Stoneridge, Inc.

Welcome to the Stone Ridge second quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please sign up a conference specialist by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press start and one on your telephone keypad. To withdraw your question, please press start and two. Please note this event's being recorded. I would now like to turn the conference over to Kelly Harvey, Director of Investor Relations. Please, go ahead, Ms.

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 today on today's call are John DeGainer, our President and Chief Executive Officer, and Bob Krikoliak, 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 plan. 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 was filed with the Securities and Exchange Commission under the heading Forward Looking Statement. 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, Kelly, and good morning, everyone. Let me begin on page three. In the second quarter, we continued to navigate through supply chain challenges resulting from the global pandemic. This impacted material availability, production schedules, product mix, labor availability and cost, logistics, and even our tax rate, as earnings and expenses experienced unusual jurisdictional shifts. Despite these headwinds, we continued to position the company for long-term profitable growth through new business awards, continuous improvement in our manufacturing facilities, and careful cost control to drive profitability. Our second quarter sales of $191 million resulted in an adjusted gross margin of 22.5%, translating to an adjusted operating loss of $1.9 million. Adjusted EPS for the quarter was negative 14 cents. Our second quarter performance was significantly impacted by external headwinds, which in total unfavorably impacted adjusted EPS by approximately 13 cents in the quarter relative to our prior expectations. I will provide a more detailed review on the performance drivers of our second quarter results later in the call. During the quarter, we continue to make progress with our MirrorEye platform, preparing for OEM launches and expanding our retrofit programs. Additionally, the value of the MirrorEye technology is beginning to resonate in our other end markets, including the bus market, where we have sold over 1,500 units of Mirai on bus applications year-to-date, and we recently signed an agreement with a major bus OEM to supply Mirai in Europe. In addition, we continued the transformation of our global footprint during the quarter by completing the sale of our Canton, Massachusetts facility for net cash proceeds of $35.2 million. The cash proceeds from this transaction were used to pay down our revolving credit facility balance further strengthening our balance sheet and creating additional capital that we can use to drive future growth. Finally, this morning we are adjusting our full-year guidance based on current market conditions and forecasts. We continue to see strong revenue performance and are guiding to the high end of our previously provided range. Additionally, based on current production forecasts, we expect significant top-line growth to continue into 2022 as our weighted average end markets suggest production growth of 10% next year and we expect to continue to outperform our end markets. That said, we do expect continued supply chain challenges and the resulting impact on our tax rate to negatively impact our adjusted EPS guidance for 2021 relative to prior expectations. I will discuss some of the actions we are taking to help offset these substantial headwinds later in the call. Page 4 summarizes our key financial metrics relative to prior quarter results. excluding the divested SIT sensor business in all periods. During the quarter, we experienced significant volatility in OEM production schedules, primarily in our passenger vehicle and market. However, these headwinds were offset by continued strong performance in our commercial vehicle and off-highway end markets. This resulted in adjusted revenue approximately in line with the prior quarter. During the second quarter, we continued to experience the unfavorable impacts of component shortages, incremental material and logistics costs, labor volatility, and an unfavorable product mix. These factors contributed to adjusted gross margin and operating margin declines of 180 and 300 basis points respectively relative to the first quarter. The second quarter included incremental supply chain related costs of approximately $3.7 million, which was $2.5 million higher than previously expected and $1.4 million increase versus the first quarter. These incremental costs reduced gross and operating margin by 80 basis points relative to the prior quarter. During the second quarter, operating expenses were slightly unfavorable compared to the first quarter, primarily due to planned incremental engineering expenses to support program launches. This was partially offset by a reduction of annual incentive compensation program costs. We continue to focus on managing engineering and SG&A costs in consideration of current market conditions while ensuring that we are structured to support critical program launches and continue to invest in advanced technology development. While we expect additional headwinds related to external factors for the remainder of the year, we also expect that our facilities will continue to execute at a high level and that we will limit controllable costs. Page five summarizes the second quarter drivers of adjusted earnings per share. As I mentioned earlier, Our second quarter performance was negatively impacted by external factors, resulting in 13 cents of headwind during the quarter. This includes incremental supply chain costs, unfavorable product mix, other incremental COVID-related costs and variable cost inefficiencies, and the resulting impact on our effective tax rate. Finally, continued volatility in our customers' production schedules drove incremental direct labor costs, as we were required to run more overtime and incur higher direct labor wage rates than we previously expected. As a result of our current forecast, we reduced our annual incentive program expense, which offset external headwinds by approximately $0.04 during the quarter. During the quarter, we recognized an inventory obsolescence charge primarily related to previous MRI generations, which impacted results by approximately $0.03. Our fleet trials have been critical both as we expand Mirai retrofit volumes and also as we continue to develop the system to address the features and functionality that drive the greatest value proposition to our end customers. For example, one of the most common requests from our fleet partners was to integrate video recording. As a result of changes made to the hardware and design of the system to accommodate some of the requests, we were required to obsolete some of the older Mirai components as they were no longer utilized in retrofit systems. With these improvements to features and functionality now incorporated, we do not expect additional inventory charges as we continue to ramp up near-eye production. We continue to maintain control of our operating costs and take actions to offset substantial headwinds. These controls favorably impacted results and approximately offset the inventory adjustments during the quarter. Turning to slide six, I would like to provide more detailed update on the specific supply chain disruptions impacting our business our current view of the financial impact of these disruptions for the remainder of the year, and the actions that we are taking to offset these incremental costs while continuing to support our global customers. I'd like to stress that this is our current view of the situation and, as such, is the basis for our updated 2021 guidance that Bob will discuss in more detail later in the call. We recognize that this situation will continue to be dynamic as we move forward in the second half of the year, and we are committed to taking necessary actions to offset costs as much as possible. In summary, supply chain disruptions have become incrementally more challenging. We continue to incur significant material cost increases and premium freight costs. Supply chain shortages have also resulted in significant market volatility and OEM production schedules. This has resulted in labor and other operating inefficiencies during the second quarter. To combat the price increases and shortages, we continue to actively negotiate a sharing of these incremental costs with our suppliers and customers. In conjunction, we are developing strategies to recover these impacts when markets return to a more normalized state and we continue to look for efficiencies within our overall supply chain to fully offset these incremental costs going forward. These actions include working with our customers to review our product designs and developing a long-term supply chain strategy to better optimize the flow of product. For example, we were successful in the second quarter in passing through $2 million of the $5.7 million of increased costs incurred during the quarter. Based on current market conditions, we have updated our expectations for incremental supply chain costs from approximately $5 to $5.5 million for the full year as of last quarter to almost double, or $9.1 to $10.3 million for the full year. To date, we have already incurred $6 million of net incremental costs. We continue to monitor the global supply chain and the impact on our OEM customers to ensure we respond efficiently and effectively to any disruptions. As it relates to current production volumes, slide 7 outlines the most recent IHS and LMC information for our OEM and markets for the remainder of 2021 and 2022. As we have discussed in previous calls, our passenger vehicle customers reduced production schedules in the first half of the year with a more significant impact during the second quarter. Production in our commercial vehicle and off-highway end markets remain strong, which we expect to continue for the balance of the year. Looking forward, current forecast and production levels have been adjusted for the expectation of continued supply chain-related issues for the remainder of the year and into 2022. As a result of the continued global supply chain disruptions, passenger car forecasts have declined, while commercial vehicle forecasts have remained relatively stable or have improved. This results in a forecasted decline of approximately 1.6% in our weighted average end markets for the full year 2021 relative to production forecasts as of our last call. Despite this decline, we are guiding to the high end of our previously provided revenue guidance, primarily due to our performance in the first half of the year and the expectation that our product portfolio will continue to outperform our underlying end markets. Bob will provide further details on our revenue guidance later in the call. Looking forward to 2022, we expect continued strength in demand in our end markets as IHS and LMC are forecasting that our weighted average end markets will grow by approximately 10% compared to 2021. That growth is expected to be led by the North American passenger car market, where growth is expected to be approximately 16%. North American and European commercial vehicle markets are expected to grow at 10% and 9% respectively. We expect to continue to outperform our underlying end markets, which implies significant growth in 2022 for the company. With the actions we continue to take related to our cost structure and operating efficiency, we are positioned to take advantage of the forecasted growth next year. Turning to page 8, we continue to make progress in our Mirai programs in all of our existing end markets and are starting to gain traction in additional end markets as the value proposition for Mirai is translating well to many applications. This morning, we are announcing that we have signed an agreement with a major OEM bus manufacturer to supply Mirai and began accepting orders in Q2. Overall, we have already installed Mirai on over 1,500 buses in Europe and expect to install systems on approximately 2,000 buses by the end of 2021. This momentum outside of our traditional Class 8 commercial vehicle market shows the true power of Mirai's technology to influence safety and efficiency across multiple applications going forward. Similarly, pre-wire orders continue to gain momentum in Q2. Year-to-date, we have orders for approximately 500 units with approximately 200 of those in July. While total pre-wire orders are still relatively small, the progression and growth of the orders suggest increasing acceptance of the technology by fleets across the U.S. and is a good indication of growing momentum. This momentum is also gaining the attention of other OEMs who continue to work with us to develop pre-wire applications. Finally, our first two OEM Mirai programs are expected to launch later this year in early 2022. These programs comprise $29 million of peak annual revenue and 15% estimated take rates. While we are not able to speak more specifically on systems until after OEMs officially launch the programs, we are encouraged by the amount of excitement generated by our OEM partners for the Mirai system as to begin their marketing activities related to their new platforms. We continue to believe that their end customers will see the significant value in Mirai applications and select to have Mirai installed on their trucks directly from the factory. Turning to page 9, our electronics segment continues to build momentum in product areas beyond Mirai, as exemplified by several key program launches and a significant new business award in our connectivity platform. In the second quarter, we were proud to support PACCAR as they launched their new Model 579 truck with Stone Ridge's first fully configurable digital driver information system. The system, a 15-inch digital display, is the largest in its class and enables system diagnostics, gauge customization, and advanced driver assistant features. Additionally, every conventional Class 8 Peterbilt truck will feature this display going forward. This is one of the largest program awards in Stone Ridge history estimated at $40 million of peak annual revenue. In the second quarter, we were awarded our first SmartTube tachograph platform with a European OEM. Our next-generation tachograph enables over-the-air software updates to efficiently respond to changing regulatory requirements, extending the life of the platform, and making sure our customers and their customers have the most current technology in their trucks. Our platform makes drive-time analysis more flexible and consistent and provides us and provides us with an opportunity to add features and functionality to the platform going forward. We expect to launch the program in 2023, aligned with new European regulations requiring advanced features on tachographs. With the launches of previously awarded business and our continued success winning new business, such as our Smart2 tachograph program, the electronic segment is set up for significant growth going forward. Turning to slide 10. Our control devices business continues to launch programs and win business that supports the electrification of our customers' vehicles and enables advanced technologies throughout the vehicle. In the third quarter, we will launch two additional Park-by-Wire programs on the Ford E-Transit and Maverick platforms to add to the launch of the Mach-E program last fall. Following up on those programs, we will launch an additional Park-by-Wire program for an electrified light truck platform in 2022. Finally, we launched the next generation of our shift-by-wire programs with Geely Auto's new SUV in China in July 2021. These awards comprise a total of $30 million of peak annual revenue for Stone Ridge. As an example of the overall shift from traditional powertrains to electrified applications, it was announced earlier this year that the Ford e-transit platform, in partnership with Oshkosh Trucks, was selected as the replacement for the current United States Postal Service fleet as they modernize their vehicles. Electrified powertrains are becoming the standard of efficiency, and we are proud to support Ford and all of our global customers as they transition from the internal combustion-based powertrains to the electrified powertrain platforms that will drive future growth. This morning, we are providing detail on two additional business awards within our actuation product line launching in 2023 and 2024. The first, a $28 million peak annual revenue award continues our success supporting 4x4 applications with our front axle disconnect product on next generation light truck and SUV platforms. The second award for our SmartBar product with $11 million of peak annual revenue is applicable to a new, more specific end market where our off-road demands require performance in the harshest conditions. SmartBar enables vehicles to operate their wheels on different planes as they traverse rough terrain to ensure maximum traction at all times. We continue to refine our product roadmaps and technology development to expand our capabilities and electromechanical actuation to take advantage of the continued growth in this segment. Finally, this morning we are announcing a new award in our trailer tow product line on multiple electrified light truck and SUV platforms. Our advanced trailer tow connection facilitates a fully digitized connection from the trailer to the cockpit, which enables advanced camera technologies on attached trailers. We expect that the continued expansion of our electronic capabilities, which help advance technologies for our customers, will continue to open doors to new opportunities. Turning to page 11. In summary, the second quarter was challenging as we continue to face the impact of the global pandemic and the cascading impact it has had on global supply chains. We remain committed to delivering on our strategic priorities and continuously improving the business to drive strong financial performance and stable long-term profitable growth as we prepare for significant growth in 2022 and beyond. At StoneRidge, we will continue to execute on the things that we can control and respond effectively and efficiently to a challenging environment. We will maintain our focus on our long-term strategy, driving continuous improvement and refining our capabilities to deliver shareholder value. With that, I'll turn it over to Bob to discuss our financial results in more detail.