if you look at, I'll give you the comparison to tariffs. So tariffs for us in the second half of last year was running at about, it was $2.5 million in the second half of the year, so it was running at $1.25 million a quarter in the third quarter and fourth quarter. And then the team started putting mitigating actions in place and tariffs were $900,000 in the first quarter this year. Still higher than we would like them to be but the team has moved quickly taking mitigating actions and we are seeing the results of it through the P&L. So you'll see the same thing on the Electronics components. So it's really a combination of a number of things. It will be redesigned of products. It will be using alternative suppliers. It's really 4 things. Its redesign products, alternative suppliers, existing capacity with current suppliers and then also looking to potentially qualify specific components as automotive spec versus industrial spec which will be able to expand our capabilities in terms of acquiring the necessary products. So it's really in those 4 categories and that's how we're going to work that down over the balance of the year.

And then you mentioned in Control Devices, gross margins saw some headwinds due to higher warranty costs. Could you get into some detail on that?

Chris, we didn't talk about that for this quarter. That was, in fact, previously. We actually have seen progress from an operating standpoint within Control Devices, ex Shift-by-Wire volume down. What we talked about previously, in previous quarters, with some of the operating challenges both warranty and customer quality issues. And we actually made progress on a quarter-to-quarter basis, Q4 2018 to Q4, or Q1 2018 Q1 2019.

And then you cited product mix in Electronics. Could you get into more detail on that?

Yes. I mean, overall just, I think, in terms of product mix, Chris, we've seen overall favorable product mix and if you see, if you look at, electronics was always been consistent with our expectations in terms of, if you look at the performance of Electronics and we talk about the contribution margins we look at 2.5 to 3 times our EBITDA margins on incremental level.

And then just last from me. What are you, including in your guidance around either some retrofit revenue or some OEM revenue on MirrorEye?

So nothing on the OEM side for revenue this year, Chris. The retrofit side. We do have revenue included to retrofit both. We haven't specifically disclosed that amount.

Your next question comes from the line of DeForest Hinman from Walthausen & Company.

I wanted to just touch and talk about MirrorEye and then aiming a little bit of a different way than some of the other questioners. Can you talk about the ongoing fleet feedback we received from the fleet partners? And maybe talk about how the system performed in the winter, which I think it's important for the fleet guys to understand maybe a more challenging environment to drive in dust, salt, ice characteristics like that. And what was the feedback?

So before, I just want to say thanks for the question. It's one of the reasons why we did the trials the way we done it, why we have taken the time as to get that feedback. What we've had is fairly consistent positive feedback in particularly with regards to visibility, at night visibility, in rain and visibility in inclement weather like snow. There's certainly been little bit of feedback that has helped us work on improving our display, clarity and some of the ability, for example, to adjust brightness at night. But overall, the feedback has been extremely positive. And specifically, the feedback of the quality of visibility in inclement conditions has been very positive.

So just so we understand, I guess, in terms of the fleet partners that we view, have they gone enough length where they have over 12 months of performance? And I'm saying that in regard, they've seen how the system perform in every season, every type of conditioning environment they be facing at a full-year basis?

Well as we talked about, for the first five fleet that answer is, yes. For the ones that we added recently, that answers, no. But that's why it's a measured self fleet trials that's why we add fleets as, on an incremental basis as opposed to trying to go more aggressively. And because this is a product development activity as much as anything to make sure that we're getting the feedback that we're understanding, what the driver, the ultimate consumer of this product needs. And what his feedback is.

And then can you just help us understand how that information can be potentially shared with others? All the fleet trials, I guess, confidential in the sense of the results we figured? Or can we take information from those first five people? What they've seen and share it with some of the other people, other than the pilot?

Yes, of course. And that comes through us. So we have a team that has been set up specifically to work with the fleets to take that feedback. We have a full-time driver on staff. So we're translating what the driver says to another driver. And all of that goes back into our product development activity. And we're refining both everything from what our product does to our training materials to our installation activities. So that the next fleet trial have the benefit of the first fleet trials. But that's done through us and our team.

And DeForest, it's Bob. One thing I would just like to that is there also have been several panels at a number of industry trade shows by our current MirrorEye fleets that are evaluating our technology that are talking about in the public. And we have a number of articles that are available as a result of those event. And we can pass those along to you as well.

And then maybe just the baseball analogy for those first 5 fleet partners. I mean, what inning are they in, in terms of figuring out how they are going to roll out the -- potentially the retrofits?

Yes. Somewhere in the middle, we're expanding the fleet trials with them as well. And we're continuing to work with them on how it gets rolled into both retrofit or into their OE device.

I don't know if you broke up there. I think I missed the first part.

You asked me what inning. And I said the fifth.

The fifth. Okay. I didn't hear that. And then shifting gears on the share repurchase side. You're talking about working with the OEs and potentially ramping retrofits maybe with some larger fleet operators. I'm just thinking out loud, does that potentially put us in a situation where there is a continuous blackout on share repurchases? And if so, is there any type of program we can put in place where we could be buying within a blackout period or -- just help us understand.

Yes, there's nothing related to any of the commercial negotiations with our customers that would preclude as we're entering into a share repurchase program. What's then prohibited for us is the negotiation with SMP on the divestiture. So that kept us out of market and then we have our normal quarterly trading windows as well. But with respect to my comments, I just want to reiterate obviously, we're as frustrating as everyone that we have been able to go into the market and buy back our stock but we remain fully committed to actual program and the timeframe that we announced last year.

I guess, I forgot to ask this one last question. On the fleet work that we've done for the pilots, I talked about sharing the information with the other fleet operators, but are we allowed to share that with the OEs as they work on their decision?

Yes. It's part of our development activity. There's no embargo on that. But that's part when you say it's part of our product development activity. We're having those conversations with the OE's.

[Operator Instructions] Your next question comes from the line of Gary Prestopino from Barrington Research.

With the fact that you said you got, you're going to have some retrofit revenues this year. So as some of those fleets translate I assume that you got a signed contract or number of signed contracts? Is that enable you to start generating revenues in the back half of the year?

We don't, the magnitude of the contracts that we have with the fleets are not material. Where we would disclose that. So it's an ongoing expansion of the fleet trials with these 15 fleets that we've talked about and with others that we continue to work with.

And then what inning are you in, in terms of the Electronics divestiture or the business are you looking to take some action on?

As we said in the script Gary, we will have a conclusion on the strategic analysis in this year. So that's how we're looking at it.

I'm showing, there are no further questions at this time. I would now like to turn the conference back to Jon DeGaynor.

Yes. I want to thank everybody for their participation in today's call. I can assure you that our company is committed to continue to drive shareholder value through strong operating results, profitable new business and focused upon our available resources. This management team will respond efficiently and effectively to manage and control the variables that we can impact and continue to drive strong financial performance. We're confident that our actions will result in continued success for 2019 and beyond. And we look forward to speaking to you at the next call. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.