Good day, and thank you for staying by. Welcome to the Stoneridge Second Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a Q&A session. [Operator instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kelly Harvey, Director of Investor Relations. Please go ahead.

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 Webcast and Presentation. Joining me on today's call are Jon DeGaynor, 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 has been filed with the Securities and Exchange Commission under the heading Forward-Looking Statements. During today's call, we will 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 Matt have finished their formal remarks, we’ll open up the call to questions. . I would ask that you keep your questions to a single follow-up. And with that, I will turn the call over to Jon.

Thanks, Kelly, and good morning, everyone. Before we begin with the specific results of the quarter, I want to recognize and thank the Stoneridge team for their continued dedication to the company and to our customers during this challenging period. Turning to Page 3. In the second quarter, we continued to navigate through macroeconomic challenges, including ongoing supply chain disruptions, production volatility, and rising material costs. During the quarter, we also experienced significant foreign currency headwinds, primarily related to European currency exposures. We focused on responding to fluctuating production schedules, securing material, managing our cost structure, and continuing to engage with our customers and suppliers on cost recovery actions. Our second quarter adjusted sales of $205.7 million, resulted in an adjusted gross margin of 18.7%, translating to an adjusted operating margin of negative 3.2%. Adjusted EPS for the quarter was negative $0.29. Second quarter adjusted EPS performance was impacted by net foreign currency headwinds of approximately $0.06 versus previous expectations. We continued to offset a large portion of the incremental material and supply chain-related costs through pricing actions and pass-through of costs. We have offset approximately 90% of incremental costs year-to-date relative to last year. Additionally, we continue to pass the majority of spot purchases through to our OEM customers, offsetting more than $15 million in spot buys in the quarter. We will continue to evaluate macroeconomic conditions, and expect ongoing discussions with our customers regarding price increases and other cost recovery actions. We remain focused on the growth initiatives that will drive long-term profitable growth. During the quarter, we continued to make progress with our MirrorEye platform, focusing on our first OEM program launch in Europe, and the continued expansion of our retrofit programs. Take rates in Europe continued to exceed prior expectations, and customer production forecasts suggest take…

Thanks, Jon. Turning the Slide 10, adjusted sales in the second quarter were approximately $206 million, an increase of 4.6% relative to the prior quarter. Adjusted operating loss was $6.5 million or negative 3.2% of adjusted sales, which decreased by 170 basis points versus the prior quarter. The decline in margin performance is primarily due to the negative impact of foreign currency of approximately $1.6 million, as well as non-recurring inventory adjustments related to specific expenses within the quarter of approximately $1.5 million. These incremental expenses were offset by the continued impact of pricing actions and reduced operating expenses, as we continue to right-size our cost structure to align with current market conditions. It is important to note that these price recoveries dilute margin, as they are accounted for as both incremental material costs, and corresponding incremental sales. This impact is amplified as gross material costs continue to rise. As Jon discussed earlier in the call, we are adjusting our full year 2022 guidance to reflect second quarter performance, which was primarily impacted by foreign currency headwinds, as well as current market conditions. We are reducing our midpoint adjusted revenue guidance by $15 million or 1.7% to reflect slower than expected improvement in customer production forecasts, driven primarily by material shortages, despite continued strong end market demand. We are reducing gross margin by 75 basis points and operating margin by 50 basis points to reflect reduced fixed cost leverage on reduced sales expectations, offset by reduced cost structure. Additionally, we expect incremental tax expense, FX headwinds, and interest expense. This results in a reduction to adjusted EBITDA margin guidance of 75 basis points, and a reduction to adjusted EPS guidance of $0.17, resulting in a midpoint of negative $0.20. I will discuss the specific drivers of our adjusted guidance in…

[Operator Instructions] Our first question comes from Justin Long of Stephens. Your line is now open.

Thanks, and good morning. So, I guess I wanted to start with the guidance, Matt. It was helpful to get that color on the cadence of EPS breakeven in the third and then a pretty big ramp in the fourth. Could you share what your expectations are for the cadence in revenue and EBITDA moving through the back half?

Yes, of course. Good question, Justin. Obviously, we do expect a significant ramp in the second half. That's aligned with, not only the production forecast that we see, but also several of our customers' public comments around easing material limitations and really strong end market demand. So, we're expecting revenue to ramp stronger from the second to third, and then again from the third to fourth. And that would translate to an EBITDA that, aligned with our guidance, would be kind of mid-single-digit margin in the third quarter, ramping to close to - high single digits, close to 10% by the end of the year, as we look at an exit run rate. That's aligned, Justin - if you look at the second to third quarter progression, that's aligned with our - kind of the high end or a little bit greater than the high end of our historical contribution margins, if you think about kind of the impact of FX and the inventory stuff we talked about in the second quarter, which we see as reasonable given the fact that we've taken cost reduction actions that we expect to continue for the remainder of the year, and the fact that as you get some incremental revenue - some significant incremental revenue, we always expect to contribute at the high end of that range as revenue ramps up faster. So, we expect stronger revenue progression from the second to third, with continued from the third to fourth, and kind of mid-single digit EBITDA margin in the third, ramping to close to 10% by the end of the year.

Okay. That's helpful. And as I think about that and your exit rate this year from an EBITDA perspective, high single digit, close to 10% margins. If I just kind of back into the implied EPS in the fourth quarter, at the midpoint of the guidance, it's $0.36. I mean, that's a significant swing. I guess, just from a high level, can you talk about your visibility to that implied fourth quarter guidance? And as we move into 2023, is taking a kind of run rate of this fourth quarter a good starting point for next year?

Yes. So, we always have a little bit of seasonality in the fourth quarter, Justin, when you get engineering reimbursements and the timing of some expenses. So, we always get a little bit of benefit from an earnings perspective in the fourth quarter. When you couple that with some strong ramp-up over a relatively short period of time on the topline, you get contribution margins that are really strong. So, we think it's reasonable to expect a really strong ramp-up from an earnings perspective heading into the fourth quarter. From a run - and to answer your question on visibility, we are continuing to street see extremely strong demand in our end markets, not only the OEM markets, but the aftermarket. When you think about Orlaco and some of the things that we do off-highway, we're seeing really strong, continued demand in those markets. When you couple that with easing material availability as we get into the fourth quarter certainly, like we talked about, MirrorEye has a potential to continue to accelerate from a take rate perspective. And we expect that to even accelerate further as we get to 2023. So, we have good visibility into the continued strong demand. We are seeing some material easing, which gives a little bit of that demand - some material limitations easing, I should say, which gives that demand a little more credibility as we head into the second half of the year. One of the things that I would note here, Justin, is, spot buys seem to be a good leading indicator on material availability. And we are seeing spot buys reduced from the first to second quarter, which suggests that we should continue seeing material easing as we get in the second half of the year. So, we're seeing really strong demand. Our customers are publicly talking about extremely strong demand. So, we think that the ramp in the second half is viable. And from an earnings perspective, it should follow pretty closely. And like you said, going into 2023, as material issues subside, we think that we've got obviously a very strong contribution margin, perhaps even some upside to things we talked about previously when we think about MirrorEye take rates and volume. So, we think there's a really strong run rate heading into 2023.

Okay. And last thing I wanted to ask about was MirrorEye. It was good to get the update on your take rate expectations in a normalized supply chain environment. But I was wondering if you could provide an update on MirrorEye retrofit activity, what you're seeing here recently. And maybe on the 2022 guidance, what's getting baked in from a MirrorEye perspective, both OE and retrofit.

So, Justin, it's Jon. We're excited both on the progress on the take rates for the first OEM program, as we talked about during the call. And again, that's - those take rates are far exceeding what we put in our backlogs and what our customers initially anticipated. And what we're seeing is just the market acceptance for the product is huge. There, we are constrained by material, and both the - our customer and we are working with the supply chain to try to break those loose. And we expect to see that - it's one of the reasons why we feel so confident in the second half, or feel more confident in the second half. And that also then portends well for the next programs, because the level of success there from one OE will or should read across. With regard to the fleet, we continue to expand our fleet trials and continue to see greater acceptance as they’re hearing about the OE side, but also hearing about the results from specific fleets that we've talked about, like Maverick and Schneider. So, we're bullish on both sides, really proud of what the team is doing on both the OE and the retrofit side, and look forward to what that means in the end of the year 2023.

Okay. Thanks. And Matt, I guess on the revenue guidance, is there anything you can share on what's baked in for MirrorEye this year?

Yes, sure. Yes. So, year-to-date, like we talked about, we've recognized about $7 million in OE sales. That has been constrained even up till now, obviously, by material. So, we expect that to improve sequentially as we go forward. There is an incremental portion that's retrofit as well. I think we talked about at the beginning of the year, kind of $15 million to $20 million of total MirrorEye sales OE and retrofit. And I would think that we stay within that range, even with the material constraints through the remainder of the year here.

Got it. Very helpful. Thanks, Jon. Thanks, Matt.

All right. Thank you, Justin. I would now like to turn it back to Jon DeGaynor for closing remarks.

I want to thank everybody for your participation in today's call. I just want to close by saying that we can assure you that the company is committed to continuing to drive shareholder value through strong operating results and profitable new business and focus deployment of our available resources. This management team will respond, has responded, and will continue to respond efficiently and effectively to manage and control the variables that we can impact to drive those strong financial results. We're confident in our actions. We'll deliver great results in the balance of the year and beyond. Thanks very much.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.