Ladies and gentlemen, thank you for standing by, and welcome to the Stoneridge Fourth Quarter 2019 earnings call. [Operator instructions] I would now like to hand the conference over to your speaker, Matt Horvath, Director of Investor Relations.

Great. Thank you. Good morning, everyone, and thank you for joining us to discuss our fourth-quarter and full-year results. The release and accompanying presentation was filed with the SEC and is posted on our website at www.stoneridge.com in the investors section under webcasts and presentations. Joining me on this call are Jon DeGaynor, our President and Chief Executive Officer; and Bob Krakowiak, our Chief Financial Officer. Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties, and actual results may differ materially. Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-K, which will be 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 open the call up to 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. Let me begin on Page 3. In 2019, we continued our transformation and positioning of the Company for strong future growth. Our 2019 adjusted sales of $830 million resulted in an adjusted gross margin of 26.5%, translating to an adjusted operating margin of 5.8%. Adjusted EPS for the year was $1.47. Excluding the impact of divested product lines, our 2019 sales were $793 million with an adjusted gross margin of 27.2% and an adjusted operating margin of 5.6%. Divested product lines contributed approximately 37 and $0.09 to our 2019 adjusted EPS. We are announcing that we have been awarded two additional OEM MirrorEye programs with peak annual revenue of $50 million at relatively modest take rates. With these awards, the customer platforms on which we have been awarded MirrorEye programs represent approximately 75% of the North American OEM Class 8 production volume. In Europe, we have received approximately half of the business that has been awarded to date, which represents approximately one-third of the European OEM production volume, with a couple of OEMs yet to make sourcing decisions. These additional awards solidify our position as the global market leader in camera mirror systems for the commercial vehicle industry. As a result of our success with our customers, our awarded business backlog, excluding the impact of external factors, grew by over 6%, driven by another year of strong business awards. As a tangible signal of our confidence in the transformation of the Company, we are announcing an additional $50 million share repurchase, and this morning, we are providing guidance for our expected performance in 2020. Despite reduced volume expectations due to production declines in our end markets and continued investments in advanced technologies, we expect operating margin to remain relatively stable in 2020. Bob will…

Thanks, Jon. Turning to Slide 15. Sales in the fourth quarter, excluding divested product lines, were $183.9 million, a decrease of 8% relative to the fourth quarter of 2018. Excluding divested product lines, adjusted operating income was $5.1 million or 2.8% of sales. More specifically, control devices sales, excluding divested product lines, was $93.5 million, which was a decrease of approximately 6%, compared to the fourth quarter of 2018, resulting in adjusted operating income of $10 million or 10.7% of sales. Electronics sales of $80.5 million decreased by 11%, resulting in adjusted operating income of $1 million or 1.3% of sales. As we continue to integrate our global business, going forward, we will refer to PST as Stoneridge Brazil. Stoneridge Brazil sales of $17 million resulted in adjusted operating income of $400,000 or 2.1% of sales. This morning, we are providing guidance for our 2020 financial performance. We are guiding 2020 revenue to a midpoint of $760 million, implying a decline of approximately $33 million versus our 2019 revenue, excluding the impact of divested product lines. As discussed previously, we expect gross margin expansion this year through continued reductions in component costs and tariffs, as well as operational improvements. Despite improved expectations for gross margin, we are expecting operating margin to be approximately flat, due to incremental investments in engineering resources and SG&A. We are guiding adjusted gross margin to a midpoint of 28.5%, an improvement of approximately 130 basis points versus 2019. We are guiding 2019 adjusted operating income to a midpoint of 5.5%, and adjusted EBITDA margin to a midpoint of 9.5%, which are both approximately in line with 2019 adjusted results, excluding divested product lines. Finally, we are guiding to a midpoint effective tax rate of 22.5% relative to our 2019 adjusted effective rate of 8.4%, compared…

[Operator Instructions]. And our first question comes from Justin Long with Stephens. Your line is open.

Thanks, and good morning.

Good morning, Justin.

So maybe to start with the guidance for 2020. So you gave the full-year outlook for operating margins to be 5% to 6%, but could you give us a rough sense for your expectations for the quarterly cadence of those operating margins throughout the year? And as you answer that, specifically within Electronics, how long do you think it will take for margins to recover back to the levels that you saw prior to the fourth quarter?

Thanks for the question, Justin. Yes. So in terms of the cadence, we have seen some encouraging signs in January in terms of our performance. And that gives us confidence with respect to the guidance with the annual guidance that we've provided. We have talked about the revenue split, the 51-49 revenue split. The revenue for us in the performance is more first-half weighted versus second half. A number of the initiatives and the things that impacted our fourth-quarter performance we're more one time in nature around exiting the Canton facility, the GM strike and some of the operational performance issues that we had in one of our facilities. So we're seeing the beginning of the year start out really within our expectations and gives us comfort in the guidance in terms of the rollout of the operating margin. It's more first-half weighted versus second half.

Okay. And then next question I had was on that 2021 guidance. So just taking the midpoint of the revenue outlook for this year and kind of looking ahead to 2021. You're assuming about a $90 million revenue increase. Can you just talk about your level of visibility to that number and help us just kind of build a bridge, how much of that business is secured in the backlog and maybe how much of that is MirrorEye versus other products?

Yes, Justin. Thanks for the question. So, as you know, most of our businesses is OE business and it's a blessing and a curse, because we have a really great line of sight to what our sales are going to be over the next few years But generally speaking, we win programs, two to three years in advance of production. So on the OE side, there's really not a lot we can do in terms of moving the needle over the next couple of years. So in terms of line of sight to that $850 million, if you look at what we do is we take the IHS and LMC projections and we take our awarded business at those levels and layer in the new program launches. So with respect to the new program launches, as I mentioned earlier on the call, we've got the instrument cluster. Our largest cluster award has been launched late this year, we've got MirrorEye launching this year as well and we have our Park by Wire launch as well. So, basically, what we do is the vast majority of that of that $850 million is basically in the backlog and as long as volumes materialized per IHS and LMC data then that constitutes, as I said, really over the majority of our total backlog. Jon, if you want to add to that.

And Justin, as clearly, we have portions of the business that are not backlogable. So our lack of business, our Stoneridge Brazil business and some of our other miscellaneous aftermarket business is not backlogable. So that doesn't -- we have confidence in the year-over-year progress there, but it's not in the backlog. So we're very confident with regard to the increase year-over-year.

Yes, Justin. I think what I would add is just wasn't the IHS assumptions. Right? So if you look at our primary end markets, we don't have -- really, if you look at the IHS data, so the IHS data in terms of what was built on the $850 million of revenues. If you look at North America pass car, the IHS data is up 1.1% this year and down six tenths of a percent next year. For commercial vehicle, it's down 24.6% this year, up 3% next year. If you look at Europe commercial vehicle, if you focus on Western Europe. So Western Europe commercial vehicle, if you look at the LMC data down 5% this year and up 5% next year. So basically flat over the next two years, but down five this year. So we don't have kind of lackluster assumptions built into get to the $850 million.

Okay. Great. That's really helpful. And then last one and then I'll hop back in the queue, but there is a lot of talk about MirrorEye and the positive developments there. Have you kind of thought, again, about what you view as the addressable market for MirrorEye? Historically you've talked about $250 million on the OE side, 100 million on the retrofit side, 350 million in total. I know you threw out that number of $500 million assuming that it became standard on all equipment, but obviously that would be a pretty bullish scenario. So do you just have any thoughts on a realistic addressable market for MirrorEye going forward?

Well, it's one of the reasons why we provided that Slide with the regular range. We actually think that the addressable market is greater. The more work we do with both the fleets and OEMs we have higher -- stronger and stronger confidence with regard to the penetration of this product and how people will use it. I'm also incredibly pleased with the feedback that we've gotten from both the fleets in the OEMs with regard to our specific product and that manifest itself in the business that we want. So I would say to you that we think the addressable market is actually grown from the numbers that you gave, that you just stated, and that's why we showed the slide that we did.

Okay. I'll leave it at that. Thanks for the time.

Thank you, Justin.

Thank you. And our next question comes from Chris Van Horn with B. Riley. Your line is open.

Good morning. Thanks for taking my questions.

Good morning, Chris.

So you talked a lot about take rate and the upside opportunity and, obviously, that looks attractive. Could you talk about what specifically the decision points were for the different take rates that you decided for your recent awards? And then maybe your thoughts on what could get that take rate higher. Is it just success of the product? Is it price? Is it something? Some other factor?

So, Chris, what we try to give you a couple of interim points between as we've always said we give you a backlog number based on what our customers tell us with regard to take rates. The feedback that we've gotten in the last months both from the fleets, as well as from a couple of OEs, is that are quoted take rates are likely understated. So what we're trying to show to you is what would that look like. So the 15% versus the 30% isn't because somebody has changed it 30% or we would have changed the backlog, but what we're trying to show you is a range and we have had at least one OE tell us that they believe it will go to 100%. We haven't changed our program with them, but that's where we see it going. And just as a reminder, we know that there is at least one OE in Europe that's making CMS system standard equipment. So what we see is as people get more and more comfortable with the technology, and that's one of the reasons why our fleet trial activities have been so important and our demonstration programs have been so important, as our OEs see both the fuel economy and the safety benefits, we expect to see, one, the adoption accelerate, and the take rates expand.

Chris, just to add onto what Jon said. I think one of the things that we talked about on the call that I think is important to understand is we announced almost $200 million of peak annual revenue awards. But if MirrorEye went to standard equipment with the awards that we've already won, that peak annual revenue would be somewhere in the $450 million to $500 million. So the impact of this has to the Company is absolutely transformational. And the take rate is something that, we haven't sold a lot of products that are subject to a take rate, and this is a new product. So what we're trying to do when we provide sensitivities is we just give you, as Jon said earlier, here's what's been quoted. And because a lot of investors have asked what would happen if this became standard equipment, what will be the impact of the overall take rates for the Company, so that's the reason that we provide the range, and we'll give you some additional information based upon the fee that we're hearing from the fleets. But, ultimately, at this stage of the game with the product not being in production, we provide the range to allow investors to make a determination of where they think this is ultimately going to go and allows them room for sensitivities.

Okay. Great. Thanks for that color. And then you talked about $8 million to $12 million of savings in '20. Yes, that's a really solid number there. Do you see additional saving opportunities? I imagine it's an ongoing initiative to look at the cost savings, but do you see those savings or additional savings as you had 2021, or how should we think about that?

Yes, of course. So, Chris, we continue to reiterate our goal to get to top quartile financial performance, and operational efficiencies are part of that. Obviously, as we start to see revenue growth, I think it's important for everybody to understand that we're balancing, scaling our organization in a down market with the need to make investments in new technology, so therefore, D&D and SG&A investments to support future growth. So, expanding our gross margin and maintaining our operating margin in a significantly down market is a demonstration of that. And as we see the market come back, as we see revenue growth between 2020 and 2021 at 12%, you wouldn't see the fixed cost and you wouldn't see the structural costs move with it. You'd see gross margin move, but you wouldn't see some of the other costs. So we will continue to work to get to that top quartile financial performance and adjust the business for the externalities as well.

And then I'll just squeeze one more in, if you don't mind. Your other products, I think, are interesting as well around driver information systems, digital clusters, etcetera. Could you maybe update us on the pipeline for those and maybe what you saw? I know you have a big launch in Q4, I believe you said of '20, and how that market is going.

Yes. So, if you look at our overall backlog and our business wins, Bob mentioned that we had over $200 million of peak annual revenue business wins in 2019, and only a small portion of that, only roughly a quarter of it, was MirrorEye. We continue to win in other spaces, and our overall goal is deepening those relationships with our customers and continuing to win. We're not just being a one-product company, but offering integrated systems and capabilities. So, we see good opportunities with regard to our driver information systems. We see good opportunities with regard to our connectivity products. We also see very good opportunities in the control devices business. We didn't spend a lot of time on this call with regard to that, but we see good opportunities there. So, while MirrorEye becomes a large portion of our conversation, just because of the magnitude of the opportunity, there are -- the foundational business continues to see growth and additional business wins. And then if that weren't true, we wouldn't have had the $200 million in business awards that we talked about in 2019.

[Operator instructions] Our next question comes from Scott Stember. Your line is now open.

Jon, you had mentioned that, I guess given the rapid acceptance on the OEM side for MirrorEye, that you were going to start to see probably some decisions shifting from retrofit to OEM, I guess beginning of life. Can you maybe just talk about how that being the contract that you start in the fourth quarter, I guess it's in the $10 million or $12 million range. Could that turn into $15 million to $20 million just because of increased take rates because of the shift in demand from retrofit to OEM?

So, Scott, thanks for your question. And, yes, absolutely. It's one of the reasons why we provided the chart range that we did with regard to the possible take rates. The fleet trials that we have done and the conversations that we've had in the marketplace and the conversations that we have with the OEs, have continued to reinforce the impact of this technology. As we said during the presentation, that fleets are very measured in how they do these sort of things to make sure that they have robustness. Trucks are a piece of production equipment. Commercial vehicles are piece of production equipment. So making sure that they have appropriate uptime and that they don't create undue downtime, both in the install or in the quality of the system, so they're conservative in how fast they retrofit, how fast they move. But as they learn more and as we do more with the OEs, we're going to see pre-wire, which is effectively a retrofit activity, and then also OE business ramp up.

Got it. And moving over to Shift-by-Wire, I know we've been talking about the wind down for a while, and we're expecting another $20 million to $25 million impact in 2020. Once we get through this for this year, are we still looking at an impact in 2021? And I guess a follow-up to that would be do you expect to maintain permanently any Shift-by-Wire business outside of what you've announced in China?

Yes. Thanks for the question, Scott. So after this year, we'll basically have about $15 million of Shift-by-Wire business remaining. There is a ramp up with a couple of awarded programs in China. But that particular piece of the Shift-by-Wire portfolio will be at about $15 million with the current portfolio of customers next year, and that will just wind itself down over the next couple of years after that.

Okay. If I could just sneak one last one in. You guys talked about a $500 million opportunity if it becomes standard equipment, again this is for the MirrorEye. Are we talking North America exclusively?

No, that's global.

That was just based upon business that we've been awarded to date.

Okay. Got it. Well, obviously, it would be a lot bigger and more contracts. I got it.

Correct. Yes.

That's all I have. Thanks.

Thanks, Scott.

Thank you. And our next question comes from the line of Glenn Chin with Buckingham Research. Your line is open.

Good morning, gentlemen, and thanks for all the information on the slides, as usual.

Good morning, Glenn.

Good morning, Glenn.

Good morning. So just a quick follow-up on one of the prior questions. I just want to make sure I heard it correctly, and I think you may have addressed in your prepared remarks. The higher SG&A and D&D expenses, those should be spread evenly throughout the year, the cadence?

Yes, that's correct.

Okay. Very good. And then going back to MirrorEye, so these North American program wins, presumably, they will incorporate mirrors, since that is still required by Mitzna. Is that correct?

We've seen a couple of different mechanizations with regard to the quotes for different OEs. Some had chosen to integrate the CMS system into a reduced size mirror, others have chosen to quote it separately, which gives them the flexibility as to whether they're able to get the regulations changed by 2023 or not. So the additional quotes that the additional awards that we have in 2023 are for stand-alone systems, not for a hybrid system with a mirror.

Okay. And then, Jon, in your slides you talk about, I guess, OEM customers suggesting that a change in regulations may be coming. Do you guys sense that there's movement on that end?

Well, what we sense is that -- two things. One, both in Europe and in North America, the OEMs are trying to address both market issues and regulatory issues to find ways to drive fuel economy and find ways to drive safety. And what we're learning more and more is the impact of MirrorEye, and therefore, why they would want to use that. So that is a response to regulations that are already out there and things like the vulnerable road user regulations in Europe. In addition, what you're seeing is you're seeing the OEs get more confident in the technology and thus go back to Mitzna and start the process with Mitzna with regard to the elimination of mirrors, in line with what's happened in Europe. And, obviously, as they get more data and more confidence, you would see that accelerate.

Okay. Very good. And then sort of a related question. Your program number three win, the take rate in Europe is 25% versus North America, I guess, 10 percent-ish. Just out of curiosity, what is the reason for that discrepancy in take rate? Is it because it's legal in Europe? And are they assuming hybrid in North America, straight MirrorEye in Europe?

No. So it's -- you've got the Daimler Actros that's been out there for a year. You've got just an adoption curve. Neither North America nor in Europe is it a hybrid. In both situations, it's a stand-alone activity. And I think just the adoption rate is from an OE perspective, one, the laws allow it. And secondly, you're seeing more market pull for it.

Thank you. And we have a follow-up question from Justin Long with Stephens. Your line is open.

Thanks for taking the follow up. Just had a quick question on the buyback authorization. Bob, I was wondering if you could give us any thoughts about the timing of the buyback going forward? And also just clarify, is any impact from that buyback factored into the guidance?

Thanks for the question, Justin. So nothing is factored in the guidance relative to the share repurchase. And we're evaluating options, and just like we did on the prior repurchase in terms of accelerated programs versus 10B51 grid-based programs, they're still open market repurchases. And we've basically -- we're comfortable that we'll be able to complete the program within the 18-month time window that we've announced today.

Thank you. And I'm not showing any further questions at this time. I'd like to turn the call back to Jon DeGaynor for any closing remarks.

Well, 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 our strong operating results, profitable new business, and focused deployment of our available resources. This management team will respond effectively and efficiently 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 in 2020 and beyond, and I look forward to talking to you on the next call.