Stoneridge, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Stone Ridge second quarter 2020 conference call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Matt Horvitz, Director of Investor Relations. Thank you. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us to discuss our second quarter results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted on our website at StoneRidge.com in the investor 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 TEN-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 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 question to a single follow-up. With that, I will turn the call over to John.

Thanks, Matt, and good morning, everyone. This morning, we're going to discuss our performance during the quarter, as well as some exciting news for the company. However, before we get started... I want to take a minute to recognize the fact that the global health crisis we are experiencing does more than impact the bottom line for the company. It also directly impacts our employees and their families. We've sought to protect our employees to the greatest extent possible. For example, we have partnered with local authorities to construct a field hospital in Manaus, Brazil, and have instituted rapid COVID testing capabilities in our Juarez, Mexico facility. Our employees around the world have allowed us to continue to make progress as a company and to support our customers. I want to personally thank them for their dedication to StoneRidge during this challenging period. Let me now begin on page three. On our first quarter call, we outlined several actions we were taking to respond to current market conditions and position the company for future growth. During the second quarter, we executed on those actions resulting in strong operating performance despite significant revenue headwinds. We continue to focus on controlling the things that we can and responding efficiently and effectively to external factors. In the second quarter, despite a 45% reduction in revenue relative to the first quarter, our decremental adjusted operating margins remained in line with our expectations of approximately 30%. As Bob will discuss later in the call, we expect that the incremental contribution margins we will see as production continues to ramp up in the second half of the year will exceed the detrimental margins we experienced in the second quarter. We were able to limit cash burn in the second quarter to approximately $11 million, which was better than the $15 to $20 million we outlined on our first quarter call. Our liquidity remains strong with total available capital of over $300 million. Based on current production forecasts, a continued focus on inventory reduction, and efficient cash management, we expect third quarter cash generation to at least offset The second quarter increase in net debt. Despite challenges associated with COVID-19, we continue to transform the organization and position the company for long-term profitable growth. During the second quarter, we announced the exit of our soot sensor product line as we continue to focus on aligning our resources with the highest growth opportunities for the company. Due to the expectations for reduced end market demand for diesel powertrains and relatively poor financial performance of the product line, we chose to redeploy resources to higher value platforms and technologies. One example is our Mirai platform. We have been able to continue to advance our Mirai progress with both our fleet and OEM customers. During the third quarter, we will expand our retrofit installation programs with three of our fleet partners, two of which have already been completed as of this call. Those three fleets represent approximately 6,000 trucks on the road today. In addition to the continued ramp-up of our retrofit programs, We have partnered with Daimler Trucks North America to offer prewire options for mirror eye retrofit systems. This prewire option reduces retrofit time and is a critical step in the adoption of this technology. Orders will begin for prewire trucks in the third quarter. Due to the continued uncertainty regarding the expected impact of COVID-19, this morning we will not be providing updated 2020 guidance. However, we will continue to provide additional details regarding our expectations for the remainder of the year, which Bob will discuss later in the call. Page 4 summarizes our key financial metrics quarter to quarter. Due to prolonged shutdowns or significant reductions in production, revenue declined by 45% from the first to second quarter, falling to just under $100 million. The impact was greatest at control devices, where sales fell by approximately $50 million Thank you very much. However, we were able to manage decremental conversion to approximately 30% as we focused on efficient response to the rapidly evolving global crisis. We will continue to flex our cost structure, which we expect to drive strong incremental margins as global production returns to a normalized state. During the quarter, we remained focused on managing our cash position, and we were able to limit cash burn to approximately $11 million, versus our expectation of $15 to $20 million outlined on the first quarter call. Our available credit remains strong, while our net debt to trailing adjusted EBITDA ratio is 2.3 times. Turning to page five, while COVID-19 had a significant impact on the quarter, we started to see a return to semi-normalized production by June. We expect that the sales run rate at the end of the second quarter will remain consistent in the third quarter. As production continues to ramp up, We are starting to recognize the benefits of the cost reduction actions we executed in early May and remain on track to recognize the savings we outlined on our first quarter call. Relative to the first quarter, we reduced SG&A expenses in the second quarter by approximately $7 million, which includes a reduction in our annual incentive programs. We have taken the appropriate actions to right-size the company for current market conditions and expect to continue to see those benefits for the remainder of 2020 and beyond. In contrast to reductions in SG&A, we have maintained our investment in engineering and advanced development. We will continue to invest in the platforms and technologies that will drive future growth and fund that investment through appropriate structural cost reductions and continued focus on improved operational performance. Moving to slide six, in addition to maintaining our investment in engineering activities, We continue to evaluate our portfolio to ensure that our investments are directed to the opportunities that will drive profitable growth for the company. As a result, during the quarter, we announced our intention to exit the Soot Sensor product line and focus those resources in other areas of the company. This decision was made in part due to the reduced market expectations for diesel powertrains and passenger vehicles, as well as the relatively poor financial performance of the product line. While this strategic activity was started prior to COVID-19, we took advantage of available capacity in our production facilities during the crisis to accelerate the exit of the product line. This is a good example of our leadership team's ability to quickly adapt to changing market conditions to drive our overall strategy and look for opportunities to take advantage of an otherwise difficult situation. We expect production to end for the product line by the first half of 2021. Once we conclude the exit of the product line, we expect annual revenue to be reduced by approximately $30 million relative to our prior expectations. However, due to the poor financial performance of the product line, we expect exiting the product line to be margin accretive going forward. Although we don't anticipate any other significant portfolio rotations at this time, we continuously evaluate our portfolio, our return on resources, and our opportunities to ensure that we are focused on the products and systems that will drive financial performance for the company. Slide 7 outlines the most recent IHS and LMC information for our OEM end markets. As a result of the ramp-up in production from most of our global customers during the second quarter, the current IHS and LMC forecasts improved slightly relative to the forecasts provided during the first quarter earnings call. Full year 2020 production improved by 1.3% relative to prior expectations. Our weighted average end markets are forecasted to increase by 4.4% in the third quarter, followed by a slight decline of approximately 1.7% in the fourth quarter. Looking beyond 2020, we are starting to see signs of recovery in our end markets as IHS and LMC are forecasting that our weighted average end markets will grow by approximately 16% in 2021 compared to 2020. That growth is led by North American and European commercial vehicle markets, where growth is expected to be 25 to 30 percent, followed by the North American passenger car market where growth is expected to be approximately 15 percent. Turning to page eight, this morning we have several exciting updates related to our Mirai programs. As we discussed in our last call, COVID-19 limited our ability to roll out larger retrofit installations in the first half of the year. As we have moved into the third quarter, our customers have been able to expand their installations. We have completed two installations of approximately 50 units per fleet and have another planned by the end of the quarter as part of a larger retrofit rollout program. In total, the three fleets we are expanding our installations with represent approximately 6,000 trucks on the road today. One of the three fleets has indicated their plan to equip their entire fleet with Mirai over time. This is the first such indication we have received from our fleet partners. In addition to expanding on our retrofit installations, this morning we announced that Dynalert Trucks North America is the first OEM that will offer a factory installed prewire option for Mirai retrofit systems. We continue to look for ways to reduce installation times and ultimately make the system more broadly available to our end customers, the fleets. We understand that DTNA has already received orders for the prewire option from one of our existing fleet partners and expect those trucks to go into production in the third quarter. As we move toward the launch of our first OEM programs, our customers will have several ways to make sure that the vehicles that they order or the vehicles that are currently on the road are able to take advantage of the Mirai technology to dramatically improve safety and fuel efficiency of their fleet. Turning to page nine, as we've outlined previously, over the last three years, we have been awarded record new business and are in the process of launching a number of large programs that will drive revenue growth. These programs will drive organic growth in addition to the growth in forecasted production in 2021 and the ramp up of our mirror eye retrofit programs. Over the next several years, we will launch a number of new programs in our powertrain actuation product lines in North America and Asia. Our existing Park by Wire programs, which began late last year, will continue to ramp up this year before expanding with additional platforms in 2022. These programs account for approximately $40 million of peak annual revenue which is incremental to our existing base business. In addition, the launch of our Ship by Wire programs in China over the next two years are expected to generate an additional $25 million of peak annual revenue. In addition to our Park by Wire and Ship by Wire launches, we continue to see significant growth opportunities for our emissions products as we expect to take advantage of powertrain transformation in North America and increasingly stringent emissions regulations in China. Shifting our focus to electronics in Stone Ridge, Brazil, we are launching two large driver information systems programs next year. The first is an extension of an existing global program with peak annual revenue of over $55 million. The second was a conquest award that will provide $38 million of peak annual revenue with a launch timeline early next year. These programs will be followed by two smaller programs, including one in Brazil, worth approximately $18 million of peak annual revenue. Over the next three years, we expect to launch driver information system programs resulting in revenue of over $110 million annually, of which approximately half is incremental to our existing programs. Our first two OEM Mirai programs will launch in early 2021 with peak annual revenue of approximately $22 million at relatively conservative take rates. Our largest global mirror eye program, as well as the smaller North American program representing $50 million of additional revenue at modest take rates, will launch in 2023. These mirror eye programs do not include the potential for additional retrofit and pre-wire revenue as I just discussed. In total, the aforementioned programs represent almost $250 million of peak annual revenue that will launch over the next three years, including $190 million of incremental business awards. These awards comprise just a piece of our total backlog over the next five years. We will continue to focus our resources on executing these program launches and accelerating progress in these technology areas. Turning to page 10. In summary, during the second quarter, we executed on our plan to limit the impact of significantly reduced revenue and maintain a strong balance sheet without impacting our future growth opportunities. We expanded our mirror eye retrofit and pre-wire activities and continued to focus our resources to drive profitable growth for the company. 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.