Stoneridge, Inc.

Good day, and thank you for standing by. Welcome to the Stone Ridge Second Quarter 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded I would now like to hand the conference over to your speaker today, Kelly Harvey, Director of Investor Relations. Please go ahead.

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 stoners.com in the investor section under webcast and presentation. Joining me on today's call are John DeGainer, our President and Chief Executive Officer, and Matt Horvath, 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 view the appendix for reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. After John and Matt have finished their formal remarks, we will open up the call to questions. I would ask that you keep your questions to a single follow-up, and with that, I will turn the call over to John.

Thanks, Kelly, and good morning, everyone. Before we begin with the specific results of the quarter, I want to recognize and thank the StoneRidge team for their continued dedication to the company, and to our customers during this challenging period. Turning to page three. In the second quarter, we continued to navigate through macroeconomic challenges, including ongoing supply chain disruptions, production volatility, and rising material costs. During the quarter, we also experienced significant foreign currency headwinds, primarily related to European currency exposures. We focused on responding to fluctuating production schedules, securing material, managing our cost structure, and continuing to engage with our customers and suppliers in cost recovery actions. Our second quarter adjusted sales of $205.7 million resulted in an adjusted gross margin of 18.7%, translating to an adjusted operating margin of negative 3.2%. Adjusted EPS for the quarter was negative 29 cents. Second quarter adjusted EPS performance was impacted by net foreign currency headwinds of approximately six cents versus previous expectations. We continue to offset a large portion of the incremental material and supply chain related costs through pricing actions and pass through of costs. We have offset approximately 90% of incremental costs year to date relative to last year. Additionally, we continue to pass the majority of spot purchases through to our OEM customers, offsetting more than $15 million in spot buys in the quarter. We will continue to evaluate macroeconomic conditions and expect ongoing discussions with our customers regarding price increases and other cost recovery actions. We remain focused on the growth initiatives that will drive long-term profitable growth. During the quarter, we continue to make progress with our Mirai platform, focusing on our first OEM program launch in Europe and the continued expansion of our retrofit programs. Take rates in Europe continue to exceed prior expectations, and customer production forecasts suggest take rates will continue to rise as material becomes more readily available and customer truck production continues to shift to new models. This morning, we are updating our foliared guidance to reflect current market conditions as well as second quarter performance. We are lowering our midpoint adjusted sales guidance by $15 million to reflect slower than expected improvement in customer production volumes despite continued strong end market demand. Therefore, we are updating margin expectations to reflect reduced fixed cost leverage on these lower sales expectations. Additionally, we expect ongoing non-operating headwinds related to incremental tax and interest expense. As a result, this morning we are reducing our full-year adjusted EPS guidance to a midpoint of negative 20 cents. Matt will provide additional detail on our full-year guidance later in the call. Page 4 summarizes our key financial metrics relative to the prior quarter. During the quarter, we saw continued strong performance in our commercial vehicle and off-highway end markets, offset in part by continued customer production volatility. In addition, the continued ramp-up of new programs, including the first OEM near-eye program, as well as incremental pricing actions contributed to higher sales during the quarter. Second quarter sales were unfavorably impacted by foreign currency by approximately $1.6 million. Excluding the impact of foreign currency relative to Q1, we experienced an adjusted revenue growth of approximately 5% quarter-to-quarter. Excluding the impact of foreign currency, second quarter recession gross margin declined by 140 basis points relative to the first quarter of 2022. Within the quarter, we incurred incremental expenses related to specific non-recurring inventory adjustments that impacted our gross margin by approximately 70 basis points. We do not expect that our run rate gross margin profile will be impacted by these items. We expect that revenue growth in the second half of the year, combined with improvement in our operating performance, and continued careful cost control will drive expanded gross and operating margins, creating a strong run-right into 2023. Slide 5 provides an update on supply chain-related costs and actions taken to offset incremental costs in 2022. Material costs continue to rise. However, we have agreements in place with customers to offset a large portion of these costs. That said, we continue to face headwinds on material costs and expect that additional pricing actions and supply chain strategies will be necessary going forward. Excluding the material spot buys passed through to our customers, we were able to offset approximately 90% of the incremental supply chain costs experienced year-to-date, primarily driven by price increases and cost recovery actions. We recognize there is continued risk in the overall supply chain as markets Externalities continue to drive increased material cost and limit material availability. Overall, we expect the impact of material costs and other recoveries to remain neutral versus our previous expectations. We continue to work with our suppliers and customers to put actions in place to recover not only incremental costs, but strengthen our gross margin as supply chain issues continue to ease. Turning to page six. During the quarter, we announced that Kevin Heidel, our Senior Vice President of the Integrated Supply Chain, has returned to a consulting role for the company, effective July 1st. As a result, we announced the appointment of Sal Orsini as Chief Procurement Officer to lead our global procurement organization, and Archie Nemmer, the current Vice President of Operations, to lead our global operations. Sal brings more than 25 years of global supply chain management experience in the automotive and aerospace industries, leading procurement organizations around the world while living in Asia Pacific, Europe, and Mexico. Sal will be focused on executing our company's strategy through all aspects of the company's global procurement organization, including supplier quality and global supply chain strategy. Archie Nimmer, the current Vice President of Operations, will continue to lead our global operations team and join my staff. Since joining StoneRidge in 2017, Archie has played an integral role in shaping our operations organization. Archie will continue to execute on our strategic objectives with a focus on continuing to drive operational excellence globally for the company. Turning to page 7. Market demand continues to be strong for the first OEM Mirai program that launched in Europe in late 2021, with take rates averaging approximately 35%. That said, production has been limited due to supply chain constraints on certain components, and as a result, is constraining take rates in 2022. Based on discussions with our OEM partner, we expect the take rate will continue to expand as supply chain issues subside and are forecasting the take rate to be greater than 50% heading into next year. This has the potential to drive significant revenue upside and strong contribution margins going forward as the existing program continues to expand. It is also important to note that our customer is still transitioning from an old model to a new model of production, and as such, not only do we expect a tailwind from overall take rate percentage, but also in overall vehicle volume as that take rate is applied to only the new model production. Based thereon, we are estimating at least $40 million in Mirai sales on our first OEM program in 2023. Year to date, we have recognized approximately $7 million in Mirai OE sales. In addition, based on the take rates for the current program, we are optimistic that take rates for future program launches will exceed prior estimates. This has the potential to drive significant revenue upside in earnings potential. We believe the initial OEM take rates are strong indicators of future performance for the system. We will continue to invest the necessary resources and effort to expand on our current successes and accelerate near-rise adoption through all of our channels. The last two years have been challenging for our industry, and we have battled every day to continue to drive performance in the business and make progress against our long-term strategic plan. Moving to slide eight, I think it is important to take a moment to step back and reflect on our progress, despite the macroeconomic challenges we have and expect to continue to face. Over the last several years, we have effectively transformed the company's product portfolio to align with industry megatrends, including electrification, safety, and vehicle intelligence. Through continued investment in advanced technologies and product platforms aligned with those underlying growth drivers, we have built a robust five-year backlog of awarded business of $3.4 billion. This alignment supports significant top-line growth moving forward with the expectation of $1.5 billion in revenue by 2026. This represents significant market outgrowth and a compound annual growth rate that exceeds 9%. We have developed this growth trajectory while also aligning our portfolio with the power trains that will drive our industry forward, as more than 85% of our product portfolio is expected to be drivetrain agnostic by 2025. We expect that this level of growth, coupled with our continued focus on operational performance and cost structure optimization, will drive significant margin expansion. We expect contribution margins of 25% to 30% going forward, aligned with our historical performance, driving EBITDA margins of at least 12.5% and up to 14% by 2026. Our successful cost recovery actions through price increases and pass-through of incremental material costs, as well as efficient operations and supply chain strategy, have contributed to margin stabilization despite the significant macroeconomic headwinds we have faced since early 2020. We will bring about this transition formation through strict allocation of resources, creating global capabilities, cost savings, and technology platforms to accelerate the growth and financial performance of the company. Our focus on the Mirai platform has positioned us well to drive continued growth of existing programs, facilitate incremental awards, and expand retrofit opportunities. We have invested a significant amount of engineering resources in the Mirai platform, and we are now at an inflection point where our investments are starting to pay off. While much of the discussion of our expected growth has been centered on Mirai, it is important to remember that our control devices segment has transformed significantly over the last several years and has a product portfolio aligned with powertrain electrification that positions the segment for sustainable growth. It is easy to fixate on the macroeconomic challenges we have faced over the last several years because they've been substantial and had a significant impact on our financial performance. That said, We continue to execute on our long-term strategic plan that positions Stone Ridge to significantly outperform our end markets, drive significant margin expansion, and ultimately deliver shareholder value through long-term profitable growth. With that, I'll turn it over to Matt to discuss our financial results in more detail. Thanks, John.