Ladies and gentlemen, thank you for standing by and welcome to the Stoneridge Second Quarter 2020 Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Matt Horvath, Director of Investor Relations. Thank you, please go ahead, sir.

Thank you. Good morning everyone and thank you for joining us to discuss our second quarter results. The release 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 Rob 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 the 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. This morning, we are going to discuss our performance during the quarter, as well as some exciting news for the company. However, before we get started, I want to take a minute to recognize the fact that the global health crisis we are experiencing, just more than impact the bottom line for the company. It also directly impacts our employees and their families. We sought to protect our employees to the greatest extent possible. For example, we have partnered with local authorities to construct a field hospital in Manaus, Brazil and have instituted rapid COVID testing capabilities in our Juarez, Mexico facility. Our employees around the world have allowed us to continue to make progress as a company and to support our customers. I want to personally thank them for their dedication to Stoneridge during this challenging period. I will now begin on Page-3. On our first quarter call, we outlined several actions we were taking to respond to current market conditions and position the company for future growth. During the second quarter, we executed on those actions, resulting in strong operating performance despite significant revenue headwinds. We continue to focus on controlling the things that we can and responding efficiently and effectively to external factors. In the second quarter, despite a 45% reduction in revenue, relative to the first quarter, our detrimental adjusted operating margins remain in line with our expectations of approximately 30%. As Bob will discuss later in the call, we expect that the incremental contribution margins, we will see as production continues to ramp up in the second half of the year, will exceed the detrimental margins we experienced in the second quarter. We were able to limit cash burn in the second quarter to approximately $11 million, which was…

Thanks, John. Turning to Slide 12. Sales in the second quarter were $99.5 million, a reduction of 45.6% versus the first quarter. Adjusted operating loss was $19.1 million or negative 19.2% of sales, which resulted in second-quarter decrementals adjusted operating margin of 30.1%, which was in line with our expectations. Due to the continued uncertainty regarding the expected impact of the pandemic, we will not be providing updated 2020 guidance this morning. However, we will continue to provide detail regarding our expectations for the remainder of the year. Based upon the latest IHS and LMC projections, our weighted average end markets in the second half are expected to improve slightly versus the forecast we provided during our first-quarter earnings call. As John outlined previously, we expect our third-quarter revenue to be in line with the production rates that we saw at the end of the second quarter, were sales in June were approximately $51.5 million. While our decremental margins in the second quarter were roughly 30%, we expect second half incremental contribution margins to improve to approximately 35% relative to the second quarter. As we leverage our cost reduction actions and the anticipated ramp-up of production for the remainder of the year. Due to the amendment of the credit facility in the second quarter, we expect interest expense to increase by approximately $0.5 million quarterly over the next year based on our current debt position. Given the unusual cadence of expected earnings this year, we expect our third quarter tax rate to be significantly different than our previously guided rate of 20% to 25%. Based on the current view of expected earnings, jurisdictional mix and specific tax provisions around the world, we are expecting total tax expense in the third quarter to be approximately $0.5 million. Finally, net debt increased…

[Operator Instructions]. And your first question comes from the line of Justin Long with Stephens.

Thanks for all the color on the third quarter, it looks like based on the revenue commentary, something in that $155 million range and maybe around breakeven from an operating income perspective is what you're expecting. But looking into the fourth quarter, I was wondering if you could give any color there. It seems like based on the industry forecast you laid out as something that's kind of sequentially flat from a revenue perspective 3Q to 4Q, is what we should be expecting, but would love to get any directional color you can provide on that and maybe any fourth quarter cash flow thoughts, if you could provide that as well.

Yes. So, Justin, if you think about the comments that we made last quarter on the call, so last quarter we had said that the -- our end markets were down about 23% relative to the $760 million guidance that we originally provided. So we have -- what we have said today is that our end markets have improved slightly by about 1.3% relative to our first quarter guidance. So I think with those numbers, with the run rate that we talked about, the $155 million based upon the current IHS and LMC for Q3. And with that additional bit of guidance, you should be able to -- really kind of backing our expectations for the fourth quarter, but they're not in line with what you're saying.

Okay, that helps any -- anything on the cash front that you can provide for 4Q?

So on the cash, I do want to -- I want to make a couple of comments generally on cash. And we've been talking about it in a number of investor events that we've attended. We're really pleased with the progress that we're making with respect to free pack -- free cash flow generation. If you look at the investments -- the technology investments that the company has made with ERP systems, it is providing much more granularity to our op -- to our operations team, and which is allowing us to get into another level of detail in terms of managing our working capital. And we're -- obviously, we were able to exceed our goal, from a cash flow generation point of view. I said $15 million to $20 million, but in Q2, that was $11 million. And now we're saying we're going to at least offset that in the third quarter, which is quite a bit better than what we had mentioned before. A lot of adjustments is just being driven by the fact that our -- we have taken this downturn and the slowdown in our business as an opportunity to really do a lot of great work with this new system that we have, and really getting a lot of detail and really manage it at another level. And we'll start to see it on the working capital side. As a CFO, that's something that's really exciting to me, so. We're not going to give you specific guidance around the fourth quarter cash flow, but if you think about those -- the incremental contribution margins and our cash conversion rate, our historical cash conversion rate, that -- you should be in line, I think probably a little bit better than that based upon the additional work that we're doing on inventories.

Okay, great. That's helpful. And then the slide on the awarded program launches was something that was pretty helpful just laying all of that out. And, John, you gave some color there, but I was wondering if you could just remind us about your thoughts on how long it takes to ramp to peak revenue for these contracts, and just generally, the length of these contracts. And then maybe, on the incremental margin front, you increased your expectation in the back half as we look towards these program launches, is a higher incremental margin framework the right way to think about things the next several years in a recovery?

I mean, there's a lot in that question, Justin, but thanks for the question. The -- every program and every customer are different, and obviously, the commercial vehicle versus the passenger car side is also different. But from a typical program award, it's a couple of years before you get started production. And then once you get to the start of production, it's usually 12 to depending on the car program or the truck program, it's 9 to 15 months' worth of ramp-up time. So, we -- what we see, then, with length of program is particularly with Powertrain side and Drivetrain side, on the passenger car is five years and on trucks, it's longer. So, when we talk about having $190 million of incremental business from a peak annual revenue basis, you can think about that as an increase over a three to five to seven-year period with the sort of technologies and the customer base that we have. So, it's -- we recognize and we talk about awards. And I think anybody that's been following our story understood that outside the pandemic, we knew that 2020 was a challenging year, because we had things rolling off and we were just in the process of launching. What we're trying to lay out for everybody is, we get the benefit of the economy coming back and we get the organic impact of all of these launches that will be happening in 2021 and in the subsequent years. Really, that's what we've been talking about for the last couple of years and we're now restarting to see all those things come to fruition, launch and ramp-up [Technical Difficulty].

John, maybe talk about the pre-Wire opportunity here, it seems, obviously, this is a way for fleets not to have to wait a couple of years for the MirrorEye product on their newer trucks. If you could just talk about how this -- does this change the overall OEM opportunity that you've talked about in that $250 million range, and maybe talk about the margin profile of pre-wiring a truck and having it installed at the beginning of the life versus having it done on the -- totally on the OEM floor down the road.

So, Scott, thanks for your question. A couple of things to think about is, because of the trucks are a piece of production equipment, anything that can be done to make that truck more robust and more predictable is a benefit and the fleets are going to want that. The ability to do the wiring in place in the factory before it leaves the factory is a way to reduce risk for the fleets. So that's piece number one. Secondly, it's a demonstration that our fleets are asking the OEs to prepare their trucks this way because the OE would not do it if there were not a market poll, so that's piece two. Piece three is it's another example of we go from what do we do to retrofit trucks that are on the road today to making it easier to retrofit future trucks until such time as the [indiscernible] regulations are changed where a truck could leave the factory without mirrors. Remember that our FMCSA exemption is only for post factory vehicles. So currently, trucks must be shipped with mirrors. But this pre-wire option really becomes part of how do you facilitate that transition more rapidly and set the groundwork for what happens when mirrors can be removed from the trucks. So we view this as a very important step. It's a signal of what the fleets want and a signal that the OEs see the benefit of doing it.

Got it. And you talked about the sensors about $30 million leaving the equation here on an annualized basis. Can you maybe just talk about how we should be looking. I know you gave the quarterly number of Q3 for revenue, but the cadence of the wind-down heading into next year?

Yeah. So you -- so this is a decision that we -- we've made. We've notified our customers, we work on transition plan, but in these situations, out of respect for our customers, this isn't a -- we don't call them and tell them, hey, we are stopping production tomorrow. It's an orderly transition, so we won't see a revenue change in this in the very near term. When we give you the $30 million, it's really for modeling future state revenues post-exit [Technical Difficulty].

And your final question comes from the line of Gary Prestopino from Barrington Research.

Couple of questions here, just on the awarded program launches, at the state of the world is where it is right now with the pandemic, and it looks like it's reaccelerating in some locales. Is there anything in -- with these scheduled launch dates that could get pushed back if we stay where we are right now, which is looking like things are getting worse than better?

So, Gary, I mean, we monitor those situations with our customers on a regular basis. As we said in the last call, we have not seen any material change in launch schedules from either our commercial vehicle or our passenger car customers, but could it happen? Of course, it couldn't happen. We haven't seen any platforms that have been canceled or any programs that have been materially delayed.

Okay. I'm just writing this down. Hang on. And then the last question would revolve around, within your three lines of business, are you happy with all of the segments, products or whatever, that you have there? I guess what I'm getting at is do you anticipate exiting anymore kind of lower margin or low return businesses within each three of the three business segments?

Gary, as we said, we evaluate our product lines on a continual basis. We're happy with where we're at. We don't see any other material portfolio adjustments at this point, but I think we've demonstrated, over the last couple of years, that we will prune and adjust our portfolio as appropriate and we look at a highest and best use of our resources to drive growth and drive shareholder return. And at this point, we don't see any additional changes, but that doesn't mean it won't happen in the future.

And there are no further audio questions. I would now like to turn the conference back over to Mr. Jon DeGaynor for closing statements.

Thanks very much and thank everybody for your participation in today's call. I just wanted to, in closing, assure you that our company is committed to driving shareholder value through our strong operating results, profitable new business that we talked about and really focused deployment of our available resources. This management team will respond efficiently and effectively to manage and control variables that we can impact and continue to drive strong financial performance. We're confident that our actions will result in continued success for the balance of 2020 and beyond. And again, I appreciate your attention. Thanks very much.

Well, ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.