Good day, and thank you for standing by. Welcome to the Stoneridge First Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that this call is being recorded. And I would now like to hand the conference over to our speaker today, Kelly Harvey, Director of Investor Relations. Please go ahead.

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 Webcast and Presentation. 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-K, 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 measures to the most directly comparable GAAP measures. After Jim and Matt have finished their formal remarks, we will 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 3. Our first quarter financial performance exceeded the expectations that we outlined on the fourth quarter call for both revenue and adjusted earnings per share. First quarter adjusted sales of $232.2 million resulted in an adjusted gross margin of 18.5%, translating to an adjusted operating margin of negative 1.5%. Adjusted EPS for the quarter was negative $0.25. We recognized adjusted revenue growth of approximately 18% compared to the first quarter of the prior year and approximately 3% versus the fourth quarter of 2022. Strong revenue performance in February and March, particularly in our commercial vehicle end markets, offset the challenges we outlined on our fourth quarter call for January related to reductions in China and supply chain constraints in our off-highway business, which limited production. With those headwinds behind us and stronger top line performance to exit the quarter, we are expecting strong continued revenue growth throughout 2023. As expected, gross margin during the first quarter was reduced by continued broad inflationary pressures, including higher labor costs and continued elevated material costs that were not yet offset with price increases due to the timing of the negotiations with our customers. Although we reached agreements on price increases with some customers during the first quarter, the negotiations are ongoing and we expect to reach agreement with most of our customers, including some of our largest, by the end of the second quarter. Based on current negotiations, we expect the final agreements to provide relief forward as well as favorable benefit retroactive to January 1 of this year. This morning, we are reaffirming our previously provided full year 2023 guidance with some relatively minor and offsetting adjustments to tax and interest expectations, as Matt will discuss later in the call. We…

Thanks, Jim. Turning to Slide 9. Adjusted sales in the first quarter were approximately $232.2 million, an increase of 18.1% relative to the first quarter of 2022. Adjusted operating loss was $3.4 million or negative 1.5% of adjusted sales, which was in line with the first quarter of last year as well as the expectations we outlined on our fourth quarter call. As Jim discussed earlier in the call, we are reaffirming our full year 2023 guidance with some relatively minor and offsetting adjustments to expected tax and interest expense. We continue to expect strong top line growth driven primarily by continued strength in our commercial vehicle end markets, the ramp-up and the annualization of new and recently launched programs, and our content on high-demand passenger car and commercial vehicle platforms. Based on our current view of the geographical mix of our earnings for the remainder of the year, we expect our tax expense to be relatively lower for the full year than previously expected. We expect that this tax benefit will be partially offset by higher interest expense driven by rising interest rates and a higher net debt balance in the short term, primarily driven by incremental working capital requirements to fund our growth. As a result, we are reaffirming our previously provided breakeven midpoint adjusted EPS guidance. Based on current market conditions, our current run rate and customer production forecasts, we are expecting second quarter adjusted sales at the high end of the previously provided guided range for approximately $245 million. Furthermore, we continue to focus on cost recovery actions and improve manufacturing performance to drive margin expansion. It is important to note that January gross margin performance was significantly impacted by the revenue reductions we discussed previously. However, performance in February and March significantly improved as revenue…

Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] We have a question from the line of Justin Long with Stephens.

I wanted to start with a question on pricing, just given some of the commentary there. I know you said you'd be finished with the negotiations by the end of the second quarter, but could you talk about your level of visibility around the magnitude of that pricing tailwind? And is there any color you can provide on that collective tailwind? And how much that could impact revenue for the full year?

Yes, so great question, Justin. We are obviously in active negotiations with the majority of our customers around pricing. We're obviously seeing significant inflation related to input costs, not just material, but also labor, energy, things like that. So we are incorporating all of that in those discussions. And obviously, that is, -- there's a lot of ins and outs, so it can be very complex, which is why it takes a little bit longer to solidify those conclusions. We are -- as you can imagine, those are multiple iterations of discussions. So we have some good visibility to our expectations of the result of those negotiations. But obviously, nothing is concluded until we reach a conclusion. So we do have good visibility to kind of the order of magnitude that we expect. It's been included in our guidance for the remainder of the year. And I would expect, an order of magnitude larger in the second quarter and than obviously in the first quarter. So while I wouldn't want to specifically talk quantitatively about the order of magnitude, I think it's fair to say that we've got pretty good visibility. There's some variability in timing, like we talked about for several quarters now, but I think we feel pretty comfortable that what we expect has been included in the guidance, and at this point, we see it being achievable.

And maybe this is just a bigger picture question to Jim on this same topic. I mean, if you think about the margin performance of this business over the last two, three years, given the inflationary pressures that we've seen, and now having to go back to customers and try to play catch-up on price and price cost. Has this changed the way you think about pricing your business from a structural perspective? And could we see any changes going forward in terms of how you go to market and price?

Well, again, I think we're in an unusual timeframe still here where we have inflation coming from our suppliers. Typically, especially in the electronics space, we would see a deflationary kind of activity over time. And even for the most part, in all commodities, but perhaps less so outside of electronics. And until such a time where that gets back to some kind of normal historical kind of behavior, then yes, in fact, it will impact how we go to market and how we will price with customers, because the price downs that were often included in contracts need to be carefully considered now, given still for most commodities, the inflationary nature of what we're seeing. So yes, we are looking at that quite differently. And in addition, Justin, we are, I'll say, redoubling our efforts around our material cost improvement, right? This -- when you have this situation where you're in an inflationary period on the supply components, the work that you're doing for material cost improvement is actually quite a bit more important. And we're redoubling our efforts there to make sure that we have the right programs in place to drive from a design perspective even a cost -- reduction in cost in materials going forward.

And maybe this one is for Matt, but I think at the beginning of the year, you provided guidance for MirrorEye revenue of roughly $60 million this year. I'm curious if that's still what you're expecting, and also if you could comment on any MirrorEye revenue that was recognized in the first quarter?

Yes, so Justin, the majority of the MirrorEye revenue that would have been recognized in the first quarter was related to the first OEM program that we launched in Europe, and the continued ramp up there where take rates are remaining really strong. We would have recognized some nominal level of kind of retrofit revenue, but the expectation is that continues to ramp up over the year. Our first program in North America has a slow ramp up here in the first half, which we expect to accelerate in the second half of the year. And as such, that's not significantly different than what we would have outlined in the original guidance and is considered in our current guidance expectations. So progressing as planned there, and I would expect more commentary around that, both on the OEM side in North America, as well as the retrofit side as we get into the second half of the year.

Yes. And last question for me is on the balance sheet and related to interest expense. I know the tax rate or tax expense is coming down. You said interest expense was going up to offset that. I was just wondering if you could give us any color on what your revised expectation is for interest expense? And then just more broadly, free cash flow is negative here in the first quarter. Do you think it's possible to be free cash flow positive for the full year?

Yes, so great question, Justin. So we're seeing a little bit of incremental. So if you look at the tax adjustment, it was about a $1.5 million down to the midpoint. And we're expecting incremental interest expense to roughly offset that. Part of the challenge on the interest side has been incremental working capital investment required here early in the year to facilitate the growth that we expect, really strong top-line growth for the remainder of the year. That is not abnormal historically, where we have first quarter cash use. It was probably a little bit stronger, relatively speaking, this year, or a little bit more used this year because of that working capital investment early in the year. I do expect that we will be able to, as we have historically, from a seasonality perspective, improve that cash flow profile forward. And obviously, we don't give full-year cash flow guidance, but if you look at what we're expecting from a net debt perspective, and what we talked about by the end of the year in both long-term, we would expect that to normalize here for the remainder of the year. So I would expect relatively neutral overall cash performance for the year with an improvement here forward, both through the seasonality, which is normal, as well as some actions we're taking around inventory to improve working capital.

I would now like to turn it back to Jim Zizelman for closing remarks.

Thanks, Britney. And thank you, everyone, for joining us for the call. I know your time is very important, and we do truly appreciate your willingness to engage with us today. And we couldn't be more excited about our industry-changing product platforms and the growth it brings to our company. Our focus is now on rigorous and disciplined execution, which will bring the performance we outlined today. So thanks again, everyone.

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