Stoneridge Inc (SRI) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q1 2015 Stoneridge Earnings Conference Call. My name is Joyce and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. (Operator instructions). I would now like to turn the call over to your host for today, Ken Kure, Corporate Treasurer and Director of Finance. Please proceed.

Good morning, everyone and thank you for joining us on today's call. By now, you should have received our first quarter earnings release. The release and accompanying presentation has been or will shortly be filed with the FCC and has been posted on our website at www.stoneridge.com. Joining me on today's call or 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 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 these actual results to differ may be found in our 10-K, filed with the Securities and Exchange Commission under Forward Looking Statements.

During today?s call, we?ll 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. With the sale of the Wiring business, our financial reporting starting in the second quarter, 2014 for control devices, electronics, and PST were reported as continuing operations and Wiring results were reported as a single line called Discontinued Operations. In addition, our balance sheet and statements of cash flow included the Wiring business through July?31, 2014. Our forward projections for 2015, for our remaining segments, only, as our historical results including, the Wiring business, are not indicative of our future performance.

Jon will begin today's call by describing his initial observations and strategies to address the near term challenges and longer term value enhancement for Stoneridge. George will discuss the financial and operational aspects of the first quarter.

We?ve prepared and published an earnings presentation to provide more detailed schedules to help your understanding of our first quarter results, trends of our continued improvement, and update you on key initiatives to improve financial performance. A copy of these items can also be found on our website at www.stoneridge.com in the Investor Relations section. After Jon and George have finished their formal remarks, we will open up the call to questions.

With that, I?ll turn the call over to Jon.

Thank you, Ken, and good morning. Thanks for joining us today. I want to start by expressing how excited I am to be part of the Stoneridge team. Stoneridge is a company with a long history, celebrating 50 years in 2015, and a sound business model for the future the Company has a good portfolio of innovative products and is poised to deliver the largest increase to organic growth from new program sales in its history in 2016.

I joined Stoneridge because it's a business with sound fundamentals in both market serve and footprint and strong prospects for the future. Since joining, I have visited the majority of our facilities globally, and have met a group of talented and dedicated individuals who develop, manufacture, and sell products that deliver value to our customers and can generate significant earnings leverage and cash flow.

Thus far, I have been impressed by the number of opportunities that I've seen regarding our product's footprint and customer base. I can also see that Stoneridge faces some near-term challenges; the challenging economic environment in Brazil and unfavorable foreign exchange rates caused by a strong US dollar are affecting our financial performance unfavorably, and may be masking some of the true value of Stoneridge.

Due to my limited tenure with the company, I'm going to limit my comments regarding future strategies for the company, but I will address a couple of topics that represent near-term challenges and opportunities for longer-term value enhancement. Our first priority as a leadership team this year is to ensure our new products are launched flawlessly. 2015 is a transitional year, as the production ramps up, particularly, for our shift by wire product, and that occurs in the second half of this year.

Our management team is committed to ensuring the production ramp-up occurs on time, on budget, and meets the commitments to our customers. Based on my recent site visit to our Juarez, Mexico facility, this is exactly what is occurring, and I have confidence in our control devices team and their ability to execute.

The second area of immediate focus will be executing in areas that management can control. During the first quarter, our results were impacted by unfavorable foreign exchange currency movements, over which we have limited control, but we can control, to varying degrees, our pricing and cost activities. For example, we have already moved on pricing initiatives within the organization, particularly at PST, to offset some of the economic headwinds.

Globally, we are evaluating opportunities to lower direct material and labor costs, as well as appropriately position and rationalize our sales in general and administrative costs. In addition to cost initiatives, we are constantly evaluating our product portfolio and its competitive positioning in the various markets we serve, to ensure that resources are appropriately deployed. There are businesses in our portfolio that have a strong potential to grow profitably and we will continue to invest in those businesses -- for example, actuation, sensing, and vehicle electronics.

In conjunction with the focus on execution in the core businesses, we continue to monitor and evaluate a variety of alliance and acquisition opportunities which may be complementary in product, customer, and geographic dimensions. Beyond the initial thoughts that I've outlined today, it would be premature for me to comment on a more extensive long-term strategy. During the second quarter call, I expect to have a more thorough insight as to the long-term strategy of Stoneridge and the direction we plan to take as an organization.

As Ken said, 2014 was a transitional year for Stoneridge with the sale of the Wiring business and the refinancing of the company's debt. The leadership team intends to build on those milestone events in 2015 with a focus on consistent positive momentum through execution in all areas.

I will now turn over the call to George, who will discuss our financial results for the quarter in greater detail.

Thank you, Jon. Stoneridge's first quarter of 2015 adjusted earnings per share was $0.17, compared to $0.05 in the first quarter of last year. The adjusted first quarter 2015 income from continuing operations [attributable] to Stoneridge was $4.7 million, or $0.17 per share, diluted, which excluded a non-cash expense of $2.2 million for the accelerated vesting in connection with the retirement of Stoneridge's former President and CEO. This expense would normally be recorded over the remaining length of the grant period, so this is only a timing difference in recording the expense. See slide 7 for reconciliation of reported EPS and the impact of unusual items and are adjusted EPS for continuing operations.

Stoneridge's consolidated revenues in the first quarter were $162.8 million, an increase of $1.5 million, or 0.9% over the first quarter of last year. On a constant currency basis, though, will which excludes the impact of foreign exchange translation, Stoneridge sales would have grown 9.7%, compared to the first quarter of last year. So our fundamental growth in control devices and electronics remain strong.

By business unit, sales in the first quarter increased in control devices by $2.5 million, or 3.3%; electronics by $6.3 million or 12.7%; and sales of electronics decreased slightly by $800,000 or 1.6%, after excluding sales of $7.2 million to Motherson, which was previously accounted for as an intercompany sales to Wiring and are now recorded as third-party sales.

In addition, electronics revenues were negatively affected by approximately $8.7 million on translation of sales due to the weakening Swedish krona and euro against the US dollar. And on a local currency adjusted basis, electronic sales were up by 15.6%, which can be seen on slide 4.

Passenger car and light truck revenues were $65.1 million in the first quarter, a 4% increase over the first quarter of last year's sales of $62.6 million, as volumes increased on control device products, which included new programs and shift by wire, seat track position sensors, and keyless entry.

North America automotive production continue to look very favorable in the first quarter for control devices and the outlook for the rest of this year remains equally positive. In addition, our business in China, which is part of our control device reportable segment, is beginning to show tangible results and during the first quarter, they recorded an operating margin of 3.8%, which was far ahead of our plan for them this year, which is about break even, and significantly ahead of last year's first quarter operating margin loss of 1.7%.

And sales in our commercial vehicle category, which are predominantly electronics sales, were $60.5 million in the first quarter, compared to $55 million, a 10% increase over the first quarter of last year, due primarily to higher volume sales of instrumentation products in Europe and sales to Motherson of $7.2 million, which were classified as intercompany sales in the first quarter of last year. As previously mentioned, electronics revenues continue to be negatively impacted by weakening Swedish krona and euro against the US dollar.

PST's first quarter sales declined by $7.4 million or 21.8%, to $26.5 million, compared to the first quarter of 2014. And these results were negatively impacted by approximately $5.5 million for FX translation as the Brazilian real devalued by 20.9% in the first quarter of 2015 over the first quarter of last year. And on a constant currency basis, PST sales were down by only $1.9 million or 5.5%.

To offset the currency impact, PST management raised prices by 11.3% in March and April in the aftermarket channel, followed by audio line price increases by 10% in April and the OES dealer channel products were increased by 12%, on average, for all products in April. PST has been monitoring competitor pricing actions taken in response to PST's price increases and their different channels of distribution to make sure competitors are following PST's lead.

While the first quarter results from PST still reflect economic weakness, we remain optimistic about the remainder of the year. PST management is taking pricing actions to maintain their profitability through the [inaudible] the cost actions to drive and maintain gross margins by product line and channel distribution.

We still expect the cargo tracker product line to grow at over 25% in 2015. We believe we have the best cargo tracking system in the market because in addition to GPS and GSM capabilities, we have developed our own 900 megahertz systems, strategically located throughout the country, to provide us a better footprint to track vehicles. Our superior technology is manifesting itself in increased market share. Recently, testing was completed by Brazil [Risk], an independent agency which tests these systems for the industry. Brazil [Risk] reported from these tests very favorable results on our tracking systems anti-jamming capabilities and our recovery rate remains the highest in the industry at 82%.

The cost actions executed in 2014 and the redesigned audio line will benefit PST in 2015 by about $4 million to $5 million for this year, which now includes the negative impact from currency changes. So far this year, the year on year favorable mix from higher sales of services has offset unfavorable effects impacts caused by a strong dollar. Excluding the effects of purchase accounting, PST had a negative operating margin of 5.9% in the first quarter, mainly due to the unfavorable Brazilian economy, as GDP has now been estimated to drop to a negative 1.3% in the first quarter and the devaluation of the Brazil real but 20.9%, compared to the first quarter of last year. The real hit a record low of 3.25 on March 27, but has rebounded to real 3.06 on May 6, which demonstrates the volatility we've experienced over the last four months. We expect to see a return to profitability in the third quarter of 2015, as seasonal demand increases.

Consolidated Stoneridge operating income margin was 1.9% in the first quarter of 2015, compared to 4% in the first quarter of 2014, primarily due to PST's performance and see slide 5 for more details. Stoneridge's operating margins, excluding PST, decreased to 4.1% or $5.7 million from 5.1% or $6.7 million, compared to the fourth quarter of 2014, due mostly to the unfavorable FX impacts on direct material cost in Europe electronics. And excluding the non-cash retirement charge previously discussed, our operating margin, excluding PST, was 5.8%, which is a significant improvement over prior year's 5.1%, and includes an additional $2.2 million direct material cost in Europe for US dollar denominated purchases.

On a constant currency basis, our first quarter operating margin, excluding PST, would have been much higher. Where PST and electronics experienced increase profitability from FX to the US dollar. Slide 5 of our deck has a complete P&L breakdown on first quarter 2015 versus first quarter last year for continuing operations for the bridge item differences identified on slide 6. Slide 3 identifies Stoneridge's segment sales increases and decreases versus the prior year's first quarter.

New and replacement business awards for control devices and electronics in the first quarter were $26.5 million, representing $3.9 million in new business awards and $22.9 million and replacement awards. The new awards included release switch award for a North America passenger and light truck customer for its Asia-Pacific market; a temp sensor award for Asia-Pacific commercial vehicle customer; and a temperature sensor award for a North America passenger and light truck customer.

While we continue to win new business awards and focus on enhancing our long-term pipeline, our primary focus this year will be flawlessly executed executing our shift by wire watch. At Minda Stoneridge, our unconsolidated JV in India, posted first quarter sales of $10.3 million, an increase of 2.1% versus the first quarter of last year. The rupee remains stable in comparison to the first quarter of last year and our share of Minda's net income from operations in the first quarter was a profit of $189,000, compared to profit of $238,000 in the first quarter of last year.

China is beginning to show the results of the hard work and refocus on local business growth and our control device sales in China has improved in the first quarter from $3.3 million to $5.2 million or a 57.6% increase. This growth has been on EGT sales of the China market, the leverage on higher profit sales has taken control devices in China to double-digit operating net earnings. And from a geographic diversification, our sales in North America represented 55%, Latin America was 16%, and Europe Asia was at 29%. And our sales growth projection of $130 million in net new business is being driven across all regions and this can be seen on slide 8. Our customer diversification is a proof of the balance between automotive and commercial customers, which also can be seen on slide 8. In addition, slide 14 shows the top line sales growth of the audio line and track and trace, as well as other PST other products.

And for the three months ended March 31, the company recognized income tax expense of $100,000 on pretax income from continuing operations of $2.3 million, for an effective tax rate of 6.5%. The decrease in tax expense of the effective tax rate, compared to the same period of last year, was primarily due to higher mix of earnings with the results for the US operations and lower mix of products from Europe reducing tax expense in the effective rate being offset by a smaller operating loss in PST.

Our ability to drive top line sales, reduce our costs to drive profitability and generate cash flow remains our primary focus for continuing operations. And in the first quarter, operating cash flow was an outflow of only $4.3 million, in comparison to an outflow last year of $16.2 million. Our cash flow in the first quarter of last year included results of the Wiring business, which produced a $10.1 million use of operating cash. As indicated on slide 13, we improved our debt leverage for continuing operations, as measured by the total debt to EBITDA ratio from 4.1 times December 31 of 2012, which dropped to 2.8 times December 31 of 2013, 2.5 times in 2014, and we have leveraged the company now at 2.4 in the first quarter of this year.

PST management has maintained lower inventories through the first quarter, in comparison to the first quarter of last year. Inventories were lower by $22.1 million and on a local currency basis, inventories are down 14%. As mentioned on our last earnings call, the inventory levels were lowered to better balance expected demand with the expected new order patterns for sales in the first quarter. Our favorable outlook for the remainder of 2015, and [reiterance] of our guidance is based on our confidence that we have repositioned the company for improved operations and financial performance. Control devices continues to generate consistently improved operating profits by leveraging their sales growth. They are, by far, the largest part of our growth story. They're disciplined approach to targeting advanced development projects and the admissions and actuation should continue to sustain their growth trajectory for years to come.

For electronics, new programs launched in North America in 2015, coupled with advanced display technology and Europe to service the safety and fuel efficiency markets, should further enhance the growth of this segment. In addition, near-term programs reduce controllable cost, defer noncritical investment in headcount and judicious reduction in advanced development will improve electronics' contribution in 2015, despite the FX headwinds they are experiencing.

PST has experienced significant currency headwinds from both transactional and translational exposures. They have implemented pricing actions in 2015 and expect to see benefits from the costing actions taken in 2014 and headcount overhead reduction and redesign of their audio line. Their future [performance] has a more diverse product line with car alarms still an important focus with a new emphasis on track and trace services, as well as portfolio enhancements like Bluetooth on all audio devices. PST can generate and enhance long-term shareholder value.

The company has been repositioned as a higher-value market participant with the completion of the wiring transaction August 1 of last year, the redemption of 10% of our debt in September, and the subsequent redemption of $157.5 million of our 9.5% senior secured notes using the new $300 million revolving credit facility was a significant step in deleveraging process of the company. These actions have positioned the company well to continue to enhance shareholder value.

We will now open up the call for questions.

(Operator instructions). Justin Long with Stephens, Inc.

Thanks and congrats, Jon on the new role. Look forward to working with you.

Thanks, Justin. I look forward to it as well.

I wanted to start with my first question. You know it seems like over the past year or so, you've been in restructuring mode. You've sold the Wiring business, cleaned up the balance sheet, you're taking out costs in Brazil, but would you say we've hit the point where that restructuring process is over and we're now shifting to more of a focus on growth and if that's the case, outside of the shift by wire business, could you talk about the areas in the business where you see the biggest growth opportunities?

Justin, I'll start at a top level and let George add in color, give his greater history here. I do think that while we will continue to tweak around the edges from a restructuring standpoint, looking at areas within the portfolio, I think the major restructuring areas are complete. And if you look at the way in which our products are positioned, and it's not just shift by wire, but it's things like soot sensing, the EGT and turbocharge actuators, as well as some of the things that we're doing for fuel efficiency and vehicle safety in the electronics business -- they're all in market spaces that should grow at a rate higher than the overall market. If we think about the overall vehicle market growing at about 3% compound annual growth rate, those market spaces should grow between 2x and 3x that. So my belief is that the leadership team is really focused on executing our current launches and executing within our operations that continue to give us credibility with our shareholders and with our customers and at the same time, refining our development portfolio and really focusing on those areas where we can bring the right products and also grow in the right market spaces.

Thanks, that--

Justin, I have nothing -- I think Jon said it very well. I think the major restructuring that we have been in is really complete. I think the thing that Jon and I have talked about is I think we've got some more work to do on our product portfolio and we're looking at that in select areas but for the most part, I think we have the products and we have the geographic breadth now that we have the ability to cross sell to our customers and cross sell in geographic applications, so for our company, and I think this is one of the things that has been a pleasing surprise to Jon is we have a global footprint, which has the unique advantages for a company like ourselves and now with the paring of the Wiring business, we can clearly focus on those technologies and those products of how we take those. And if you look at the growth that's coming, a lot of it's coming in Asia, it's coming in India and China and we are well-positioned to address those issues in these areas.

Great, that's helpful color. Second question I wanted to ask was on Brazil. I was curious if there was any change to your expectation for the sequential progression of operating income from PSG over the remainder of the year. Any updates to the expectation that you're kind of baking into that full-year guidance?

You know, Justin, Jon and I were just down there two weeks ago and I think we had a pretty good in-depth review of Brazil. And what we see right now is, and we always said we'd lose money in the first quarter; that's our lowest quarter, they will be close to break-even here in the second quarter. It's really a combination and what we're seeing as an uplift in the market. I think the one surprise what we saw while we're there is GDP continued to drop. It was running a positive 1% over negative 1.3% the first quarter, but I think the positive side of that is our management group has been very reactive to what's going into the market. I shared with you the price increases put in place and for the most part, those price increases were established to really offset the currency swings that we're seeing. And that is how we have to recover it in Brazil. So I think the trend over the remaining quarters is very close to what we shared in our last call is that we should be close to break even, should start to run in the range of probably 2% to 4% of op income in the third quarter, and then it progresses and improves in the fourth quarter with the seasonal uplift and demand.

We are seeing very positively, though, the track and trace as we are well-positioned in that market. We actually had a leading edge product and I think we're competing extremely well in that area and it gives us a tremendous upside in Brazil than probably beyond what are forecasts are right now, but I think they have done enough things and other product lines and that's why I wanted to say we're building off the strength we have an alarm systems, but we're diversifying our product portfolio and we are assessing some of the product lines there as Jon mentioned earlier. We are looking at our audio line and should we be in all those lines -- so that's a continued thing that we'll revisit with them and work with them, but we feel pretty comfortable where Brazil has managed the negative circumstance of the economy and the FX and we're really working on things we can control, both on the product side and on the cost.

Okay great, and last question I had, looking at the 2015 guidance as well, I guess last quarter you had talked about a negative impact from foreign exchange somewhere in that 10% to 15% range, looking at EPS. Given the fluctuations in rates since that time, any update to the EPS headwind you're assuming in 2015 in that guidance?

Well, I think if you -- clearly, the currencies have all moved in different directions and when we created that and advised you the rates we're looking at, the Brazil rate at that time was 2.70. It hit a low at 3.25. It's now back to around 3.05, but I think even if you look inside the results for the first quarter, even with that variance in what we're doing with the price increases, I think we are managing through that currency change.

Europe, we actually used a rate of 1.13, if you remember. It dropped as low as 1.05. Today it's trending right around 1.11, so if the euro stays about where it's at, I think we can manage through that process and then Jon alluded the other things we need to address in the cost to help facilitate that as we move through it. I think we're comfortable with that and I share with you today a lot of detail, and maybe it was a little cumbersome to understand, but in the European side, and local currency terms, they actually had real growth of 10%. When you look at the currency adjusted, they were actually up in the range of about 15.6%. So I think one of the things we're seeing is not only were they forecasting the market would be down, but also the negative currency. I think what we're seeing is the markets actually a bit stronger than what we were originally forecasting back in the January timeframe. So I think that's partly offsetting some of the currency impacts that we're seeing. So I think we're comfortable with where Europe is right now and then we've been getting favorable trends in the peso, where we have a lot of manufacturing capabilities is running around 15.4, so that's been a little bit on the positive side. So I think if you put all the currencies together, they clearly have moved to different variants than what we laid out in January, but I think is a basket and what we're doing to manage the currencies in our exposures, we're about right what we told you in the first quarter.

Great, that's helpful color. I'll leave it at that. I appreciate the time today, guys.

You're welcome, Justin.

Rhem Wood with BB&T Capital Markets.

Good morning and welcome, Jon.

Thank you.

Morning, Rhem.

Okay, so my first question -- I just want to stick on Brazil for a second. Do you feel like your cost structure is right at this point? I mean, can you take more out there or is it just a matter of volumes coming back? Sorry, I've got a little echo here. And then you mentioned on the call that, I think, previously, you said you'd be around break even in the second quarter, but then on the call you said maybe third quarter, and then you said it'd be close to that in the second quarter, so it sounds like that that is going to trend in the right direction. I mean how much do you think revenues, including foreign-exchange, will be down in 2015? Just a little more color on Brazil, thank you.

Rhem, I'm going to take the first piece and let George and so the second piece of that. With regard to the cost structure, as George said, we were down there actually just last week and we believe that before we take another shot at cost structure, the first thing for us to look at is exactly our product portfolio and where what products we're working on and where we're spending our focus, because we believe there are some winners as well as -- some winners beyond what we had planned, as well as some areas of challenge. So we went through with the Brazil team focused on the portfolio activities. The cost structure would then follow that.

The other thing that we see from an opportunity there is we believe there are actually some opportunities, probably in the second half of this year into the future, where our footprint there can give us access to other markets, so we have to be careful just with regard to discussion on cost structure to make sure that we're doing it associated with products that don't have future potential, rather than just cutting across the board.

And then Rhem, to sort of address your other part of the question and as you know, we have purchase price accounting, so that is always in there. So we manage Brazil both looking at local currency and the dollar impact, and so when I say will be about break even, that includes purchase price accounting. So they're actually doing better than that in the local currency aspect and that trend looks still pretty favorable to us. We've seen a little bit of weakness because the currencies been moving between Argentina and Brazil, but outside of that, in dollar terms, we're looking that our sales will be very close to what they were in 2014 and the second quarter on a dollar basis, but they will be up fairly significantly in local currency, probably in the range of about 10% to 15%. And then the normal trend of succession in the third and fourth quarter, we continue to see that same kind of uplift over last year and the profitability starts to improve fairly nicely in local currency that we should be able to run in the range of about 5% to 6%. When you look at it in terms of dollars, it's going to run about 3% and that's got the purchase price accounting and it, which you know that cost, which is I think somewhere right around $5 million for the year.

So I think the trend that we forecast and what we shared with you earlier is holding with Brazil. I think the one critical thing that Jon and I will have to stay very close to is that we put a pretty aggressive price increases in the second quarter and a lot of that depends on competitive positioning, will they follow the price increase. So far, our major competitor in audio followed our price increase in that sector. They raised prices 10% within three or four days of when we raised prices. So if that trend continues, then I think we feel comfortable combination of our price increases and the offsetting the current see, then we are positioned as we do some of the other items that Jon mentioned on cost and our product portfolio evaluation and review.

Thanks, that's good color. And then the second question -- can you talk a little bit about the markets in Europe? Are you still seeing those markets improve?

You know, Rhem, I think this has been a little bit of a surprise to us because when we established the budget -- I was sharing with Justin in his question is that what we're seeing, even though the currency's off about 13%, 14%, our dollar converted results are saying that our dollar translation is about equal to what it was last year. So yes, the local markets for us, at least the accounts we have and the platforms we are on, are showing growth and strength and we were up about 10% in local currency in Europe, which was a pleasant thing to see in the first quarter and we see nothing that's really changing that mix for the portfolio in the second quarter.

We do have some actions, as Jon alluded to, as we've got to sort of balance some of the cost issues we have there, but I think we'll address this fairly quickly and understand where we need to move and the things we have to do so -- but yes, the market is stronger than what we appeared and then as you probably noticed, the euros starting to come back. It weakened down to about 1.05 and as of the last week, it's back up to about 1.11 and we set our budget was based on 1.13.

Great, thanks. That's good. And then, can you give us some updated thoughts on [inaudible] and acquisitions -- how big is your pipeline right now? What areas are you maybe most interested in? Any thoughts there?

Yes, Rhem, right now we have a series of things that are, I would say, in very preliminary stages from an acquisition standpoint. What we're focused on first is as a leadership team is making sure that, as we talked about, that we're talking about execution and really knowing where we want to go with this with our product portfolio. Now that we restructured the business and gotten the distractions of 2014 out of the way, the first piece is making sure, as I've talked about in Justin's question, what are those next products that really represent opportunities for us and then as we refine that portfolio, then we look at where are the opportunities to spice that with acquisitions. So I would say we continue to scan the market, both from an alliance and from an acquisition standpoint, but there's nothing that's far enough down the path that we're ready to talk about it outside.

Okay, thanks and one more, I'll turn it over. Just is the $2.2 million in the non-cash expense for the share grant, is that in SG&A?

Yes, it is, Rhem.

Okay, just wanted to make sure. Thanks for the time.

You're welcome.

Jimmy Baker with B. Riley & Company.

Thanks. Good morning, George and let me add my welcome to Jon.

Thank you.

Morning, Jimmy.

First, just a couple follow-ups on the FX front. So -- oh, bad, bad echo here, apologize -- but the net new business outlook is unchanged. I know you typically update that annually rather than quarterly, but just given that we've seen some other companies in the space have to adjust those figures for FX, can you just kind of remind us of the geographic mix of that backlog, so we can be thinking about that?

Well, over this year and next year, Jimmy, I don't think it'll be affected that much, because most of that growth is coming in the shift by wire and EGT, where the currency's really not impacting that. In fact, both of the key customers, both Ford and General Motors, they are having us produce those products in Canton, Massachusetts; Juarez, Mexico; and we were selling them, we are producing them in a week currency, in peso, but we're selling to them in dollars, which, like the Fusion award, even though it's a 40% for China, it's actually produced and sold to them here in dollars, so it will not be influenced by any of the currency movements.

Clearly, we've seen an improvement in EGT that we alluded to in China, but strangely enough, the China currency's actually revalued against the US dollar, so we've seen some improvement there. So in the short term, in the 2015 and 2016 era, I don't see a lot of the impact on our net new business by currencies.

Okay, that's helpful and then if I think about the core Stoneridge business, control devices and electronics continues to see some fairly significant gross margin pressure. I'm just trying to understand exactly what's driving that and, I guess given where you started the year on a consolidated basis, 120 bps below the low end of your full-year range, can you just speak to what steps you're taking that give you confidence in maintaining that full-year range?

Well, Jimmy, I think the numbers are a little deceiving, because if you look at the true operations, and let me break the two businesses apart. Control devices, if you look inside that, and our Q will be filed here very shortly, you will see that control devices' margins continue to expand. In fact, they've had a very good first quarter and we're already seeing what they're doing in April and it continues to improve. And we're getting a real good lift on marginal contribution.

The one issue we're seeing and electronics that's being heavily influenced by what's going on with the currency in Europe and a lot of our dollar components are US-based and US dollar based, so we're seeing a currency swing of roughly 10 to 12% on some of those imports, unless dollars, and so we are working, and I think Jon alluded to this fact, is we've got to look at other ways under our control to either look at alternatives to supplies or can we change the portfolio, the product lines, to try to address that issue. So if you look at our cost structures and our margins, it's all being influenced by the US dollar component cost of our raw materials in Europe. And that is an area we're focusing on very aggressively right now and attempting to develop plans how to address that issue. But -- and I'll add to that--

Okay, so is it a--

-- we believe our margins are improving, clearly on the control device side of the business, and even within the portfolio of electronics. In North America, they're fine. I think we've got to address what's going on in Europe, highly driven by what's going on with the currency.

Okay, so that kind of dovetails into if we're looking out to, let's say 2016 and 2017, when more of your new business comes online. Would you say your expectation, I guess particularly given where the peso has gone, that you would expect some of that to come online and become accretive to consolidated gross margins and not only drive the segment margins higher but actually the consolidated gross margin higher?

Yes, in fact what our real -- when you look at shift by wire, it's such a large component to ours and what you really think about is we've been developing this product line over the last two to three years, and that was all a period cost to us, so you won't see a big uplift in gross margins, but we're going to be able to leverage op income significantly and it's in the range of 200 to 300 basis points, so I think you're going to see a fairly significant uplift and marginal contribution with our net new business and especially at the op income level.

Okay, that's helpful, thanks a lot for the color.

You're welcome.

(Operator instructions). Chris Van Horn with CBR Capital Markets.

Good morning, everyone. This is actually [Cole Allen] on for Chris this morning. Most of my questions have already been asked, but I thought I'd touch on a couple other things. Could you guys just like, I guess, walk us through the expectations for the product launch, maybe, for the second half, shift by wire. Is that more of an early 3Q or later 4Q story? And then, I guess, what are you guys seeing from demand on that side?

Well, Carl, good morning. This is a business that full-year run rate next year, we think about that as an $10-something million business where we should get between $10 million and $15 million worth of revenue in this year. So that's really, a late third quarter, early fourth quarter impact. So the revenue impact in 2015 is huge, as it is laying the foundation for the ramp up and addressing 2016. We are seeing good opportunities where there's additional demand and expanded take rate with the customers with whom we're working and the control devices team continues to look at -- okay, what do we need to do from an operational standpoint, from an organizational standpoint, to be able to support that growth -- so we're really excited about the opportunity that the shift by wire business represents for us and it's beyond the numbers that I've already just mentioned.

All right, excellent, excellent. That's good color. And then I guess the last question I had was you said Europe has been performing really strong and we've seen that in both commercial market and light vehicle market numbers that have been coming out. Is there particular products within Europe that are doing well or is it kind of just overall demand is really bolstering everything?

Yes, this one for us is because our content is so tied to how the specific commercial vehicle makers are doing, and Volvo in particular. It really is a little bit of rising tide lifts all boats from that standpoint and we get the advantage of their uplift.

All right, thanks so much, guys.

You're welcome.

Irina Hodakovsky with KeyBanc Markets.

Thank you, good morning everyone.

Hi, Irina. How you doing?

Good morning.

I'm doing well, thank you. Welcome aboard, Jon.

Thank you very much.

I had a couple of questions for you guys. SG&A as a percentage of sales unusually low. What are your expectations going forward?

SG&A shouldn't change substantially from where we're at, but I think one of the things that I think Jon brings to us is a refresh and a new look SG&A, so I think where we're headed is we will be -- and I don't think you'll see a substantive change for this year but I think the areas we are going to focus on are the raw material cost line, SG&A, and how do we focus our D&D, so I think those things will come under sort of the scrutiny in terms of how we look at it and improve the efficiency as we move forward.

And the other aspect to that, Irina, is when you have a product as large as shift by wire, as an example, where the development was done in preceding years, you have a mismatch in periods between when you're spending the money to develop it and when you're really getting the revenue against it. So you would see some thinning, just based on the fact that you don't have to spend that same sort of development activity while you're starting to get the revenue.

That makes sense. Thank you very much. Another question -- tax rate's substantially lower, you mentioned in your release, driven by profitability mix. It appears that your profitability mix will shift a little bit back towards Brazil. As you mentioned, you should become a little bit more profitable as you go forward there. So what are your full-year tax rate expectations?

We, you know, over the last couple of years, as you know, we've been running between about 13% and 16%, and I think what we saw in the first quarter is the profitability in Brazil was down, typically, and their effective tax rate is 20%. So as their profit goes up, you can assume that we're going to pay about 20% on their earnings. And Europe, as that comes back, their effective tax rate is about 23%, and we're paying zero tax in the US. So really, the big swing in the first quarter we saw is we're continuing to get a great performance out of control devices in the US and the tax savings will, if everybody remembers, on the interest expense, you know, with our interest expense is lower in the first quarter by $3.6 million over first quarter last year. So those two things together -- the performance of our US operations and our interest savings have really driven the rate down from our historical level of 13% down to 6%.

As Europe improves here in the second quarter, I would venture to guess by the third quarter we should be back at that more traditional mix of around 13% to 15%.

Okay.

I think it'll still be fairly low in the second quarter, just because the interest savings and control devices in North America continues to do very well.

Got you. Question on the PST -- the price increases that you've implemented and you're seeing the response from one of your competitors, given that it such a difficult demand environment, how is the take rate on that? How are your customers responding? I mean, you're banking on sales to improve. What is your first initial response from the demand standpoint to the price increase?

One of the things that, if you understand the culture in Brazil, that 47% of all their demand comes in the last five days of the month, so one of the negatives to that when you raise prices is always the dealers trying to anticipate when prices are going up what do I build in my inventories, so we've been a little bit cautious because an aftermarket, we actually -- that 11.3% was two price increases. It was one at 6% in March and we put another 4%, so it's a compound growth rate or increase 11.3%. So we've seen a little bit of buying in March at a higher level and then a little softness in April, but I think as the dealers understand, and our key competitors follow that, it'll normalize itself. But we're getting, in the short period, when you raise prices in two different months, the dealers are trying to play games with their inventories versus their depositions. But so far, we have not seen any huge dislocation where somebody or the dealer network just stop buying and it was very encouraging in the audio line that our largest competitor actually followed us, and we would normally look at them as being a price leader, but we led that price increase and they followed within a few days.

Okay, thank you very much, guys.

You're welcome, Irina.

We have a follow up question from the line of Jimmy Baker.

Thanks, thank you, just a follow up for you, Jon. The shift by wire -- did I understand your response to an earlier question correctly that the offering is to take rate dependent? And I guess if so, is that true at both OEMs and what take rate is assumed in the backlog figure?

All right, Jimmy, you caught me. You caught an incorrect word on my part. What I'm saying is it's actually going across additional platforms or additional vehicles that might be on the same platform, so where Ford had originally targeted it for one vehicle, they're actually adding it to other vehicles along the platform. It's not take rate dependent within a specific vehicle line, but more take rate dependent or more being applied across additional vehicles and additional platforms. I apologize for the confusion, and thanks for asking the question to clarify that.

In fact Ford, as you know, they started with the Lincoln. They went for the Taurus. Now, their Fusion. They're actually talking about adding it to another platform in North America, which could be another extension on that platform, so--

So the message from our standpoint and that I want everybody to take away is that we see the adoption of this technology for this product as really exceeding what we had originally expected in the plan for the product.

Understood. That makes complete sense and then would you say it's a fair statement that as the, let's say, adoption rate improves within those customers, you're advantageously positioned, given your income position on the existing wins?

Yes, and that's why I made such a big deal of our execution and the best thing that we can do to protect that incumbency and to support this growth is to make sure that we execute well on the first ones and that's why the entire organization is so focused on it and why I'm spending time in Juarez checking on the launch.

Understood. Thanks very much.

There are no further questions in the queue at this time. I would now like to turn the call back over to Ken Kure for closing remarks.

Jon's going to take this.

Yes, let me just thank everybody for your questions and for your interest in Stoneridge. As I said earlier, I really do believe that Stoneridge as a company is well-positioned, with its balanced product portfolio and its footprint, and in my view the footprint in particular for a company our size is an asset that is probably -- it's a jewel to have this sort of footprint in the company our size. By eliminating the distraction of wiring and using the proceeds to improve our balance sheet, this business really is positioned for the future and for focus on execution and growth. As I mentioned earlier, our products and our capabilities are in spaces in the market that we believe will grow faster than the overall market, between 2x and 3x what we expect the overall market to do and with our global team and their dedication and capability, I really believe that we're positioned to execute and meet/exceed the commitments to our customers and our shareholders. I look forward to getting a chance to meet many of you and to talk to you again in the next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.