Stoneridge, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Stone Ridge third quarter 2020 conference call. At this time, all participant clients are in the listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero. As a reminder, I would like to hand the conference over to your speaker today, Matt Horvath, Executive Director, Investor Relations and Corporate Strategy. You may begin.

Thanks, Boo. Good morning, everyone. Thanks for joining us to discuss our third quarter results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted on our website at sonrich.com in the investor section under webcast and presentations. Joining me on today's call are John DeGainer, 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 and 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 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. Before we get started, I want to take a minute to recognize the fact that we continue to be in the midst of a global health crisis, and we have and will continue to put the health and safety of our employees and their families at the forefront of every decision we make. I know that this situation has been challenging for many, and I want to thank our employees for their dedication to stoners during this period. Let me begin on page three. During the third quarter, we experienced strong top-line growth as a result of the broad recovery across our global end markets. We continued to focus on improving gross margin through reduced material costs and the efficient ramp-up of direct labor costs as production volume increased across our global facilities. We're able to leverage our fixed cost structure to capture an adjusted contribution margin of over 35% during the quarter on incremental revenue and improved gross and operating margin relative to the first quarter. We expect that revenue will continue to decline slightly in the fourth quarter, primarily due to the impacts of typical fourth quarter seasonality and be partially offset by continued strength in the commercial vehicle production volumes. Additionally, we expect continued strong margin performance in the fourth quarter. Bob will provide additional detail regarding our expectations for the fourth quarter, as well as the primary drivers of our fourth quarter guidance later in the call. Our liquidity remains strong, as we reduced net debt by over $10 million during the third quarter. As a result of our cash generation in the quarter, we were able to reduce our revolving credit facility by $17 million. Based on our current production forecast, a continued focus on inventory reduction, and efficient cash management, we expect stable net debt in the fourth quarter. Our portfolio transformation continues simultaneously with our focus on exciting new products. For example, our exit of the soot business is on track. As we outlined last year, the divestiture of our switches and connectors business to S&P facilitated the exit of our Canton, Massachusetts facility. We recently completed negotiations on a lease with a premium tenant for the building. We are working with third-party brokers to evaluate a divestiture for the building, which we are targeting for the first half of next year. During the quarter, we continue to make progress with mirror eye retrofit and pre-wire applications and prepare for our first OEM launches in 2021. I will discuss our mirror eye progress in the quarter and our expectations for 2021 in additional detail later in the call. Finally, although there was still uncertainty regarding the ongoing impact of COVID-19, This morning we are providing some additional guidance for the remainder of 2020 as well as an outlook for 2021 based on current market conditions and IHS and LMC forecasts. Page four summarizes our key financial metrics for the quarter, quarter to quarter. Due to the ramp up in production volumes in our global markets, revenue increased by 76.6% from the second quarter to the third quarter to just over $175 million. This exceeded the expectations we outlined during the second quarter call by approximately $20 million. The impact was greatest at control devices where sales more than doubled to just over $100 million due to continued ramp-up in North American production to meet the pent-up demand. This was particularly evident in light truck, SUV, and CUV platforms where control devices is more heavily weighted. Electronic sales increased to a lesser extent by approximately 48% to $74.4 million primarily due to continued ramp up in global commercial vehicle markets. Sales at Stone Ridge, Brazil increased by approximately 83% as the impact of the virus in Brazil continued to lessen throughout the quarter. Despite this significant revenue growth in each of our segments, we are still not quite back to normalized production as Q3 revenue was approximately $8 million or 4% less than Q1 revenue. Despite lower sales, our third quarter adjusted gross margin and operating – and adjusted operating margin improved by 80 and 140 basis points, respectively, relative to the first quarter. Our adjusted contribution margin exceeded 35% on incremental revenue in comparison to the second quarter, which is above our historical contribution margin and better than expected in outline during the second quarter call. We continue to focus on continuous improvement and an efficient response to the global crisis, which has resulted in strong financial performance during the quarter. Slide 5 outlines the most recent IHS and LMC information for our OEM end markets. Current market forecasts suggest that fourth quarter production will remain approximately flat for our weighted average end markets relative to the third quarter, as production moderation in North America is offset by growth in Europe. Looking forward to 2021, we expect continued recovery in our end markets as IHS and LMC are forecasting that our weighted average end markets will grow by approximately 13.5% compared to 2020. That growth is led by North American and commercial vehicle markets, where growth is expected to be 17 to 19%. followed by the North American passenger car market, where growth is expected to be approximately 17%. Turning to page 6, we expect that the forecasted recovery across our global end markets will continue to contribute to strong top-line growth in 2021. Adjusted for the discontinued sensor product lines, we expect revenue growth of at least 20% in 2021 to over $715 million in revenue. Additionally, we expect that the annualization of our recently launched Park-by-Wire programs, as well as the launch of a large global driver information systems program, our first two Mirai OEM launches, and the continued ramp-up of our Mirai retrofit and pre-wire programs will drive incremental revenue for the year. Although we are early in our annual budgeting process, we expect that the third quarter of this year will be a good representation of the cost structure we expect in 2021. In other words, based on our current outlook, it would be reasonable to use third quarter performance as a basis for performance expectations in 2021, and as a comparison point to consider contribution margin on expected incremental revenue. We continue to monitor the global business environment, particularly as it relates to COVID-19, and expect to provide detailed 2021 guidance on our fourth quarter call early next year. Turning to page seven. As we discussed on our second quarter call, During the third quarter, we completed installations that expanded the number of Mirai units with three of our fleet partners. These trial expansions are part of a standard rollout approach with many of our fleet partners. Additionally, the option to prewire Daimler truck vehicles in North America launched at the end of the quarter. This allows trucks to be delivered straight from the factory, wired and ready for Mirai retrofit. This prewire option is significant as it reduces install time and complexity in the retrofit process and signals the support of the OEM in this technology transition. Although we do not yet have specific visibility into the fleets and number of trucks being ordered with the pre-wire option, we understand that the initial pre-wire order was made by one of our long-time fleet partners with subsequent orders coming from fleets that we have not undergone evaluation periods with. This suggests that not only do our long-term partners understand the significant benefits of outfitting their trucks with MIRAI, but that the overall market is beginning to understand the significant value proposition that Mirai presents. During the quarter, we train DTNA dealers on the benefits of the Mirai system, and we expect that Mirai pre-wire orders will continue to ramp up as the benefits continue to be understood. Looking at the balance of 2020 and into 2021, we expect the continued ramp up of retrofit orders with DTNA, both inside our existing fleet network as well as from the broader market. Remember, not all fleets order trucks every quarter, so in the beginning of the pre-wire option, orders may come in lumps rather than linearly. We are pleased with the initial interest in pre-wire and look forward to supporting our existing partners and new fleets with retrofit applications as brand new trucks are delivered in the coming months. Additionally, we are working with multiple other OEMs to ensure that pre-wire options are available on more platforms to provide access to Mirai, no matter which truck a fleet prefers. Overall, we expect approximately $10 million in retrofit sales, either through pure retrofit applications or in pre-wire applications in 2021. As we expand our existing retrofit installations and support pre-wire applications, we are simultaneously focused on OEM programs. We are preparing for our initial two OEM launches of the system in both Europe and North America in 2021. We are working with each of our OEM partners to ensure strong penetration of the system through various marketing efforts, including specific fleet activities both in Europe and North America. The previously quoted penetration rates of 10% to 15%, we expect Mirai OEM revenue to be $5 to $10 million in 2021. The development of the Mirai platform has significant synergies between each path to market and each region in which we are working. We remain focused on supporting our fleet partners as they increase the number of systems installed on their trucks ensuring that we are providing the best solutions to solve their safety, fuel efficiency, and driver retention challenges. Simultaneously, we can apply the learnings from the fleets as we work with our OEM partners to develop and launch their systems on their exciting new platforms beginning in 2021 in both North America and Europe. We believe our approach provides the most efficient method of system development and refinement, as well as the fastest path to market. Turning to page eight, in summary, During the third quarter, we demonstrated strong execution as production volumes ramped back up in our global end markets and recognized strong incremental contribution margin. We continue to maintain a strong balance sheet and efficiently manage cash during the third quarter. We remain focused on our Mirai retrofit and prewire opportunities as well as our first two OEM programs. Looking forward to the remainder of the year, we expect revenue to remain relatively stable in the fourth quarter with continued strong margin performance. Looking beyond 2020, improved production forecasts and new program launches are expected to drive revenue in excess of $715 million, resulting in top-line growth of at least 20% adjusted for the discontinued SIP sensor business. We remain committed to executing on our strategic priorities and continuously improving the business to drive strong financial performance and stable, long-term, profitable growth. With that, I'll turn it over to Bob to discuss our financial results in more detail.