Stoneridge Inc (SRI) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Stoneridge First Quarter 2018 Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. Matt Horvath, Director of Investor Relations. Sir, the floor is yours.

Thanks, Brian. Good morning, everyone, and thank you for joining us to discuss our first quarter results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted on our website at www.stoneridge.com in the Investors section under Webcast & Presentations.

Joining me on today's call are Jon DeGaynor, our President and Chief Executive Officer; and Bob Krakowiak, our Chief Financial Officer. Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties and actual results may differ materially. Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-Q, which has been filed with the 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 then open up the call for questions. (Operator Instructions] With that, I will turn the call over to Jon.

Thanks, Matt, and good morning, everyone. Yesterday evening, we released our results for the first quarter, in which we delivered another quarter of strong financial performance.

Let me begin on Page 3 with an overview of our financial performance for the quarter. Our first quarter sales of $225.9 million resulted in a gross margin of 30.1%, translating to an adjusted operating margin of 8%. Adjusted EPS for the quarter was $0.50, an increase of $0.12 or 33% relative to the first quarter of last year. This morning, we are increasing our 2018 full-year outlook for sales and earnings per share as a result of out-performance this quarter as well as our expectation of an improved revenue outlook for the remainder of 2018. In short, we expect improved revenue growth particularly related to Control Devices and Electronics.

Our full-year guided margin expectations remain intact, resulting in an improvement to full year midpoint EPS guidance. Bob will provide additional detail on guidance later in the discussion.

Our segments performed as expected during the quarter, with Control Devices delivering growth in our admissions and certain actuator products. As discussed last quarter, planned Shift-by-Wire revenue reductions more than offset our growth in other actuator product lines, leading to roughly flat revenue quarter-over-quarter for this segment. Revenue growth of 34% in our Electronics segment was driven by strong performance at Orlaco as well as the ramp-up of new programs. Additionally, the robustness of the commercial vehicle markets in both Europe and North America and favorable currency rates contributed to top line growth for the segment.

Sales at PST remained flat relative to the first quarter of 2017, primarily due to the impact of expected seasonality and unfavorable currency. Margin expansion continued for the segment, resulting in a trailing 12-month adjusted operating margin of 6%. This compares to a breakeven operating margin for the segment over the same period 1 year ago.

This morning, we are excited to announce pending new business awards of over $35 million in peak annual revenue, related to our MirrorEye and connectivity products. We will update our 5-year awarded business backlog when we receive the finalized contracts.

Page 4 provides a summary of key financial metrics for the first quarter compared with the first quarter of 2017, as well as a comparison for the trailing 12-month period. Sales increased by 11% to $226 million for the quarter. Adjusted gross profit improved quarter-over-quarter by 9%. However, gross margin declined by approximately 30 basis points, compared to the first quarter of 2017. While gross margin benefited from our continuous improvements activities, unfavorable mix on incremental revenue, launch costs, including overtime premium freight and scrap diminished the impact of base operational improvements in the quarter.

Adjusted operating income grew by 4% while operating margin declined by 50 basis points compared to the first quarter of 2017. During the quarter, we incurred higher net engineering costs due to program launches and investments in development activities. As we continue to ramp up recently launched programs, we expect to see improvements in operating margin in the coming quarters.

As we have discussed regularly, we focus on continuous improvement throughout the organization to drive cost reductions more broadly and over the long term through operation of manufacturing processes as well as our global supply chain. This continuous improvement focus includes engineering products that enable efficient production and improved quality. While change is continuous, the financial improvement related to these opportunities is not always linear as we experienced during the quarter.

Adjusted EBITDA improved by 13% and EBITDA margin improved by 20 basis points. The improvement in EBITDA margin relative to operating margin can be attributed in part to improved operating performance at our joint venture in India, which translates to improved equity earnings for Stoneridge. We expect the momentum in our joint venture in India to continue due to new business awards and operational improvements.

Our financial performance resulted in adjusted earnings per share of $0.50 compared to $0.38 per share in the same period in 2017, representing growth of 33%. We were able to achieve these results through continued top-line growth that exceeds our underlying markets and the focus on continued operating efficiency. We're pleased with the improvement in each of our key financial metrics and we remain committed to improving our execution in all facets of the business.

On page 5, I would like to provide an update on the segment-specific opportunities that will drive our success in 2018. In Control Devices, our revenue growth is and will be driven by our success in actuation and emissions products. In the quarter, this growth was more than offset by planned reductions in Shift-by-Wire volumes. In response to those reductions, we took steps to optimize our lever cost through relatively small but targeted cost reduction activities in our North American facilities. Additionally, we are implementing improvements to our production processes to address the premium freight, scrap and overtime cost that we discussed previously. We expect these actions, along with overall continuous improvement activities, to drive margin expansion for the segment.

As I mentioned earlier, we have significant new awards in the Electronics segment, including the MirrorEye OEM award. Our Electronics segment grew by more than 30% relative to the first quarter of last year. Our customers are recognizing our ability to deliver technology -- our customers are recognizing our ability to deliver technology-based solutions globally, which is driving record business awards. In addition, we continue to focus on the most prudent use of our engineering resources to facilitate growth in the segment and ensure that we support our global customers. Although PST experienced flat revenue growth relative to the first quarter of 2017, the mix of our revenue continues to shift toward higher-margin track and trace products. We expect revenue growth for PST for the remainder of the year as macroeconomic conditions appear relatively stable. Leveraging the existing cost structure will allow for continued margin expansion at PST. Each of our segments is well-positioned for continued success.

Turning to page 6. I'm happy to announce that we have an award pending for our first OEM MirrorEye program with a leading commercial vehicle manufacturer. Scheduled to start production in 2020, this program is forecast to generate roughly $13 million of peak annual revenue based on forecasted vehicle production and conservative assumptions around system take rates. We believe this award is just the beginning of the OEM opportunities for MirrorEye. We continue to work with a number of customers on development programs in anticipation of additional awards.

As we have discussed previously, MirrorEye is not just an original equipment application. One of the other opportunities is a retrofit opportunity, particularly with fleets in North America. Recently, we submitted a request to FMCSA for an exemption to the current regulation that requires an external side mirror. This exemption would allow MirrorEye-equipped trucks to completely remove the standard-size mirror. While the exemption is pending, we expect a favorable response later this year. With or without the exemption, the retrofit opportunity for MirrorEye is significant.

Additionally, we continued to explore other applications of our MirrorEye technology, such as municipal vehicle, passenger transport and off-highway applications. In fact, we have been awarded a relatively small program on buses operating in urban environments that will protect both passengers and the surrounding pedestrians. This award reinforces the fact that MirrorEye will change the safety environment, both on the highway and in our cities. Stoneridge is focused on bringing this technology to all applicable markets worldwide.

Overall, we expect MirrorEye to drive growth for our Electronics segment, starting with retrofit opportunities as soon as this year and OEM revenue beginning in 2020.

Turning to page 7. Additionally, we are announcing a significant pending award related to our connectivity products, which start production in early 2019 and peak annual revenue of $24 million. Our product our is a state-of-the-art connectivity device that allows our customers to deliver data services to truck owners and fleets via a cloud-based solution. This is an open platform that will facilitate classical vehicle management, advanced fleet management as well as dispatching and location-based services. As an open platform, with the ability to tap into almost any data in the vehicle, there are no limitations as to which services can be provided using our device. This award is truly a global award as we are leveraging our existing technologies, currently applied in Europe, to bring a product to the North American and Brazilian markets in an accelerated timeframe and support our customers as they incorporate added intelligence into their vehicles.

We continue to partner with our customers globally, and our footprint in Brazil is differentiating us from our competition. This award not only validates our global manufacturing and engineering strategy, but it also positions us to expand our product offerings to an important OEM customer. As we execute this program, we will continue to evaluate opportunities to expand our connectivity products and related data offerings with OEM customers to enable intelligent connected vehicle solutions worldwide.

Turning to page 8. We were honored with the Partnership Supplier Award from Daimler during the first quarter for our international launches of driver information systems for our Mercedes-Benz, Freightliner and FUSO trucks. Stoneridge is committed to deepening our partnerships with our customers and this supplier award, as well as the new business awards, is further proof that our efforts are being recognized. We are a proven global partner for both our passenger car and commercial vehicle customers. Partnering with some of the largest, most successful global OEMs in both the passenger and commercial vehicle markets will position Stoneridge for continued and accelerating long-term success.

Turning to page 9. I'm pleased with our achievements in the first quarter. As an organization and a leadership team, we not only delivered strong financial performance across the business but also identified and responded to opportunities and challenges across the organization. Over the last 3 years, we have built a culture focused not only on execution and continuous improvement but also on profitable growth. This morning, we announced awards related to our MirrorEye system and connectivity products. We continue to work with our customers to deepen those relationships and gain their confidence in order to grow the business. And finally, we are increasing our revenue and EPS guidance for the remainder of the year.

With that, I'll turn it over to Bob to discuss our financial results in more detail.

Thanks, Jon. Turning to slide 11. Net sales during the first quarter were $225.9 million, an increase of 11% relative to the first quarter of 2017. Adjusted operating income of $18 million or 8% of sales, represented a 4% increase over the same period last year. More specifically, Control Devices net sales of $117.5 million were in line with our expectations, decreasing by approximately 2% quarter-over-quarter.

Adjusted operating income of $18.4 million declined 4% relative to the first quarter of 2017 to 15.6% of sales. Electronics net sales of $100 million increased by 34%, resulting in adjusted operating income of $8.8 million or 8.7% of sales.

PST's net sales of $20.5 million decreased by 5%, resulting in adjusted operating income of $1 million or 4.8% of sales, an increase of 70% relative to the same period last year.

This morning, we are providing revised guidance on our 2018 financial performance, considering our first quarter performance and the revised view for the remainder of 2018. We expect continued top-line growth due to favorable end markets in our Control Devices and Electronic segments, the extensions of certain Shift-by-Wire programs and strong performance by PST for the remainder of the year. We are increasing the midpoint of our sales guidance by $30 million to a midpoint of $880 million, an increase of 7% over 2017. We are maintaining our guidance related to adjusted gross margin, operating margin and EBITDA margins with midpoints of 31.5%, 9.5% and 13%, respectively. We are also increasing our adjusted EPS guidance by approximately $0.13 to a midpoint of $2.13, an increase of 36% over last year.

Page 12 summarizes the key financial metrics in both quarter-to-quarter and trailing 12-month periods specific to Control Devices. Control Devices sales decreased by 2% relative to the first quarter of 2017. In the trailing 12 months, Control Devices revenue increased by 3% relative to the prior trailing 12-month period. This increase was driven primarily by strong performance in our actuation and sensing products and continued expansion in China.

Looking to 2018, we expect continued strong performance in our product lines, highlighted by the launch of our sensor line in Europe as well as continued growth in China as well as our actuation products outside of Shift-by-Wire. We expect Shift-by-Wire sales to continue to ramp down over the course of the year. However, our sales outlook for the year has improved due to platform extensions by our customers. Adjusted operating income decreased by 4% and adjusted operating margin decreased by 30 basis points in the quarter relative to the first quarter of 2017.

As Jon mentioned previously, the relative reduction in operating margin can be attributed to increased production costs in the quarter related to launch costs, including overtime, premium freight and scrap. We have identified opportunities to improve our processes and have implement countermeasures, including targeted cost reductions, which we expect to offset these issues and drive margin improvement for the remainder of the year.

As many of you are aware, Ford recently announced plans to exit certain North American passenger vehicles. I would like to provide some additional detail on our backlog related to these programs.

Our backlog has always accounted for the planned ramp-down of Shift-by-Wire, including products on these platforms. As we have disclosed previously, Ford is one of our largest customers, accounting for 14% of our sales in 2017. Through 2019, a majority of our sales to Ford on passenger car platforms are Shift-by-Wire products. Beyond 2019, less than 1% of our $3.3 billion backlog as of the end of last year is attributable to the passenger car platforms in Ford's recent announcement.

We continue to evaluate the long-term opportunities with the company as a result of Ford's plan, which would include extensions of existing platforms prior to elimination.

As our product portfolio continues to evolve, and in line with current automotive market megatrends, there may be additional opportunities for our products in the platforms that Ford introduces to replace the eliminated vehicles. I want to reiterate that our backlog has not been updated to reflect the MirrorEye and connectivity awards that Jon discussed previously.

We will update our 5-year awarded business backlog when we receive finalized contracts.

In summary, we do not expect Ford's announcement last week to have a material impact on our backlog. A high percentage of SUV, CUV and light truck business with Ford in North America will position our company well as our customer focuses on these platforms.

Page 13 highlights the substantial time-over-time growth in both revenue and adjusted operating income in our Electronics segment. Electronics sales increased by 34% relative to the first quarter of 2017, an increase of $25 million.

Orlaco continues to outperform our expectations as we again reported a step-up in the fair value of the earn-out liability during the first quarter, which brings our total accrued earn-out liability to the maximum payout 9 months earlier than expected. Our legacy business continues to perform well with strong commercial vehicle volumes driving top line performance during the quarter.

We expect our Electronics segment to continue to deliver growth as forecasts are suggesting a robust commercial vehicle market in Europe and North America. Recent product launches in this segment continue to drive revenue growth. In addition, we anticipate continued strong performance in the aftermarket by Orlaco and the addition of MirrorEye retrofit revenue later this year. Adjusted operating income increased by 34% in the quarter, relative to the first quarter 2017. Operating margin remained relatively flat compared to the first quarter of 2017, as a result of higher net engineering costs due to program launches and investment in development activities.

While we will continue to incur launch costs across our product portfolio and design and development costs related to MirrorEye in 2018, we expect the Electronics margin to continue to improve as the year progresses. Electronics continues to deliver solid financial performance, led by a strong product portfolio, which will deliver growth greater than the businesses' underlying market.

Turning to page 14. PST had sales of $20.5 million during the quarter, a decrease of 5% versus the first quarter of 2017, primarily due to unfavorable exchange rates. Over the past 12 months, PST delivered 9% revenue growth over the prior trailing 12-month period. PST continues to drive improvement in margin by levering -- by leveraging fixed costs and growing in higher margin product lines, including our track and trace business. Adjusted operating income improved by 70% relative to the first quarter of 2017, while our operating margin improved from 2.7% to 4.8% during the current quarter. We remain cautiously optimistic about macroeconomic conditions in the region and expect PST to convert revenue growth for the remainder of 2018, into improved bottom line performance. Additionally, we continue to explore opportunities to drive growth in Brazil by introducing products from our Control Devices and Electronics segments into the region.

Moving to Slide 15. This morning, we are increasing our full year midpoint guidance for sales and adjusted earnings per share. We are revising our sales guidance up to a midpoint of $880 million, implying a midpoint-to-midpoint increase in our guidance of $30 million. Our midpoint guidance implies $56 million of incremental revenue or 7% growth year-over-year. We are reaffirming our margin guidance and revising the midpoint of our full year EPS guidance up by $0.13 to $2.13, an improvement of 35% year-over-year. The increase in our year-over-year adjusted earnings per share is consistent with our historical contribution margins on incremental volume of 2x to 3x our EBITDA margins. We expect to continue to outperform the growth in our underlying markets and drive margin performance through continuous improvement in our base operations.

Moving to slide 17. In closing, we are pleased with our performance during the first quarter, in which we delivered strong results for all our key financial metrics. Our updated 2018 guidance results in revenue growth of 7%, gross margin expansion of 120 basis points and operating and EBITDA margin expansion of 140 basis points. This results in increased EPS guidance to a midpoint of $2.13, an increase of $0.13 relative to our prior outlook. Stoneridge is committed to driving shareholder value through strong financial performance and profitable long-term growth.

With that, I will open up the call to your questions.

(Operator Instructions) And our first question will come from the line of Christopher Van Horn with B. Riley FBR.

So if I look at your guidance, you've obviously maintained the guidance rate on the margin side, raised it on the revenue side. It's implying a pretty significant sequential margin expansion as we head throughout the year. And I just want to see if we can identify some of the -- is there some big levers that caused that to happen? Is it lower launch costs or higher margin business rolling on, just some more detail there, if you don't mind.

Yes, Chris, thanks for your question. And as we've talked about during the call, we had a series of noncontinuous activities happen as part of the launch with premium freight, scrap costs and overtime that we don't expect to continue. So there are action plans that are in place. There are specific teams that are working to address each of the top 10 items. And we're very confident that we will see that -- see the improvements in each of those areas and address the one-off items that we talked about in the call.

Okay, great. And then, if I look at the FMCSA exemption decision timing, what has to happen in order for that to move favorably? And is there an opportunity still from MirrorEye if you don't get that exemption? From the way I understand it is, it can be on a vehicle even with the mirrors and just is an added safety future as well, just for clarification there.

Yes, so let me answer the first piece -- or the second piece first, Chris. MirrorEye does not need the FMCSA exemption that we put on the truck. What we see -- and therefore, to get the safety benefits, they don't need the FMCSA exception. However, the FMCSA exemption, which is a process of we apply for the exemption, they publish it and there is a period of public comment and then there's MEC, which is 30 days, and then there is 90 days in which they have posted the public comment to make those decisions. So we've submitted our proposal. It's out in the process of public comment currently, and we expect within 90-ish days to be in a situation of having the answer. And it's a 5-year exemption from there. But what we see and what we hear back from the fleet is they want that. Not only the safety benefit of MirrorEye, but side mirrors do have a fuel economy impact. And more importantly, they have a maintenance cost because it's an opportunity to damage the product, to damage the mirror. So it's a maintenance cost. So they want the benefit of taking the mirrors off. But in order to get the safety benefit, they don't -- we don't need to have the FMCSA exemption in order to do that. And so we're working with -- we're in fleet trials today where the mirrors are not pulled off.

Yes, that's important. We're in fleet trials today where the mirrors are not pulled off and the response has been overwhelmingly positive even with the mirrors on the vehicle.

And then just one final one from me. Congratulations on the intelligent vehicle win here. How big is that business today? Because the wording, it sounds like this is a business you're already in? Where do you see this kind of opportunity going forward? Because this is a pretty significant win in our view.

Yes, it's a significant win. We don't break out the segments within Electronics down at that level. But I would say that this is -- within connectivity, this is a significant win. It builds upon a platform that we're already selling in Europe with at least 1 OE customer. And what we expect to see is that more and more OE's are looking at what do they do to manage and control the data that's on the truck. And we're getting more and more of these questions from our OEM partners. So this win is significant. The fact that it's both in North American and in Brazil is meaningful, and the fact that it builds upon a set of core competencies that we already have developed means that we get to leverage our engineering as opposed to doing something bespoke.

Right, I would add onto Jon's comment that what I think is really important to mention regarding this win as well is, we're looking at a launch on this product in March of next year, which, when people in the automotive supply base talk about awards, you're generally talking about a 2- to 3-year timeframe in terms -- from the time that you receive a purchase order to the time that that program goes into production. And that just really speaks volumes to the fact that we have the installed base and software, we've got the system in place to be able to turnaround a production system and in that kind of timeframe just really, I think, speaks volumes to the capability of our teams around the world.

And our next question will come from the line of Justin Long with Stephens.

So maybe to follow up on that last question on the global connectivity program win. That was obviously a nice win. With MirrorEye, you've given us some help and kind of framed up the addressable market as you see it today. Is there a way to think about the addressable market, and a way to think about the competitive landscape for that product offering?

So the addressable market we see, Justin, is -- it's difficult for us to frame it. It has the ability to go across all trucks. It's something, if you look at some of the announcements that have been made by the OEs with regard to what they're trying to do, with regard with -- regarding data control in their vehicles, what we see is all the OEs are trying to do a better job of controlling the information that's flowing through their truck. This connectivity module is the tool to do that. So we look at it as -- this isn't a takeaway. Ultimately, it will be across all trucks. So that's piece #1. Secondly, this is a competitive activity. We won the bid competitively. Our footprint, our technology and our cost structure allowed us to win it comparatively. And we feel like we can support a customer in North America, in Europe or anywhere else around the world, in order -- as they have these needs and make -- try to offer more services to their customers.

Okay, that's helpful. And secondly, I wanted to ask about the 2018 revenue guidance. It went up by $30 million. I was wondering if you could help us understand how much of that was from Shift-by-Wire platforms getting extended versus a better market outlook. And also curious if you have the contribution -- the revenue contribution from Shift-by-Wire in the first quarter.

Yes, so Justin, thank you so much for the question. So really, the guide on the increase of revenue is -- it's really not about -- it's not about Shift-by-Wire extensions. It's really more about our end markets and our customers, outperforming, really, just the overall base market. So I would say, categorically, if you look at where we have planned our volumes versus what's actually occurring with our customers, across the board, if it's IHS in North America, LMC in North America, or LMC Europe, our customers there are gaining share and we're participating in that because we're on the right -- our programs are on the right platforms. It's more of a story of that type of growth versus Shift-by-Wire getting extended for a period of time.

Okay. On that second question, do you have what the Shift-by-Wire revenue was in the first quarter? And is there any color you can provide on how you expect that to ramp down over the course of the year?

I don't -- we haven't disclosed what the Shift-by-Wire -- we haven't disclosed that ramp-down, but really, Justin, we've given you that information. If you think about the platforms, we've provided the platforms that we're on. We've given the average selling price of the products. If you go and look at the IHS data, you can look at those platforms and you can calculate what the ramp-down looks like.

But I think is important to note, Justin, that this isn't just a 2018 ramp-down. This is a ramp-down over the balance of the vehicle life. So you're talking about ramp-downs in '20 -- end-of-life in 2020 or 2021. So it's not as though it goes from full volume to 0 within calendar year of 2018. It's been within our plan, it's at the rates that were basically within our plan, and we're adjusting our facilities for the ramp-down.

Okay, great. And I guess last one for me, I wanted to ask about free cash flow. But when we think about the conversion ratio of net income into free cash flow, is it reasonable to expect that ratio to be around 100% in both 2018 and beyond?

I think, Justin, that's a reasonable assumption, yes.

And our next question will come from the line of Scott Stember with CL King & Associates.

You guys talked about I guess having a certain level of confidence that the approval for MirrorEye here in the U.S. or North America will go through. Can you maybe just got talk about some of the, I don't know, what's supporting that confidence? Is it just what you're hearing from the end customers that are testing it? Or is it -- is there anything else, any other back-channel communications that you're having which suggest that you're feeling pretty good without it?

Well, first and foremost, it starts with we've used all of our partnerships via the OEs, via the fleets to get feedback on the product and see where they would line up. So part of this is making sure that there's whole, and that they would agree with the approach. Secondly is, we've given the regulators an opportunity to drive the truck and see the benefits of -- from a safety standpoint, see the benefits of the product. So based on the fact that the feedback that we've gotten from the regulatory bodies, what they see is the benefit of the product or the technology, the feedback that we've gotten from the OEs and what we see during our fleet trials, we feel highly confident that we will get the approval. But I must say it one more time, I don't believe that that is a make or break for the application of the product. The safety benefits come regardless of whether the side mirrors are pulled off.

Essentially, there is a market for it if, like you said, from a safety standpoint.

There's absolutely a market. And Scott, we've talked about this fairly consistently. If you look at the expenses that commercial vehicle operators have. Insurance is one of the top 3 and it's the fastest growing of those 3 from a rate year-over-year. The ability for us to help them avoid blind spot accidents, and that's really where MirrorEye comes into play, it's a supplement and it's something that they want, and we have gotten that -- we believed it and we've gotten consistent feedback from the safety leaders in the industry and from our fleet trials.

Jon, let me add to that, and correct me if I'm wrong, but I believe that the requirement, you can go down to a 50 square-inch mirror, which significantly restricts the visibility for the drivers. So I would even say if the fleets go down -- if the commercial vehicle industry goes down to a 50 square inch mirror, we're going to -- they're going to come out of that with some sort of vision system.

Yes, they have to.

They have to.

Got it. And also, just on the topic, it sounds like you're expecting some retrofit opportunities in the back part of the year. Is that in your guidance?

Well, the answer is yes and yes, but the number is relatively small. It's -- what we're looking at there is a broader proof of concept. We have fleet trials going right now. We see some small level -- low-level revenues in 2018, but it's really more of an expanded proof of concept than anything else. It's not on the same order of magnitude as the OE program. But what we want to make sure is that we have done our work and that we have validated the product and made sure that we've got the appropriate level of feedback from the fleet -- the fleets and the drivers to make sure that our product is what they need to make their vehicles safer.

And just a couple of last quick ones. You did mention some other opportunities that you've talked about, I guess, on buses for MirrorEye. What about for motorhomes, RVs? I think that that would be a very big selling point on $150,000 to $200,000 motorhome.

Yes, you're right, you're right, Scott. And our challenge right now is the list of opportunities is quite long. Creative people are continuing to find additional opportunities, and it's -- as we talked about during the presentation earlier, it also is applicable in off-highway, it's applicable in construction equipment. It really builds -- the technology that we're developing there, it builds upon the Orlaco base end markets as well. What we're trying to make sure is that we have a platform of technology that is robust and then we apply it in as many ways as possible. But the starting point is make sure that you have the technology platform robust, and then we can execute it in multiple end markets. But you're right, that the motorhome space is also an opportunity for us.

All right. Just last question on PST. You talked about how foreign currency was largely responsible for the sales decline. Do you know what the constant currency number was? And just talk about -- you did talk about how you expect sales there to improve as the year progresses. Maybe just talk about why.

Yes, so the impact for PST for currency year-over-year was a couple of hundred thousand dollars.

Here's the thing, Scott, comparing quarter-over-quarter, one thing you have to understand is, PST currently is a 100% aftermarket business. So retail channels and basically consumer channels drive this. And so timing of things like when Carnival happens, whether it happens in Q1 or Q2, will actually change how a quarter looks because of buying habits -- or Easter.

(inaudible)

What we see within PST is compared to where we were a couple of years ago, there's much greater stability in the base economics. I'm not so worried as much about quarter-over-quarter as I am how does the total economic progress in the country. But secondly, this connectivity award that we just got is really important because it's also a Brazilian OE program, and we are incredibly excited about that programs and others that are in the pipeline that will transition PST from being solely an aftermarket and to consumer business to having OE programs and us being able to support our OE customers in that important end market for them.

And our next question will come from the line of Gary Prestopino with Barrington Research.

Most of my questions have been answered. But could you -- was there any currency impact in Electronics? And is that all organic growth, that 34%?

So the majority of the growth in Electronics -- there was a little bit of currency in Electronics year-over-year, but the one big part of Electronics was the -- is the annualization of the Orlaco acquisition.

Okay, all right. And then in terms of the MirrorEye, is most of your retrofits opportunities right now in North America? My understanding is Europe is not going to be a big retrofit market, or am I incorrect there?

Yes, no, Gary, your -- our assumptions are, for the near term, that the primary retrofit opportunities are in North America, just because of the difference of the way European trucks are certified versus the way U.S. trucks are certified. It doesn't mean that there won't be an opportunity there. But the starting point in Europe is in OE application, whereas here, we see both the opportunity for retrofit and OE application.

Okay. And then just getting back to your -- the new award on connectivity. Is there any -- I know this is new for you but is there any retrofit potential there as well over time?

Yes. It's not considered in that business award, but there certainly is the opportunity for retrofit and it was one of the considerations for us winning the business versus some of our competitors.

And we have a follow-up question coming from Justin Long with Stephens.

I just wanted to ask about Park-by-Wire, there hasn't been a lot of discussion on that topic during the call. I wanted to see if you could provide an update on where we are in the Park-by-Wire sales cycle. And is there any color you could give us on a reasonable way to think about the timeline for new contract announcements on that front?

Well, what we -- so let's talk first. We're in the process of basically finalizing the development with a ramp-up of that product in 2019. Some of the announcements from our customers with regard to what they're doing on their platform choices, we actually think will create more opportunities for our Park-by-Wire as they try to do more with hybrid powertrains and electric drivetrains. So for us right now, Justin, the most important thing is launching well, bringing the credibility with the customers and being able to demonstrate our execution as they're trying to figure out what they're doing with their platform. So there's nothing short-term from an award perspective, but it's really important getting it started, getting it amped up, and being viewed as that supplier that can help them as they're trying to set their future platform strategies.

Makes sense. And I guess the last question for me. Balance sheet's in pretty good shape today. Wanted to ask about capital deployment going forward. What does the acquisition pipeline look like right now? And how are you thinking about allocating capital via acquisitions versus potentially a buyback?

Thanks for the question, Justin. So we are -- we have a very active pipeline. We're looking at a number of opportunities. We're very pleased with the acquisition of Orlaco. I mentioned earlier that 9 months ahead of time, we'll be previewing that on the Orlaco deal, and that just speaks to the success of that transaction. Alluding to strategy, we're -- strategy has not changed. We're looking at product extensions and we're looking for opportunities to expand our existing product line with different customers and different regions of the world. And we have a number of opportunities that we're evaluating. And in terms of how we look at our alternatives, we look at them like any prudent investor would. We look at opportunities in terms of M&A, really, the same way that we look at repurchasing our own stock and whatever makes -- whatever has the highest NPV for our shareholders, we'll pursue that path. You're right, we're very, very comfortable with the strength of our balance sheet. We're very well positioned, and we are evaluating a number of opportunities and hopefully I'll have more to say about that in the near future.

And Justin let me just add on top of that, part of our continuous improvement activities and our focus from an organizational standpoint on the ability to execute, is also our ability to execute growth through acquisitions, and our confidence in the organization, in order to be able to do that, so that we deliver the right returns to our shareholders. Orlaco is an example of that, and we will continue to look at the right things to add on to Stoneridge in order to accelerate our growth. It's exciting for myself and the leadership team as we talk about how to really take Stoneridge into the next phase of accelerating our growth.

Thank you, and I'm showing no further questions at this time. So it's my pleasure to hand the conference back over to Mr. Jon DeGaynor, Chief Executive Officer, for some closing comments or remarks.

Well, thank you, and thanks, everybody, for your questions and the participation in today's call. In closing, I can assure you that our company is committed to continuing to drive shareholder value through strong operation results, profitable new business and focused deployment of our available capital. We're confident that the actions that we are taking will result in continued success in 2018 and beyond, and we look forward to speaking to you in subsequent quarters. Thanks very much.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program. And you may all disconnect. Everybody, have a wonderful day.