Stoneridge, Inc.

Ladies and gentlemen, welcome to StoneReach first quarter 2020 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If you should require assistance during the conference, please press star then zero on your touch-tone telephone. I would now like to hand the conference over to your host, Mr. Matt Harvest, so you may begin.

Great, thank you. 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 someridge.com in the Investors section under Webcasts and Presentations. Joining me on today's call are John Degainer, our President and Chief Executive Officer, and Bob Prokowiak, 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 John and Bob have finished their formal remarks, we will then open up the call to questions. I would ask that you keep your questions to a single follow-up. With that, I will turn the call over to John.

Thanks, Matt. Good morning, everyone. Let me begin on page three. During our fourth quarter call, I outlined several operating initiatives aimed at improving profitability in 2020 and more specifically, reducing material costs and improving operating efficiency and manufacturing processes to reduce overhead and labor costs. During the first quarter, we executed on those initiatives and the results of the efforts were evident in the performance in the quarter. Our first quarter sales of $183 million resulted in an adjusted gross margin of 25.7%, translating to an adjusted operating margin of 3.3%. Adjusted EPS for the quarter was 20 cents. This is inclusive of the COVID-19 impact. Based on estimated customer orders and operating performance prior to the COVID-19 impact, we estimate that the global response to the pandemic impacted quarterly sales by approximately $16 million and impacted adjusted operating income by approximately $4.7 million or 210 basis points. We have taken several actions to temporarily reduce costs in response to the virus to drive financial performance and preserve cash as we adjust to reduce customer demand and federal, state, and local laws impacting our global facilities. Additionally, we took actions to reduce our structural costs based on our longer-term and market outlook and to ensure our resources are aligned with future growth opportunities. The future of Stone Ridge has its foundation in talent and technology, and on April 1, we announced that Jim Zizelman joined Stone Ridge to lead our control devices business. Jim will be responsible for driving business performance, product development, innovation strategy, and technical vision for the segment. Jim had previously been consulting for Stone Ridge after a lengthy career with DelphineActive, where he was most recently the Vice President of Engineering and Program Management. And last week, we were awarded a 2020 Automotive News Pace Award from Mirai. Since 1994, The Pace Awards have celebrated superior innovation, technological advancements, and business performance among suppliers. This prestigious award is recognized globally as the industry benchmark for innovation and acknowledges those suppliers that develop a viable solution for future mobility needs and bring it to market. Mirai was evaluated by independent Pace Award judges and excelled on its march for innovation, customer acceptance, Competitive Impact, Performance Measures, and Environmental Impact. We are honored to be recognized for the impact MIRAI will have on the industry. Finally, due to the continued uncertainty regarding the expected impact of the pandemic, on March 30, we withdrew our 2020 guidance. We will revisit our 2020 guidance once we have the ability to more clearly define and quantify the expected impact to Stone Ridge. Bob will provide additional details on our expectations for the remainder of the year, including an update on our balance sheet strength and leverage position later in the call. Turning to page four. Page four provides additional detail on our quarter to quarter progression on both sales and operating income, highlighting the management team's focus on continuous improvement while managing through the current environment. Revenue in the first quarter was approximately flat compared to the prior quarter. Revenue Growth and Control Devices, primarily related to our actuation and emission sensor product lines, was offset by declines in the aftermarket and mass retail business within Stone Ridge, Brazil. Based on customer orders prior to the global actions taken to combat the virus, we estimate that the impact of COVID-19 on sales was approximately $16 million in the first quarter. Quarter to quarter, adjusted operating margin increased by 50 basis points. We estimate the impact of COVID-19 on adjusted operating income to be approximately $4.7 million or 210 basis points. The improvement in operating margin versus the prior quarter was primarily the result of improved gross margin of 170 basis points led by reduced material and overhead costs of 80 and 90 basis points respectively. Quarter to quarter tariff expenses were reduced by approximately $600,000. and electronic component related costs were reduced by approximately $700,000. During the fourth quarter, we outlined a plan to improve adjusted gross margin in 2020 by approximately 130 basis points by reducing material costs, improving manufacturing and delivery processes, and improving operating efficiency. During the first quarter, we delivered on those commitments and improved profitability in our facilities. While we expect reductions in volume for the remainder of the year, We also expect that our facilities will continue to execute at a high level and limit controllable costs where possible. On page five, as it relates to reduced production volume expectations, the most recent IHS and LMC information for our OEM and end markets quarterly and for the full year are covered. Given the significant amount of downtime for most of our global customers during the second quarter, IHS and LMC are forecasting declines of approximately 50% in our weighted average end markets in the second quarter, followed by approximately 16% in the third quarter and 14% in the fourth. For the year, our weighted average end markets are forecasted to decline by approximately 23% relative to our previously provided guidance. We expect similar disruption in our aftermarket and non-OEM markets, which primarily consist of Orlaco and Stone Ridge, Brazil. Turning to slide six. As a result of both the production and customer production levels, as well as federal, state, and local mandates, each of our production facilities around the world has been impacted to some degree, varying from reduced utilization to full plant idling. As we return to production, we will take the necessary steps to ensure our employees remain safe while we continue to support our global customers. In North America, Our facility in Lexington, Ohio, which produces control devices products, has adjusted operations to satisfy ongoing customer demand. The plant has been operating at approximately 40% of typical utilization since late March. Based on conversations with our customers, we expect production schedules to begin to ramp up in the middle of May. Our Juarez, Mexico facility, which supplies both our electronics and control devices segments, has been closed since April 9th in response to local government regulations. Based on ongoing discussions with our customers and with the local government, we expect production to begin in Juarez in mid to late May with a ramp-up period in advance of full production. In Europe, each of our facilities primarily support the electronics business. Our facility in Orbo, Sweden, has been operating at approximately 40% of typical utilization since the beginning of April. Commercial vehicle customers generally restarted production in late April, and we expect to ramp up to follow their demand over the next several weeks. Similarly, in Tallinn, Estonia, our facility was idled since the beginning of April and began ramping back up this week. At Stone Ridge, Alaco, and Barneveld, Netherlands, our facility has been running at reduced schedules since the beginning of April due to reduced customer demand from both our on- and off-road customers. We are expecting a ramp-up of production over the summer as our global customers restart and ramp up their production. In Brazil, our facility in Manaus was closed for three weeks in early April and restarted in late April on a reduced production schedule in line with customer demand. We continue to monitor the local market and will adjust our production schedules to ensure employee safety and to align with customer demand. In Asia, we are seeing continued ramp-up in our facility in Suzhou, China, We are currently operating at approximately 80% of capacity as local customers are back online following similar shutdowns. We continue to experience reduced demand for exported products to Europe and India and expect to see a ramp up as those customers resume production. Finally, our joint venture facility in Pune, India is currently idled and is expected to restart in mid to late May. Where production has been limited by customer demand, rather than regulation or employee safety concerns, we are taking advantage of downtime to make cost-saving progress in some areas that were not possible while we were running at full production, and to ensure that we are prepared to ramp up efficiently and evenly as the customers come back. We are optimizing our inventory levels, including the balance between finished goods and raw materials in each facility to better prepare for customer ramp-ups and schedule variation. We have completed preventive and required maintenance that could have otherwise required downtime in the plants. And finally, we have completed training programs for our employees who would not typically have had the opportunity to complete those programs when we are running at full production. We are focused on controlling the factors that we can control and putting ourselves in the best possible position to efficiently ramp up production around the world. And we are committed to ensuring the safety of our employees and complying with all regulations and suggested guidelines while serving our global customers who may in many cases be essential businesses or support essential businesses. We will continue to adjust our production schedules and operations as required while limiting the impact on our employees where possible. Turning to slide seven. Our leadership team, cost focus and conservative balance sheet have prepared us for the current market turbulence. That said, we have taken additional actions to reduce costs in order both Thank you for joining us. In addition to these temporary cost reductions, earlier this week we reduced our global salary workforce by approximately 5%. A portion of these reductions were planned as part of our continuous transformation of the business to ensure our resources and cost structure remained aligned with the best opportunities for the company moving forward. However, as a result of the expected impact of COVID-19, in some functions we expanded our planned reductions to adjust for our revised market outlook. I want to be clear. These reductions were not simply evenly spread throughout the organization and were strategically focused to align resources with opportunities and to drive future profitability and growth. These reductions will not impact our ability to launch the programs that comprise our substantial backlog or preclude us from investing in the technologies that are the future of the company. We expect that these more permanent actions will result in $3.5 to $4 million of savings this year with an annualized impact of approximately $5 to $6 million beyond 2020. Given that the cost reductions occurred primarily in the second quarter, we do not expect to recognize the full impact of these reductions during the second quarter. However, we should see the full impact for the second half of the year. As a result, we expect that our second quarter decremental contribution margin will be on the high end of previously discussed 2.5 to 3 times EBITDA margin range. Finally, although we were well positioned for a downturn and our balance sheet remains strong, we have taken additional actions to preserve cash flow in the short term and optimize our working capital position as we ramp back up to normal production levels. Bob will discuss our leverage position and expectations for cash flow in further detail later in the call. Turning to page eight. We recently welcomed Jim Zizelman to the team as president of the control devices business. Jim's background aligns well with our strategic plan as he brings experience in both vehicle components and system development, as well as overall technology strategy. Jim has deep experience developing products for global customers, growing profitable businesses, and creating high-performance organizations. Jim is responsible for driving business performance, commercial relationships, product development, our innovation strategy, and technical vision within the segment. Jim will also be a valuable addition to the Stone Ridge leadership team. Prior to taking the role, Jim was a consultant for StrongBridge, and prior to that, Jim spent more than 20 years with DelphineActive, where most recently he was the Vice President of Engineering and Program Management. Turning to page nine. In summary, in the first quarter, we delivered our operational goals of driving reduced material and overhead costs through very specific operational initiatives, resulting in improved gross margin quarter to quarter. We took decisive actions to respond to reduced customer demands in our facilities, and right size our cost structure with a focus on 2020 and beyond. We will continue to execute on the things that we can control and respond effectively and efficiently to the changing macroeconomic environment. Our long-term strategy remains robust and we remain well positioned to outperform our underlying markets. With that, I'll turn it over to Bob to discuss our financial results in more detail. Thanks, John.