Ladies and gentlemen, welcome to Stoneridge First Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to hand the conference over to your host, Mr. Matt Horvath. Sir, you may begin.

Great. Thank you. 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 Investors Section under Webcasts and Presentations. Joining me on today's call are Jon DeGaynor, 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. Please see the appendix for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. After Jon 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 Jon.

Thanks, Matt and good morning everyone. Let me begin on page 3. During our fourth quarter call, I outlined several operating initiatives, aimed at improving profitability in 2020, and more specifically reducing material costs and improving operating efficiency and manufacturing processes to reduce overhead and labor costs. During the first quarter, we executed on those initiatives and the results of the efforts were evident in the performance in the quarter. Our first quarter sales of $183 million resulted in an adjusted gross margin of 25%, translating to an adjusted operating margin of 3.3%. Adjusted EPS for the quarter was $0.20. This is inclusive of the COVID-19 impact. Based on estimated customer orders and operating performance prior to the COVID-19 impact, we estimate that the global response to pandemic impacted quarterly sales by approximately $16 million and impacted adjusted operating income by approximately $4.7 million or 210 basis points. We have taken several actions to temporarily reduce costs in response to the virus to drive financial performance and preserve cash, as we adjust to reduce customer demand and federal state and local laws impacting our global facilities. Additionally, we took actions to reduce our structural costs based on our longer term and market outlook and to ensure our resources are aligned with future growth opportunities. The future of Stoneridge has its foundation in talent and technology and on April 1, we announced that Jim Zizelman joined Stoneridge to lead our control devices business. Jim will be responsible for driving business performance, product development, innovation strategy and technical vision for the segment. Jim had previously been consulting for Stoneridge after a lengthy career with Delphi and Aptiv, where he was most recently the Vice President of Engineering and Program Management. And last week we were awarded a 2020 Automotive News PACE award…

Thanks, Jon. Turning to slide 11, sales in the first quarter were $183 million, a decrease of less than $1 million relative to the prior quarter. We estimate that COVID-19 impacted sales by approximately $15 million. Adjusted operating income was $6 million, or 3.3% of sales, which was an increase of 50 basis points versus the prior quarter. We estimate that adjusted operating income was impacted by $4.7 million, or 210 basis points as a result of the pandemic. I will provide additional details on second performance, including our estimates of the impact of COVID-19 on each segment during the quarter in the subsequent slides. On March 30, we reviewed our 2020 guidance due to the continued uncertainty surrounding the COVID-19 pandemic. Based upon the latest LMC and IHS projections, our weighted average end markets are expected to decline by 23% relative to our previously provided midpoint sales guidance of $760 million. As we have discussed previously, we expect incremental and decremental contribution margins on volume changes to be approximately 2.5 times to three times our EBITDA margins or approximately 25% to 30%. As a result of the $8 million of cost reduction actions Jon outlined for 2020, we expect the detrimental impact to be on low end of that range. Our balance sheet and liquidity remain strong, as we currently have over $320 million in cash and undrawn commitments on our current revolver with no significant debt maturities in the near future. I'll provide additional color on our liquidity position and available capital later in the call. Page 12 summarizes our key financial metrics specific to Control Devices as well as our estimate of the impact of COVID-19 on the segment during the quarter. Control Devices sales of $98.2 million increased by 5% relative to the fourth quarter of…

Thank you sir. [Operator Instructions] Your first question will come from the line of Mr. Justin Long from Stephens. Sir please proceed, your line is now live.

Thanks and good morning everyone.

Good morning Justin.

So, I wanted to start by looking at the balance sheet and Bob, maybe going to some of your commentary at the end. I was curious based on what you laid out in terms of end market expectations and decremental margins what you're expecting from a cash flow or cash burn perspective over the remainder of the year as you make that comment that you feel like you'll remain in compliance with your covenant.

Sure Justin. And thank you so much for the question. So, first of all, where I'd like to start with at is let me give you -- if you look at the assumptions that we have and we talk about them in the presentation so if you look at our primary end markets if you look at North America so North America pass car for this year if you look at the data it's forecast to be down about 25% commercial vehicle down about 44%. And if you look at Europe, for this year, its same, it's about down about 25% as well for pass car and commercial vehicle; Europe is down about 38%. If you look at the IHS the LMC and the AEC assumptions on commercial vehicle and passenger car for the rest of the year and you flow them through, we're forecasting about a $15 million to $20 million burn rate in the second quarter and then about I would say less than $20 million for the second half based upon the current IHS and LMC and AEC assumptions.

Okay, that's helpful. And then circling back to the cost per inductions, I wanted to specifically focus on the structural cost reductions that you mentioned Jon. How should we think about the longevity of those cost reductions? Is this -- you're saying that in 2021 you're not expecting the end markets to come back significantly. So, these are costs that will continue to come out of the business or -- I'm just trying to think. When we return to growth mode at some point are these headcount reductions going to have to come back to support that or these over the long term structural cost reductions the next three plus years?

Yes. So, Justin thanks for the question. And I think the answer is both. The -- as we've talked to you over all of these calls we've said that we would adjust our costs in response to sales changes. We've demonstrated that over five years in different situations. I think the way to think about it is, within the -- within our facilities our direct indirect labors and sort of our plant based SG&A move with sales and -- but then you get into engineering and you get into other structures that are less flexible but also then changes to those are more or less permanent. And what you've seen as you follow Stoneridge is we continue to refine our structure and we continue to transform the business both from the footprint our product portfolio and the team. So, what we have done as we've side -- sized the business for what we see going forward with both commercial vehicle and pass car volumes. We have also taken this opportunity to structure the business as we see the appropriate organizational structure to support our growth execute what we have going forward any opportunities that we have going forward; while at the same time getting better all the time and using this opportunity to get better. That's the way we've approached this. So, I don't see the need from a -- from some of those more sticky costs to increment them back up as the revenue comes back up we see it as a thinning opportunity.

Makes sense. That's helpful and then just lastly there was no mention of MirrorEye and I know there are bigger issues in front of us right now, but I was just wondering if there was any update on MirrorEye some of the discussions that you're having in terms of new contracts. And is there anything that you see out there that's going to impact the timing of those product launches that you've already laid.

Thanks Justin. And certainly we would have loved to talk a lot more about MirrorEye considering the PACE Award, but given the turbulence of this what's going on right now, we didn't think it was appropriate to spend all that time on that. First and foremost, we continue to add more fleets to our trials and we continue to get very strong positive feedback both from the fleet owners and from the drivers. Secondly, those who are in the current trial program are excited about the product and they've actually been a good source for additional features and product refinement over the year updates and other things that they need to have this be a more important tool as part of their safety and efficiency package. And there are -- they -- those trial partners also become very important advocates for us with the OEs. The -- most of them are planning additional deployments in the second half of the year. But the challenge that we have from a COVID timing is many of these businesses are essential business some of them in the food service business and they don't want anybody external near their trucks. So, some of them have delayed install some of them have delayed delivery of new trucks and that does impact our rollout. But what we are seeing as they continue to work with us we continue to have great conversations. We had some feedback from one of the initial fleets they did their own SAE-certified fuel efficiency test and found that they got 2.6% to 2.7% fuel economy improvement. So, we talked about the safety benefit. We're seeing in real life on real trucks the fuel economy benefit and the fleet partners that we're working with are continuing to be excited about what we're trying to do and what we're working on and how to integrate it into their vehicles. So, we're optimistic about this, but we're also recognizing that there are going to be some delays right now just based on the current situation.

Makes sense. I appreciate the time this morning.

Thank you, Justin.

For sure.

Thank you, sir. And presenters your next question will come from the line of Mr. Scott Stember from CL King. Sir your line is now live, please proceed.

Good morning, and thanks for taking my question.

Good morning Scott.

Yes, good morning.

On the topic of I guess backlog and new products. I guess, we were set to have a significant amount of new stuff coming out of backlog I guess with the next few quarters. Aside from MirrorEye, can you maybe talk about some of the other contracts and other launches whether they've been delayed canceled or outright and just the general timing of what we could expect from those coming out?

So Scott, what we have seen in general is that our customers have maintained their program timing. We can't talk about the magnitude of this -- the magnitude of the backlog size because the volumes are turbulent, but as far as the program launches and the program timing, first we haven't lost any programs. Most importantly and they haven't canceled any programs. Secondly, for all of the major programs, be they instrument cluster programs, be they OE MirrorEye programs, be they actuation programs, be they other things in both Control Devices and in electronics, those programs remain on track. And what we've done is we've used this time to actually bolster our product development and make sure that we are absolutely ready both in our facilities and in our engineering activities that are launches are flawless. So we feel confident about our backlog, we feel confident about the product -- programs that we're working on. We're excited about the future state. Scott, you know that even before the COVID challenge 2019 -- 2020 was a flat year and a year of preparation for launch. We're still on that same situation.

Yes, Scott. I just want to add to that. If you think about what we've discussed and obviously we withheld guidance for the balance of the year. But if you look at the new product launches with MirrorEye with our Park By Wire launch and our instrument cluster program, which is one of the largest awards in the company history and three years of record new business wins, we're extremely excited about future. We're waiting to see where the dust is going to settle around overall global market volumes, but when you layer on that incremental new business we're -- and you look at the actions that we're taking to right size our cost structure, we're very excited about the future.

Got it. And there was a very helpful slide about all the different end markets with regards to production, but what was -- can you just give us for Q2 your total expectation of production declines? And just going forward, how closely should we peg our expectations for sales to these production changes for Stoneridge?

Yes, Scott. Thanks for the question. So it's a important question. We talked about the 23% for the full year, but obviously the largest impact of that 23% with average is going to be -- will be during the second quarter. So we are forecasting right now based upon the third-party data that our weighted average end markets will be down 50% versus our original guidance for Q2. And the way to think about it that is the way we've always talked about the business is 2.5 time to three times from a contribution margin perspective on incrementals and decrementals. Now for us the second quarter is going to be more towards the higher end of that 2.5 to three range because we've taken cost reduction actions during the quarter, but we're not going to see the full impact of those actions because we took them during the quarter. So you will see the full impact of those.

And you just can't address that….

Right. So you'll see the full impact of those in Q3 and Q4, but we've taken those actions during the quarter, so it will be more towards the three time range on our decrementals in the second quarter and then that will get better as we see the full impact of the cost reductions.

Yeah. And just as far as modeling for sales, how closely aligned will you be with these production forecasts with clients?

Close. Yes.

Okay. That's all I have right now. Thank you.

Thank you.

Thanks, Scott.

Thank you sir. [Operator Instructions] Presenters your next question will come from the line of Mr. Chris Van Horn from B Riley. Sir, please proceed, your line is now live.

Good morning, everyone, and thanks for taking my call and hope everyone is well.

Good morning, Chris.

Good morning, Chris.

And we hope you are well as well. Thank you so much.

I was wondering if you could comment on your supply chain, and if you're seeing any disruption there and how that might impact things going forward?

Yeah, Chris, it's Jon good morning. We monitor the supply chain as well as our operations on a daily basis and we have had a war room set up with sort of critical suppliers and we've monitored where that risk is really since the situation started in China. Our team feels pretty good about the majority of our supply base we have a couple of that are at risk, but the operations and procurement teams are well on top of it and we believe that we're well positioned to restart and ramp up and follow our customers. So we -- it's our goal to make sure that we're able to follow our customers and that we don't become the constraint to their ramp up. And I'm really pleased with the way our organization is working together to be proactive and be ready for the ramp up.

Got it. And then, maybe prior to the disruption in mid-March and ongoing you -- could you comment on the award activity and maybe how it is progressing and if it did progress through March?

Yeah. So, Chris, as you know, the award activity is not linear. It's lumpy and particularly with some of the larger awards, like the most recent MirrorEye awards, they come in big chunks. And so, there wasn't anything that was material in the quarter that would change our backlog or would be -- that would be worthy of a significant press releases or conversation. But what we see and as I said to Scott earlier, we have not lost any business. Everything that we have completed for we have -- we felt like we've done very well and we're confident that, as our customers come back and recognize that in some situations, our customer shut down, including the procurement organizations shut down. So some decisions just did not happen during this period of time. We're absolutely confident in the way in which we've worked with our customers, the way in which we reacted, the way in which we've worked with our customers and the way in which we have positioned the organization, sets us up very well as they come back that we're better positioned as a partner to them even than we were before the crisis.

And, Chris, one thing that I'd just like to add to that, that I think it's important. Jon talked about the SAE testing and the fuel economy. I think the overall view on MirrorEye versus the take rates that we've incorporated into our backlog, just continue to look better and better as well. So that's, obviously, going to be a big opportunity of those -- given the size of those programs and the opportunity for take rates to continue to improve as more and more fleets and our extremely compelling value proposition that MirrorEye provides to them.

Got it. Makes sense. Thank you for that. And then, lastly for me, the OEM sales in Brazil, big increase there. I'm just curious what was driving that. Was it share gains, was it new launches?

So, if you if you remember, Chris, in the latter part of last year we talked about a series of OEM wins, instrument clusters, connectivity modules and actually some OE audio. And those things have been in the process of a ramp up and it's really a transformation with regard to Stoneridge Brazil, from a aftermarket business into much more aligned with Stoneridge's overall business, which has an aftermarket side, but also has an OE side. And the other thing that isn't as apparent in these quarters is the importance of the technical capabilities in Stoneridge Brazil to help our global product development and help as we launch and accelerate these launches and connectivity with MirrorEye or in other areas we're using the global footprints and the global capabilities there. So the Stoneridge Brazil team is doing a fantastic job of transforming itself from a product standpoint and contributing to the global product development side and then I would also say, our facility in Manaus from protecting the people in a very challenged place is being recognized for the great things that they're doing, to take care of employees there as well.

Great. Thank you so much for the time this morning and stay safe and stay healthy.

Thanks Chris. Appreciate it.

Thank you, sir. And I am showing no further questions at this time. I would now like to turn the conference back to Mr. Jon DeGaynor.

Well, I want to thank all of you for your participation in today's call. In closing, I can assure you that our company is committed to continuing to drive shareholder value through strong operating results, profitable new business and focused deployment of our available resources. Our management team will respond effectively and efficiently to manage and control variables that we can impact and continue to drive financial performance. We are confident that our actions will result in continued success in 2020 and beyond. Thanks very much.

And again, thank you everyone for participating, this concludes today's conference. You may now disconnect. Stay safe and have a lovely day.