Ladies and gentlemen, thank you for standing by and welcome to Stoneridge Third Quarter 2020 Conference Call. At this time, all participants lines 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 like to hand the conference over to your speaker today, Matt Horvath, Executive Director, Investor Relations and Corporate Strategy. You may begin.

Thanks Phil. Good morning everyone. Thanks for joining us to discuss our third 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. Before we get started, I want to take a minute to recognize the fact that we continue to be in the midst of a global health crisis and we have and will continue to put the health and safety of our employees and their families at the forefront of every decision we make. I know that this situation has been challenging for many, and I want to thank our employees for their dedication to Stoneridge during this period. Let me begin on Page 3. During the third quarter, we experienced strong top line growth as a result of the broad recovery across our global end markets. We continue to focus on improving gross margin through reduced material costs and the efficient ramp-up of direct labor costs as production volume increased across our global facilities. We are able to leverage our fixed cost structure to capture an adjusted contribution margin of over 35% during the quarter on incremental revenue and improved gross and operating margin relative to the first quarter. We expect that revenue will continue to decline slightly in the fourth quarter, primarily due to the impacts of typical fourth quarter seasonality and be partially offset by continued strength in the commercial vehicle production volumes. Additionally, we expect continued strong margin performance in the fourth quarter. Bob will provide additional detail regarding our expectations for the fourth quarter, as well as the primary drivers of our fourth quarter guidance later in the call. Our liquidity remained strong, has reduced net debt by over $10 million during the third quarter. As a result of our cash generation in the quarter, we are able to reduce our revolving credit facility by $17 million. Based on our current production forecast, a continued focus on inventory reduction and…

Thanks, Jon. Turning to Slide 10. Sales in the third quarter were $175.8 million, an increase of approximately 77% versus the second quarter. Adjusted operating income was $8.2 million or 4.7% of sales, resulting in third quarter incremental adjusted operating margin of 35.8%, which exceeded our expectations during the second quarter earnings call. Control Devices sales more than doubled in the third quarter relative to the second quarter to over $100 million, while operating income improved to $13.3 million resulting in an adjusted contribution margin of 36.1%. Electronics sales increased by almost 50% resulting in sales of $70.4 million. Electronics adjusted contribution margin of 41.4% during the quarter resulted in adjusted operating income of $1.3 million or 1.9% of sales. Finally, Stoneridge Brazil sales increased by 83% in the quarter to $12.8 million, while adjusted operating income improved $600,000 or 5% of sales. Although there is continued uncertainty regarding the ongoing impact of the pandemic, this morning we are providing guidance for the remainder of 2020 based on current market conditions. In summary, we are expecting relatively stable sales in the fourth quarter and guiding to a midpoint of $170 million in sales, which results in full-year revenue of between $624 million and $634 million. Based on current production forecasts and market conditions, estimated product mix between the segments and our view on operating expenses for the fourth quarter, we are expecting adjusted earnings per share of negative $0.05 to $0.05 resulting in full year adjusted earnings per share of negative $0.22 to negative $0.12. I will provide additional detail on the specific drivers of our 2020 guidance later in this call. Page 11, summarizes our key financial metrics in more detail. It highlights the improvement in all of our key metrics, not only relative to the second quarter, but…

Thank you. [Operator Instructions] Your first question comes from the line of Justin Long from Stephens, Inc. Your line is now open.

Hey, good morning. This is George Sellers on for Justin Long. Thanks for taking the question and congrats on the quarter.

Thanks George.

Good morning, George. Thank you.

So, looking at your revenue guidance, it looks like it assumes, you're going to outgrow your end markets by about 6.5% in 2021. If for some reason, the end markets aren't up as much of the current third party forecasts, is that outgrowth of 6.5% still achievable? And said it different way, how dependent is that outgrowth on your end market performance?

So George, let me answer the first piece and I'll let Bob give some additional detail. As we talked about in the script and we've talked about many times, both – 2020 was always a year of significant preparation for launches that would happen in the end of this year and into next year. So, the annualization of our park-by-wire programs, the launch of the driver information system program, and the launch of the two OEM MirrorEye programs, as well as a series of other small launches, those will all drive growth outsized to the market. But we still are – our base revenue is tied directly to our end markets, that's why we give you the IHS and LMC data. But we're really excited about the number, the organic growth that we have just with the launches that we've been driving in the last two years.

Yes, George. Thanks so much for the question. So, at this time of the year, we are – we're going through our planning process. And at this point in time, we're getting our arms around our revenue number for next year. So right now, just given the current IHS and LMC projections, we feel comfortable that, that 6.5% growth is a really good number for next year at a minimum. Obviously to the extent that things change with respect to product mix in the market or in the regions, obviously then, you can basically run some sensitivities, George, by looking at our sales by region and making your own judgments around sensitivities around volume. And you could, with the information that we give, you can run – you can basically run your own analysis and figure out what you feel like the potential puts and takes are. But the way you're looking at it is correct, 6.5% over the market right now based on the current projections.

Got you. Okay, thanks that’s helpful. And then when you think about the free cash flow profile of the business headed into next year, is there any reason why the conversion should not approximate a 100% of net income? And if…

There is nothing – no, there is nothing that's – so Jon talked about it a little bit. So we're still going through the final points of next year, but Jon made the comment about, we feel really comfortable that, that this third quarter performance is a really good proxy for next year's performance. We still have some work to do and some – on the plan obviously for next year, we're early in the – we're early in our planning process. But the initial look, there is nothing fundamentally different about the mix and about the performance and the cash flow generation of the business.

Got you. Okay, and then combined with your outlook, how are you thinking about share buyback activity going forward?

George, we constantly evaluate the options and the uses of our capital between M&A, share repurchase and just investing in the business. And it's really not – hasn't changed at all as a result of the pandemic. We've talked about the things that we were going to do as a company. So we took some aggressive actions and cut our SG&A costs. But also we have a lot of – we got three years of record new business wins and we’re also investing. We did not just kind of go pro-rata across the business, we were very meticulous about how we went on the path of cutting our costs to make sure that we didn't do anything to sacrifice the investments that we need to make to continue to grow this – to continue to grow this company.

Okay, great. And then lastly if I could sneak one more in, are you anticipating any new OEM contracts related to MirrorEye in the near term?

George, we, I mean, we continue to talk to our OEM partners on a regular basis. Nothing that we anticipate in this forthcoming quarter, in the fourth quarter, but we're very excited about the opportunities we have and the way in which our customers, our OEM customers are responding to the product and to the quality of the system that we have, we're very optimistic.

Okay, great. Thank you all for the time.

Thank you, George.

Sure, thanks George. Thanks for the questions.

Your next question comes from the line of Gary Prestopino from Barrington Research. Your line is now open.

Hey good morning everyone. Yes, my question kind of revolves around – well, revolves around a number of things here. Number one, with some of these changes in Europe in particular with the pandemic and lockdowns going down in some countries and all that, and then even what's going on in the United States at this point, how – does that in any way change kind of what you're looking for in Q4? I mean, is it – was it dependent on things being where they were like three weeks ago?

Yes, so first, Gary, thanks for your question. And we – what we're seeing right now with the changes and lockdowns and the stuff that's in the press is, one, it's very location-specific. Typically it's also very service focused, if you will, bars, restaurants and those sort of things. So at this point, we've seen no change in production. Even where it's the hottest in our regions where the COVID is changing the most, that hasn't changed our ability to run plants, it hasn’t changed our customers’ abilities to run their plants. So what we're seeing is that, yes, there are increase in cases. It's been focused on congregation areas, bars, restaurants those sort of things. And it's not been focused on really a manufacturing or production of goods. And as long as that is the case, we believe that – what we're putting out there is the right way to go.

Okay. And then in terms of what your sales force is doing now, obviously nobody seeing each other, nobody is traveling. I would assume they're aggressively marketing via Zoom or telephonically. But beyond the programs that you've got signed up and you're talking about, how is the pipeline looking at this point? I'm just trying to get an idea, things have really stalled dramatically or are better than you would have expected given the situation?

So, we're not doing everything via Zoom. Where customers will meet with us, we are going.

Okay.

It's gone so far as me being out at some customers where they'll meet with us. We also know that certain customers, you know, they closed their doors for multiple weeks. So there are certain programs and certain sourcing decisions that were delayed. But we continue to talk to our customers, we continue to meet with our customers, we continue to do technology reviews and technology shows, and most importantly, we continue to execute on the launches and the things that we told them we would do. And we have a tremendous number of interfaces and opportunities to delight our customers, and regardless of pandemic, we're continuing to do that. And so, we feel pretty good about where the pipeline of opportunities is.

Okay, thank you.

[Operator Instructions] I’m showing no further questions at this time. I will now like to turn the conference back to Jon DeGaynor.

Yes, let me thank you all 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 operational results, profitable new business, and focused deployment of our available resources. This management team will respond efficiently and effectively to manage and control the variables that we can impact and continue to drive strong financial performance. We are confident that our actions will result in continued success for 2020 and beyond. Thank you all and have a good day.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. And have a wonderful day. You may all disconnect.