Good day, and thank you for standing by. Welcome to the Stoneridge Second Quarter 2023 Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kelly Harvey, Director of Investor Relations. Kelly, you have the floor.

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 Investors section under Webcasts and Presentations. Joining me on today's call are Jim Zizelman, 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 was 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 Jim and Matt has finished their formal remarks, we will then 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. In the second quarter, we drove strong top line growth and significant margin improvement resulting in financial performance that exceeded the expectations we outlined on the first quarter call. As expected, we finalized the majority of our pricing negotiations in the second quarter, resulting in retroactive and forward-looking price increases. Additionally, we continue to focus on improving manufacturing performance and optimizing our global cost structure to both reduce costs and improve operational efficiency. This resulted in significant operating margin improvement in the quarter and provides a good foundation to drive continued operating performance as we continue to grow the company. Second quarter adjusted sales grew by 13% relative to the first quarter to $262.4 million. Second quarter growth outpaced the growth in our weighted average end markets by more than 5 times. Second quarter adjusted gross and operating margin improved by 470 and 390 basis points, respectively, versus the first quarter, resulting in a gross margin of 23.2%, over $6 million of operating income and an operating margin of 2.4%. Our adjusted EBITDA margin increased by 300 basis points to 4.5%, while adjusted EPS for the quarter improved by $0.20 relative to the first quarter. Second quarter EPS and adjusted EBITDA included non-operating expenses of $2.7 million or approximately $0.08, primarily related to a below-the-line non-operating foreign currency expenses. Excluding these non-operating expenses, adjusted EPS would be approximately $0.03 in the quarter, while adjusted EBITDA margin would be approximately 5.5%. This morning, we are updating our expectations for operating performance and guiding to the high end of the previously provided range for adjusted revenue, gross margin and operating margin to reflect improved operating performance, continued strong demand and the favorable impact of completed price negotiations with our customers.…

Great. Thank you, Jim. Turning to Slide 8. Adjusted sales in the second quarter were approximately $262.4 million, an increase of 13% relative to the prior quarter. Adjusted operating income was $6.2 million or 2.4% of adjusted sales, which was an increase of 390 basis points from the prior quarter. I'll provide additional detail on segment level performance on the subsequent slides. As Jim discussed earlier in the call, we are guiding to the high end of the previously provided guidance ranges for adjusted revenue, gross margin and operating margin to reflect improved operating performance to date and an improved outlook for the remainder of the year on continued strong sales. We expect continued strength in our commercial vehicle end markets as customer orders remain stable and new program launches, including our SMART2 tachograph, are expected to continue to drive outsized market growth. In our automotive end markets, production volatility has improved and stabilized. Despite the fact that the third quarter is typically slower due to reduced production schedules in the summer, we expect revenue in the second half to be relatively in line with the first half. As a result, we're expecting second half revenue to be weighted to the fourth quarter. Adjusted gross margin improved by 490 basis points in the quarter relative to the first quarter, primarily driven by improved operating performance and the impact of negotiated price increases. We expect third quarter gross margin to be approximately 21% after considering the onetime impact of retroactive price benefits in the second quarter and relatively lower revenue in the third quarter, impacting fixed cost leverage relative to the second. We expect the gross margin performance will follow sales with sequentially better performance from the third and fourth quarter, resulting in full year performance at the high end of…

[Operator Instructions] Our first question comes from Justin Long with Stephens. Justin, please go ahead with your question.

Thanks, good morning. And congrats on the quarter. So maybe to start with the guidance, Matt, you talked about the gross margin cadence in the back half of the year. Is there any color you can give on that EBITDA margin cadence 3Q to 4Q? Because to your point, the run rate should be kind of well above the average for the full year on EBITDA margin. So I just wanted to see if we could get a little bit more clarity on how to think about the setup as we progress into next year?

Yes. So certainly, Justin. Thank you for the question. We expect that we will have some normalizing of gross margin in the third quarter, like I talked about in the prepared remarks particularly around the reduction of that kind of retroactive price benefit that we saw in the second quarter. That said, we expect that, that will be more than offset by reduced engineering expenses as we move forward into the second half of the year. So like I said in the prepared remarks, we expect above breakeven EPS performance for the quarter. And you should expect that we'll see sequentially improving EBITDA margin performance through the second quarter. We talk about back half of the year in run rate. Like we said, we expect weighted -- the revenue to be weighted to the fourth quarter in the second half. We would expect gross margin to continue to sequentially improve from the third to the fourth quarter, and we would expect that D&D remains kind of at that normalized level or maybe even improve a little bit in the back half. So when you put those pieces of the puzzle together, you should expect sequentially improving EBITDA margin to a run rate out of 2023 that is strong heading into 2024.

And maybe one for Jim. As we look at the margin improvement we saw in the business sequentially in the second quarter. It's encouraging. It feels like the majority of this was driven by price and that pricing outside of the retroactive catch-up is sustainable. But when you think about the next lag of margin improvement, can you talk about some of the self-help opportunities that are out in front of you? I know D&D is coming down, but what are some of the operational changes you can drive to improve margins from here?

Justin, thanks for the question. And maybe first things first. I would say that the improvement isn't just characterized by price, right? We have already started to apply some of the execution type initiatives that I've been talking about for the last six months or so. And we're already seeing the benefits of some of those actions really hitting our numbers. Going forward, of course, as you're alluding to, there are more. And some of the things that we're doing inside the house is really taking action on how we are set up as a company. What should we be doing from a functional perspective to ensure that we've got the greatest amount of efficiency as we execute. And there's several different functional areas where we are realigning those organizations so that we can operate more effectively across the company instead of so independently division by division. And by doing that, we end up taking care of redundancies and we significantly improved the throughput in the company as well, being able to handle a lot more development and launches than what we would normally do as we had been set up in a prior sense.

Okay, thanks. And last one for me is on the balance sheet. Matt, is a refi of the debt factored into the guidance at all. It looks like that's something you anticipate before the end of the year. So curious if you have any initial thoughts on the impact that could have and if that's factored in.

No. Justin, that is not included in the current guidance. We're still evaluating what the right structure is. We -- as we've talked about in the past, we were very confident in the initiatives and execution plan that we had to drive significantly better performance in this quarter. And as you see in the guidance, continue that trend for the remainder of the year. So we wanted to make sure that we got a couple of good quarters of performance as we expected out in front of us here as we look at refinancing because I think it will help us significantly with the structure and the terms that we should get in that deal. But there is not anything included in the guidance related to the refinancing at this point.

Okay, understood. Thank you so much for the time.

I'm showing no further questions at this time. I would now like to turn it back over to Jim for closing remarks.

Well, thanks, everyone, for joining us for the call. I know your time is really quite important, and we truly appreciate your willingness to engage us today. We couldn't be more excited about our industry-changing product platforms and the growth it brings to our company. Our focus on rigorous and disciplined execution is already driving improved performance based on the results we outlined today, and we will remain focused on the operational excellence to drive shareholder value as we continue to build our strong strategic foundation. Thanks again, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.