Stoneridge, Inc.

Good day and thank you for standing by. Welcome to the Stone Ridge first quarter 2023 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that this call is being recorded. And I would now like to hand the conference over to our speaker today, Kelly Harvey. Director of Investor Relations. Please go ahead.

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 StoneRidge.com in the investor section under webcast and presentation. Joining me on today's call are Jim Zizzleman, 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 10Q, 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 measures to the most directly comparable gap measures. After Jim and Matt have finished their formal remarks, we will open up the call to questions. With that, I will turn the call over to Jim.

Thanks, Kelly, and good morning, everyone. Let me begin on page three. Our first quarter financial performance exceeded the expectations that we outlined on the fourth quarter call for both revenue and adjusted earnings per share. First quarter adjusted sales of $232.2 million resulted in an adjusted gross margin of 18.5%, translating to an adjusted operating margin of negative 1.5%. Adjusted EPS for the quarter was negative 25 cents. We recognize adjusted revenue growth of approximately 18% compared to the first quarter of the prior year and approximately 3% versus the fourth quarter of 2022. Strong revenue performance in February and March, particularly in our commercial vehicle end markets, offset the challenges we outlined on our fourth quarter call for January related to reductions in China and supply chain constraints in our off-highway business, which limited production. With those headwinds behind us and stronger top-line performance to exit the quarter, we are expecting strong continued revenue growth throughout 2023. As expected, gross margin during the first quarter was reduced by continued broad inflationary pressures, including higher labor costs and continued elevated material costs that were not yet offset with price increases due to the timing of the negotiations with our customers. Although we reached agreements on price increases with some customers during the first quarter, the negotiations are ongoing and we expect to reach agreement with most of our customers, including some of our largest, by the end of the second quarter. Based on current negotiations, we expect the final agreements to provide relief forward as well as favorable benefit retroactive to January 1st of this year. This morning, we are reaffirming our previously provided full year 2023 guidance with some relatively minor and offsetting adjustments to tax and interest expectations, as Matt will discuss later in the call. We expect continued strong growth in 2023 and operating margin expansion as the year progresses. And as such, we are reaffirming our adjusted sales midpoint of $975 million and our adjusted EPS midpoint guidance of break-even performance for 2023. While we continue to work to efficiently execute and respond to market externalities, we are also focused on the growth initiatives that will drive long-term profitable growth in 2023 and beyond. During the quarter, we launched critical programs in both control devices and electronics. Our first drive unit clutch actuator program, which we often refer to as the e-axle disconnect actuator, launched on the Corvette E-Ray, representing another step in our powertrain electrification and actuation growth. This product is aligned with our platform-based approach to operate as a drivetrain agnostic supplier. Similarly, we continue to make progress with our MirrorEye platform, focusing on our first OEM program in North America that launched in mid-April. OEM take rates for our first OEM program in Europe continue to be strong at approximately 40%, and I will provide additional detail on these program launches later in the call. Finally, earlier this month, we announced Laurent Bourne, Chief Strategy Officer and Chief Technology Officer, decided to leave Stone Ridge to pursue other opportunities. Laurent made valuable contributions to our company's technology strategy and advanced development. And I want to thank him for his time at StoneRidge. As with other leadership changes, we have a clear transition and succession plan in place. And this morning, I am pleased to announce that Troy Kooprider has been elevated to our Vice President Global Technology to succeed Laurent and report directly to me. Now turning on to page four. Troy was most recently our Vice President, Advanced Engineering and Engineering Excellence, where he was responsible for developing and executing the next generation of products, including the next generation of Mirai systems and vision platforms and the Wired Rearview trailer camera. To emphasize Troy's accomplishments, we are proud to report that Stone Ridge has filed over 25 patent applications that include Troy as an inventor. Troy has more than 30 years of automotive electronic experience. Prior to Stone Ridge, Troy was executive director of engineering for Aptiv, leading global cross-functional teams focused on safety, electronics, and electronic control products, including automated driving, active safety, power electronics, and data engineering. Prior to that, he was chief engineer at Delphi, focused on infotainment and driver information systems, including V2V and V2X communication methodologies. In his new role as Vice President of Global Technology, Troy will report directly to me and will be responsible for coordinating with each division to drive technology and product strategies and subject matter expertise in the new technologies. In addition, Troy will lead the global engineering process development and deployment, as well as our technical customer interface for advanced development programs. On to page five, we summarize our key financial metrics relative to the first quarter of 2022. First quarter adjusted sales grew 18.1% relative to the first quarter of 2022, driven primarily by strong demand in our commercial vehicle end markets and reduced volatility in the North American market. This is offset by continued material constraints impacting sales in our European off-highway end market, and reduced demand in China, particularly early in the quarter as they dealt with the aftermath of rapidly rising COVID-19 cases. Revenue growth progressed each month during the quarter with an exit run rate that supports a strong foundation for continued growth in the second quarter and beyond. Adjusted gross margin declined by 260 basis points relative to the first quarter of 22, primarily due to higher material costs as a result of both inflation and the unfavorable impact of foreign currency, as well as increased labor costs. As expected, gross margin was significantly impacted in January, primarily due to labor inefficiencies and fixed cost leverage as a result of the volume reduction. In the shorter term, we expect margin expansion as we progress throughout the year as we finalize customer price agreements and recognize fixed cost leverage on revenue growth. It's also important to note that we have a large number of new program launches, and typically, New programs launch at lower gross margins until they mature and they reach normalized volumes. While we slightly outperformed our expectations in the first quarter, longer term to further strengthen our position, our focus is to improve our gross margin profile to continue to invest in the technologies and product platforms that will drive our growth while at the same time improving our overall financial performance. While we will also improve rigor and discipline around product development and focus on platform-based designs, the result will be streamlined operations driven by common platforms, common processes, and common testing procedures. We expect to drive material cost improvement as common platforms create improved economies of scale. Similarly, we will more broadly implement product development processes aimed at designing products for more efficient manufacturing, resulting in reduced labor and quality costs. While the results of these actions take a little bit longer to improve financial performance across the organization, we expect these actions to result in sustainable, improved profitability as we capitalize on our strong forward growth profile. Finally, we continue to focus on managing our SG&A and engineering costs and leveraging our existing cost structure to offset current gross margin headwinds and create a foundation for sustained margin improvement. We have continued to take actions to optimize our organizational structure, reduce discretionary spending, and improve operating leverage. We expect these actions will also drive improved operating margin as revenue continues to grow and gross margin continues to expand. Now turning onto page six. While we continue to focus on actions that will drive margin expansion and improve operating performance, we also continue to launch exciting new programs and products. We are launching industry-leading technologies across our segments and our end markets, and they're helping customers to differentiate their products in the market. This morning, I want to highlight two critical program launches that are foundational for our growth forward. First, in control devices, we've been involved in the creation of the new and exciting Corvette E-Ray. Over the past 70 years and eight generations, the Corvette has benefited from many industry-first innovations. And now it's been electrified for the very first time with an electric all-wheel drive system that works in tandem with its V8 engine to produce an incredible 655 combined horsepower. We are excited to say that our Drive Unit Clutch Actuator product is one of the technologies that enables that function on this legendary nameplate. Our actuator allows the electric powertrain to deliver power to the front wheels, augmenting power delivered from the internal combustion engine to the rear wheels, allowing the Corvette E-Ray to achieve 0 to 60 miles per hour times in 2.5 seconds, making it the fastest production Corvette ever built. It also protects the electric drive motor at high vehicle speeds. This specialized technical competency bridges electronics and software with mechanical design capabilities. This actuator is a perfect example of how Control Devices has transformed to align our products and capabilities with the powertrain application and industry megatrends that drive future growth. Our actuator also exemplifies our ability to address an application such as this utilizing our common product design strategy. Our driveline actuation business continues to grow as we extend our actuation capabilities to address electric vehicle axle and torque control applications. Finally, as we have outlined previously, we launched our second NERI OEM program, which is the first program in North America in mid April. Utilizing our existing platform, the system is unique in that it embeds the camera in a smaller production mirror to comply with the NHTSA requirements that production trucks must include a smaller mirror in addition to the camera mirror system. The aerodynamics of this system provide for fuel savings of up to 1.5% and dramatically improve the safety features including blind spot elimination, night vision, and improved vision in incontinent weather. Customer forecasted take rates for this program are approximately 10%. However, based on the excitement from our North American fleet customers, as well as take rates for our OEM programs in Europe, we believe there's an upside to that take rate assumption. We expect to provide an update on that take rate assumption and forecasted volume for this program once the system is more readily available to the customers in the second half of the year. We continue to focus on strong execution of these critical program launches, which we expect will result in revenue growth that significantly outpaces our underlying end markets. We will continue to invest in the technologies and adjacent product opportunities to optimize our position in these markets and drive technology innovation leading to improved safety and efficiency for our customers. Now, turning to page seven, in summary, we continue to make good progress in the first quarter as both our revenue and earnings performance exceeded our previously outlined expectations. That said, we must continue to focus on gross margin improvement and careful management of our operating expenses to drive improved financial performance. We will continue to focus on improving execution in our manufacturing facilities, managing our overhead costs, and offsetting inflationary material and labor pressure with appropriate and necessary price increases. We expect that these actions will drive margin expansion on the significant revenue growth that we expect in 2023 and beyond. Now, with that, I will turn it over to Matt to discuss our financial results in more detail. Matt? Thanks, Jim.