Stoneridge Inc (SRI) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Stoneridge first-quarter 2016 conference call. At this time, all participants are in a listen-only mode. Later, we will be hosting a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded over the webcast line.

Now I would like to hand the floor over to Ken Kure, Corporate Treasurer and Director of Finance. Ken, 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 the accompanying presentation has been or will shortly be filed with the SEC, and has been posted to our website on www.Stoneridge.com. Joining me on today's call are Jon DeGaynor, our President and Chief Executive Officer; and George Strickler, our Chief Financial Officer.

Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe 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 filed with the SEC under the heading Forward-looking Statements. During today's call, we will also be referring to certain non-GAAP financial measures. Please see the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

Jon will begin the call by addressing the strategies discussed during our previous earnings calls and our progress on new business wins. George will discuss the financial and operational aspects of the first quarter. George will also review our 2016 sales and earnings guidance based on the trends that we have seen through 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 continuing improvement, and updates 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 then open up the call to questions.

With that, I will turn the call over to Jon.

Good morning, and thank you all for joining us. I'm pleased to report that we recorded a strong first-quarter financial performance, which represents another quarter-on quarter improvement. The Control Devices and Electronics segments continued to perform well in the first quarter, as their combined operating margin, including unallocated corporate charges, has reached 8% to net sales in the first quarter, which is an improvement from the 4.2% in the first quarter of last year and 7.5% in the fourth quarter of 2015.

Both Control Devices and Electronics segments saw significant improvement in operating margins in the first quarter from higher sales in Control Devices; continued strength in European commercial vehicle sales; currency tailwinds; and improved operating efficiencies at Electronics. The results of these segments allowed Stoneridge to overcome the headwinds caused by currency changes and the difficult economic environment in Brazil.

The financial performance by the Stoneridge team continues to demonstrate the resolve of the management group working together to deliver on our commitments. This quarter, we continued to deliver on our commitment of increased earnings, excluding unusual items, compared to the prior year. George will provide more detail on his section on the financial performance of the first quarter.

During last quarter's call, I described focus areas for the organization. The diligent efforts of our management team in these focus areas have helped us to deliver consistent financial performance in the face of difficulties we have experienced in certain markets. I would like to highlight a few areas that are driving our consistent performance.

Our number one focus for the second half of 2015 and into 2016 has been, and will continue to be, the flawless launch of the shift-by-wire programs. Our launch continues to go as planned in the activities in our Camp Massachusetts and wireless Mexico facilities have met all customer commitments and internal objectives.

Control Devices sales were up by $12.5 million over the first quarter of last year, as the first quarter of 2016 sales by shift-by-wire performed close to our expectation, even though sales in the Asia-Pacific region for shift-by-wire were slightly lower than expected due to customer market adjustments. Our shift-by-wire outlook for the year remains on target. As we look at our order book, we see orders filling in the Q1 shortfall by the end of the year.

We are also looking to build upon the success of shift-by-wire by extending onto additional platforms with existing customers as well as other customers. A key win in the first quarter was a hybrid application, which demonstrates that shift-by-wire can be -- continue to grow beyond the initial wins.

At PST, our management team continued to aggressively adjust their cost structure and inventory levels in the face of continued sales declines. When we were planning 2016, we expected PST to be near breakeven levels in the first half, and significantly more profitable in the second half. The severity of the continued economic crisis has resulted in further sales decline in our first quarter.

This economic reality has caused our PST management team to accelerate further cost reductions. As a result, PST has embarked upon another rightsizing of the cost structure, the third in the last 12 months, which was implemented in January and February of 2016. See slide 5 of our deck for more detail.

We expect PST to breakeven in the second quarter of 2016, and be moderately profitable for the third and fourth quarters, excluding previously mentioned amortization expense related to the purchase of PST that occurred in 2011. The efforts of the PST management team to take out costs, improve supply chains, and reduce inventory levels has enabled PST to survive the current economic environment, and has positioned PST to thrive when the recovery arrives.

Profitable sales growth is a primary objective and focus for the entire Stoneridge team. This quarter, I am pleased to report that our commercial efforts have been productive and our projected net new business pipeline has expanded from the $179 million for the years 2016 to 2020 that we released in February 2016.

While many of the programs that we will discuss were anticipated in our plan, they are now definitive wins. We now expect our 2016 to 2020 net new business estimate to increase from $179 million to $232 million, an increase of $53 million or 29.6%. The increase in projected net new business is due to new program wins in instrumentation and telematics for our Electronics business, and for Control Devices wins in both actuation and sensing. New and replacement business awards for Control Devices and Electronics in the first quarter were $49.8 million, representing $47.8 million in new business awards and $2 million in replacement awards.

More specifically, these new business awards include an $11.9 million instrument cluster award for an Asia-Pacific commercial vehicle customer; an $18.8 million shift-by-wire actuator for a North American passenger car and light truck customer -- this is an important win, as it represents our first hybrid vehicle award and a further expansion of the shift-by-wire product line; an $11.7 million front axle disconnect actuator award for a North American passenger car and light truck customer; and a $2.3 million high temp sensor award for North American passenger car and light truck customer for sales in Europe.

These four new programs represent over 93% of the new business awards in the first quarter, with 27% for our Electronics business and 73% for our Control Devices business. We have also recently received word that we have significant -- we have a significant instrument cluster award for a European commercial vehicle OEM, and our first soot sensor award for a European passenger car OEM.

Both of these have been included in our revised net new business estimate for the 2016 to 2020 timeframe. These awards are indicative of our ability to leverage existing technology as well as new developments to drive organic growth.

From a geographic perspective, our sales in North America represented 61%, Latin America 11%, and Europe and Asia was at 28% for the first quarter of 2016. The geographic detail can be seen on slide 9. Our customer diversification has improved with a balance between automotive and commercial customers, as can also be seen on slide 9.

As we continue to execute our plans in 2016, we are recognizing the significant improvement in our financial results that is tied to our strategic actions. We have realigned our business unit organizations to focus more indirectly on product lines, taking a holistic approach to each line, primarily focusing on profitable and sustainable topline growth by developing both short -- by both a short and long-term vision of the products, technologies, and targeted customers.

Concurrently, we are continuously reviewing our global design and development resources to ensure that we have the correct skills in the right regions to efficiently support the planned growth in new bookings. This review has led to a portion of our Q1 restructuring as we realign D&D resources geographically. Even considering these restructuring costs in the first quarter of 2016, our consolidated operating margin was 5.2%, which is a 330 basis point increase over our first-quarter 2015 unadjusted operating margin, and would have been 6.4% excluding the restructuring costs in the first quarter.

We continue to review our leadership team with a goal of improving the efficiency and effectiveness of the organization as we move into the future. We have previously announced the retirement of our Vice President of Operations, Rick Adante, whom I want to thank for his support of the Company. We will be announcing Rick's replacement in the very near future.

Another important organizational move is our recent announcement of the headquarters' consolidation in Novi, Michigan. This move will provide a platform for collaboration between teams that has not been as easy in the past. The location of this new facility will also facilitate more frequent interactions for customers, suppliers, and technology developers, allowing us to continue to deliver products and systems that anticipate the needs of our customers. The facility will also help us attract and retain talent as we prepare for future growth.

With the continued diligent efforts of our employees, along with the enhancements of the team that have been, and will continue to be made, we have great confidence that the organization is prepared to successfully execute the next phase of growth and improved performance for Stoneridge.

With this as a backdrop, George will now provide some specifics as to our financial performance in the first quarter. I will now turn the phone call over to George.

Thank you, Jon. Stoneridge reported a strong adjusted earnings-per-share from continuing operations of $0.31 per share in the first quarter of 2016 compared to adjusted earnings-per-share from continuing operations of $0.17 in the first quarter of last year, an improvement of $0.14 a share or an increase of 82% on the combined strength of North American Control Devices, automotive performance, and European commercial vehicle performance of our Electronics segment.

Included in our first-quarter results were business realignment charges for our Electronics and PST segment of $0.05 per share, which was included in our reported earnings of $0.26 per share. We estimate that these charges are expected to yield $5.2 million of benefits during 2016. See slide 5 for additional details.

By business unit, sales in the first quarter increased in Control Devices by $12.5 million or 15.6%, and decreased in Electronics by $3.8 million or 6.7%. Electronics revenues were negatively affected by lower volumes in the North American truck market, and to a lesser extent, unfavorable foreign currency translation. PST sales were unfavorably affected by $7.1 million because of the weakening of the Brazilian real to the US dollar. See slide 4 for more detail.

Passenger car and light truck revenues were $76.7 million in the first quarter, a 17.9% increase over the first quarter of last-year sales of $65.1 million, as volumes increased in Control Device products, which included new programs in shift-by-wire. In addition, North America passenger car market continued to show significant growth in the first quarter of this year compared to the first quarter of last year.

Our business in China, which is part of our Control Device reportable segment, has continued to show improvement with an operating margin of 17.4% in the first quarter, as operating income increased from $200,000 to $1.1 million in comparison to the first quarter of last year. This is a significant improvement over last year's first-quarter operating margins of 3.8%, and even higher than the fourth-quarter operating margin of 15.6%.

Sales in our commercial vehicle category, which are predominantly Electronics sales, were $57.9 million in the first quarter compared to $60.5 million, a 4.3% decrease over the first quarter of last year. Revenues were negatively impacted by lower volumes in the North American commercial vehicle market.

And due to the strength of the Control Devices and Electronics business units, as Jon mentioned, Stoneridge's first-quarter operating margin, excluding PST, was 8% of net sales for the first quarter, which reached an all-time high since the first half of 2008. This is a significant improvement over the first quarter of 2015 in which we reported operating margin of 4.2% and higher than our fourth quarter of 2015, which was our highest last year at 7.5%. See slide 6 for further details.

PST's first-quarter sales declined by $8.9 million or 33.6% to $17.6 million compared to the first quarter of last year. These results were negatively impacted by approximately $7.1 million for FX translation, as the Brazilian real devalued by 36.3% in the first quarter of this year compared to the first quarter of last year.

On a local currency basis, PST sales decreased by only $7.2 million or 9.5%. In addition, PST also experienced a negative transactional impact of $2.2 million in the first quarter in direct material, which is offsetting some of the restructuring benefits. The Brazilian real was recently revalued from BRL3.91 to the dollar in the first quarter of 2016 to BRL3.55 to the US dollar, which should mitigate some of the negative transactional impacts experienced during the last nine months.

Consolidated Stoneridge operating income margin was 5.2% in the first quarter of this year compared to 1.9% in the first quarter of last year. In Stoneridge's operating margins, that is adjusted to restructuring in 2016, was 6.4% compared to the first quarter of last year adjusted operating margin of 3.3%. This was our expectation that we could leverage our cost structure to lift our operating income margin from 150 to 200 basis points in 2016, and is what we have guided to in 2016.

Our sales were slightly lower than our first-quarter expectations, due to lower commercial vehicle sales in North America, unfavorable currency, and slightly lower shift-by-wire sales that we have already discussed, that we were able to leverage our Control Device sales compared to prior year and improve our Electronics cost structure. Stoneridge's operating margins, excluding PST, improved 8% or $11.6 million in the first quarter of this year in comparison to 4.2% in the first quarter of last year, due mostly to lower SG&A expenses, direct labor and raw material costs.

PST experienced decreased profitability from raw material FX transactional exposure to the US dollar, as well as lower local currency sales volume, while Electronics profitably was negatively impacted by lower volumes in the North American commercial vehicle market. Slide 6 of our deck has a complete P&L breakout on first quarter of this year versus the first quarter last year for continuing operations with the bridge item differences identified on slide 7. Slide 3 identifies Stoneridge's segment sales increases and decreases for prior-year's first-quarter.

Minda Stoneridge, our unconsolidated JV in India, posted first-quarter sales of $10.6 million, which was an increase of 3% or $300,000 in comparison to the first quarter of last year. The rupee weakened by approximately 9.8% 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 $143,000 compared to a profit of $189,000 in the first quarter of last year.

China continues to show the improved operating performance as a result of the focus of SRI product lines for the Asian market. And our Control Device sales in China of $4.7 million increased in the first quarter by $200,000 or 3.4% in comparison to the first quarter of last year. And like our fourth quarter of last year, the leverage on higher-margin sales has allowed Control Devices in China to achieve a double-digit operating margin.

For the three months ended March 31, the Company recognized income tax expense of $840,000 on pretax income from continuing operations of $7 million, or an effective tax rate of 12.2%. The increase in tax expense and the effective tax rate, compared to the same period for last year, was primarily due to two things -- the overall increase in earnings and especially in North America; and the PST operating loss, which can no longer provide a tax benefit due to its full valuation allowance, which we began providing at December 31 of last year.

The 2016 projected annual effective tax rate, which was used to calculate our 2016 guidance, is based upon maintaining the valuation allowances that are currently provided against our US and Brazil deferred tax assets throughout 2016. The exact timing and amount of the valuation allowance reversal are subject to change on the basis of the level of profitability that we are able to actually achieve, as well as earnings that can be reliably forecast.

We will continue to maintain a full valuation allowance on our US and Brazil deferred tax assets until there is sufficient positive evidence to support the reversal of these allowances. The other important thing to remember about this subject is that the timing and amount of any reversals does not change the intrinsic value of Stoneridge, nor does it change the amount of cash taxes we pay. It merely affects the amount of book taxes we would recognize, and thus EPS for the period affected.

The other focus for our team is free cash flow and return on invested capital. We are still projecting to generate free cash flow for the year at the top of our range of 3% to 4% of net sales. And in the first quarter, operating cash flow was an inflow of $0.5 million in comparison to an outflow of $4.3 million during the first quarter of last year.

Our free cash flow for the quarter was $6.4 million negative compared to $12.8 million during the first quarter of last year. Our cash balance at March 31 of this year was $48.4 million., a decrease of $6 million from December 31 of last year. And the decrease was primarily due to higher capital expenditures to facilitate new business and seasonal working capital increases.

And as indicated on slide 14, we continue to improve our debt leverage from continuing operations as measured by total debt to EBITDA ratio, which has now been reduced to 2.2 times at the end of the first quarter of this year. Another important metric that we have been tracking is our ROIC, which was at 12.6% in 2015. And our guidance implies that our ROIC will improve to the range of 15% to 17%, based on our ability to increase our profitability by leveraging our sales and cost structure.

Well, this is the sixth consecutive quarter that we have improved our earnings, excluding unusual items, compared to the prior-year. Our quality of earnings and consistency of the financial results have improved immensely since the sale of the wiring business in August 2014 and the refinancing in October 2014, even with the significant downturn in the Brazilian economy.

We are very pleased with our first-quarter results and our ability to build on the progress we made through 2015. Having repositioned Stoneridge to be a high-performing company, based on topline growth with a focus on cost reduction and maintaining flat SG&A and D&D levels, our earnings illustrate our ability to increase our profitability, despite year-over-year sales being relatively flat in the first quarter, which was driven by currency headwinds in the North American Class 8 market.

We have developed a sustainable technology process that is a pipeline for new products and technologies that will continue to drive organic growth over our five-year planning horizon. And earlier, Jon shared with you some of the awards we landed during the first quarter and early in the second quarter, which adds approximately $53 million to our $179 million over the next four years, as the awards will impact 2017 to 2020.

In our existing pipeline for future opportunities, we are focused on soot sensing, turbo actuation, high temp sensing, and shift-by-wire, to name a few product families for Control Devices. In Electronics, we have opportunities such as MirrorEye, a new exciting product in the commercial market, and ELD legislation recently approved for the North American commercial market, which provides the opportunity for Stoneridge to utilize capabilities developed in Europe and PST for expansion in the North American market. We are very excited the opportunities will add to our revised net new business of $223 million over the next five years.

For both Control Devices and Electronics, we have a number of ways to increase topline sales. Our content per vehicle has increased for products like shift-by-wire for control devices, and electronics has the opportunity to do the same with mirror replacement. For Control Devices and Electronics, we have the opportunity for growth by cross-selling our products and technologies in other markets, such as in Europe and Asia, and especially India and China.

Our plans are to continue to invest in our opportunities for organic growth. We are actively pursuing M&A opportunities that fit our needs to support our growth in our Control Devices and Electronics business units. We are excited about the potential for 2016. As our first quarter is showing, we are performing in line with our guidance.

We continue to work on enhancing our net new business and the operating profit leverage that has improved, due to the higher sales, as shown on slide 16. And we are projecting that our sales will grow 12.5% to 14% in 2016 over last year. Our operating margin will continue to improve by nearly 2% to net sales by leveraging our cost structures and our earnings-per-share $1.10 to $1.30 per share, which will improve between $0.17 and $0.37 per share above our adjusted EPS of $0.93 in 2015.

And, Jon, this is a very exciting time at Stoneridge. The progress that we have made is manifesting itself in topline growth and bottom-line improvement.

We will now open the call for questions.

(Operator Instructions) Justin Long, Stephens.

Good morning and congrats on a great quarter. So, first question, I had -- I wanted to ask about the 2016 EPS guidance for $1.10 to $1.30. I guess that didn't change. Does that exclude the restructuring costs that you saw in the first quarter? So, are you using $0.31 of first-quarter EPS in that guidance?

In the guidance, Justin, we are using the $0.26. I mean, it was -- we've incurred the expense of $0.05 a share, but as we mentioned, we have benefits that will represent $5.2 million over the course of the year. So, some of those offset each other. And so we are still performing within that guidance.

Okay. That's helpful to clarify. And then maybe following up on that. So, the overall EPS outlook didn't change. But I am curious if any of the underlying assumptions within that guidance moved around, whether it's a better first-quarter than you expected? Any change to the shift-by-wire cadence, your macro assumptions, et cetera? Could you just provide some more color on how that outlook has evolved since the beginning of the year?

Well, Justin, I guess the best way to say it is that we are very pleased with our results. And overall -- and I think Jon said it very well early in his material, is that -- how we look at this thing is, this is a commitment from each one of our business units. And Electronics is performing a little bit better than what we thought.

Control Devices was just slightly off because of the delay of some of the shift-by-wire, mostly in the Asia market. And then Brazil clearly was more of a struggle than we expected. But in the aggregate, we still feel Stoneridge and we are feeling very comfortable with how we are performing in the first quarter, and then how that looks for the outcome for the year.

And Justin, just with regard to shift-by-wire, we watch that really closely. And we don't believe at this point that what we see in the first quarter from a customer pull perspective will impact us on the full-year. We actually believe that that will be caught up. And that's what we see in releases as well.

Okay, great. That's all really helpful. And maybe following up on shift-by-wire, Jon, you mentioned the hybrid win, and that's good to hear about. But I wanted to ask about your ability to continue leveraging that product on additional platforms or with additional OEMs, just based on the pipeline of opportunities you are seeing today and conversations you are having with customers. Are there any of those additional opportunities that you think could be -- can materialize in the contract announcements at some point later this year?

I think this first hybrid -- this hybrid win, Justin, is an example. We continue to work with other customers and with our current customers on expanding the penetration of the product. The fact that we've been able to find an application that's outside of what was the standard approach tells us that there is room to continue to grow this.

At this point, I can't say that we have anything that is imminent. But what we know is that our customers are pleased with us. They are pleased with the product. And we are getting the opportunities to work with engineering with our customers to try to solve their problems and use the shift-by-wire capabilities to do that. And that's where this hybrid program came from.

Okay, great. And maybe one last one from me. I wanted to ask about the mirror replacement opportunity as well. Could you just provide an update on how some of those conversations are going, now that you have had a little bit more time to market that product? And similar to what I ask on shift-by-wire, are there any contract opportunities that you think could materialize at some point this year on that front?

We are continuing to be very bullish with regard to the opportunities for MirrorEye, both in the European market and in the North American market, although we believe that the path to market will be different in North America than it is in Europe. The -- we do believe that there will be at least one customer that makes a sourcing decision in 2016, probably later in the year. And we continue to work to expand our capabilities there and support customers both in North America and in Europe with development vehicles, demonstrators, and then also working with fleets.

And you'll see some announcements from us with regard to what we are doing at trade shows and tech shows to get the word out, particularly with the large fleet. So we believe that there will probably be an OEM award sometime toward the end of 2016, and hopefully some lead fleet adoption in, if not late 2016, early 2017.

Okay, sounds great. I appreciate the time.

Thanks, Justin.

You're welcome, Justin.

Jimmy Baker, B. Riley & Co.

Thanks for taking my questions. Just first, wanted to stick on the new program awards. So, could you just talk about how you expect those to impact your gross margins and operating margins once they ramp? And then it looks like the material changes to your new business backlog are really focused on 2019 and 2020. Is that just the timing of the majority of these new awards? or are there any push-outs to be aware of in the existing backlog?

Jimmy, let me answer the first piece of the question first. These aren't push-outs. These are just the typical program timing where, in 2016, we are talking about primarily programs that would be 2018 or 2019. But I can tell you we mentioned in our discussion earlier about a European Electronics award. That award will start to impact us toward the end of 2017 and into 2018.

It is a vehicle refresh that the customer is doing. So, we typically think about at least two years, if not three years, for most of our Control Devices and Electronics awards. But we are seeing a couple that are going faster than that. So we are -- you are right that the primary impact is 2019 and beyond, but we are seeing some things that will fill in toward the end of next year and early into 2018.

And we did have some fill-in in 2017. And you are right, is that we had a little bit still we're working on in 2018. And that's where our focus has been, and can we give something in that area? So -- but overall, Jimmy, it is going across the whole five-year period. But it's mostly 2017 through 2020, and 2018 is still a little bit light from our perspective.

Okay, sure. Very helpful. And then just I guess we had previously only gotten this from you annually, an annual update. I mean, Jon, is it a practice that you are intending to adopt here that we'll get these updates quarterly now? Or I guess sporadically as material changes occur in the backlog? How should we just think about this update going forward?

Yes, Jimmy, I think the point here is we want to make sure when there is a material item to discuss that we are providing clarity on that as rapidly as practical. And so, we made the decision that it made sense -- because the change in net new business was so material, that it made sense to talk about it now.

So, hopefully, we -- this is that we'll have the ability and the need to talk about this every quarter. But our commitment from our side is that we will update you as there is a material change. And certainly, with the discussions that we've had on MirrorEye, the discussions we've had on shift-by-wire, any time that we have an update on one of those specific programs, we'll make sure that we communicate it appropriately.

Okay. Appreciate that. And then lastly, just when you look at the reduction in operating expenses, how much of that would you say is headcount reduction versus a currency impact? And I guess comparing your guidance today to when it was last updated, exchange rates have become a bit more favorable for you. So I guess going back to your response to Justin's question, you are maintaining the earnings guidance, but could you just talk about the tailwind on a full-year basis versus the prior assumptions that you'd see if FX rates hold at current levels?

Well, Jimmy, we talked a little bit about this. And some of the currency headwinds -- or tailwinds we are now seeing is we're really trying to evaluate are they sustainable or is this a temporary blip? In fact, a lot of this has been driven by the oil prices. It's been the dollar weakness. And that seems to have stalled, at least from the oil standpoint.

Jon and I have both been in Brazil over the last three weeks, and they've got a unique situation going on where Congress has now elected to make a change at the presidency and the top four cabinet positions. And as a result of that, the currency in the real is now down to BRL3.43. I haven't checked it this morning, but it was running around BRL3.98, BRL3.80. That's been a significant benefit for us.

Now one of the issues with PST and why we haven't really talked about or looking forward is that we've had some inventory build in some of the audio lines in terms of what the consumer is buying. So, it's delayed some of our purchases. And so that will have an effect that, I would venture a guess, in Brazil. We'll talk more on that on the second quarter, because I think we'll have a much better idea.

Just to give you some of the current consensus in Brazil that, if the change in the presidency does not happen, they are talking about the exchange rate potentially going back to BRL4.20 to BRL4.50. In the case where it does happen, they are saying it will probably settle out around BRL3.20. So that will be a nice tailwind for us.

In Europe, the euro has gradually gone up with the prices of oil stabilizing. The euro is sitting at about [$1.15] right now. Our budget was [$1.10]. That will help us from two aspects, as we'll have a higher conversion of dollars in the European business, and it will also reduce our impact of raw material costs, because 70% of our materials are imported [at] dollar-based.

And then in the case of our other key exposure is Mexico peso. We had a rate in there of [MXN15.80] for the year. It's been running between [MXN17.20] and [MXN17.40]. We've hedged about half that position. We locked into an average rate a little over [MXN17]. So a lot of that was built into the guidance already.

So depending on where the peso goes, we may have a little more benefit. But at least compared to what our guidance was, we had already considered that. So, if anything, though, overall, as you suggested we will have -- it's been 2.5 years we've been fighting headwinds in currencies. And now we should have, if these rates stabilize, we should have a tailwind on currencies. But we'll give you a little more detail in the second quarter as we evaluate the positions and the changing conditions of where it is. And I think the biggest one with the most uncertainty is in Brazil.

Sure, sure, that's helpful, George. Just the first part of my question, can you help quantify the operating expense reduction between headcount versus currency impact?

The most of the -- you are talking about the restructuring cost?

Well, I am actually talking about it in aggregate. The SG&A and D&D reduction on a year-over-year basis or even sequentially, whichever you think is the more appropriate bridge.

We've actually taken -- so, the restructuring cost, to give you an insight into that, we've realigned our engineering workforce, and that was really to improve skill sets and capabilities, the same time we took out 19 engineers in that process. We've taken out 165 people in Brazil. That was -- many of those people were in the Manaus manufacturing facility, but it went across the board in engineering, SG&A and all the support services.

So there has been significant headcount reduction probably in the range of 180 people in the first quarter. So a lot of it was not driven by currency other than in Brazil, where you do get the significant influence of the currency there. But for the most part, we are gaining on efficiency. And as you see it, our SG&A is flat compared to what it was last year. So -- and we estimate that we'll continue to manage at that level.

Okay. Very helpful. Thanks for the color.

You're welcome, Jimmy.

(Operator Instructions) Tristan Thomas, Sidoti & Company.

Just two quick follow-on questions regarding MirrorEye. First, as you alluded to a different path effectively to market in North America as opposed to Europe. Could you maybe provide a little more color on that? And then also maybe a potential timeframe what your expectations are?

And then the second question is regarding the OEM sourcing decision. Can we assume that's the European OEM?

The -- so, let me answer the question with regard to the path to market. Because the way vehicles are designed and certified in Europe, you don't see a retrofit play for this activity. And because the legislation -- the vehicle legislation allows for the replacement of a mirror with a camera in Europe, that's why we believe it will go through the OEMs. And, yes, it's a European OEM that will make that sourcing decision toward the end of this year that we believe.

So that's point number one. The second point is, in the US, legislation still requires a 50 square inch mirror on the vehicle. That legislation has not been changed. So, we look at it as now the value proposition is more from a safety standpoint than it is from a aerodynamic standpoint.

And we've been working with OEMs to demonstrate what the product looks like and how their vehicles would look. And we've got a demonstrator truck that is running around all of the US to get feedback both from OEMs and from fleets. But what we believe here is that there will probably be a fleet adoption for the safety benefit before there is an OEM that would make a change, because there's not a legislative drive to make the change here.

Okay, perfect. Thanks, guys. Great quarter.

Thank you.

Thanks, Tristan.

Thank you. There are no further questions. I will now hand the floor back to Jon DeGaynor, Chief Executive Officer of Stoneridge, for closing comments.

Well, I want to thank everybody for their time today. And just to reiterate George's point, we are really excited about the momentum that the organization has, and how the quarter has looked, and what we have going forward into 2016. Thanks, all, for your time.

Ladies and gentlemen, this does conclude today's program and you may all disconnect. Everybody have a wonderful day.