Stoneridge, Inc. (SRI) Earnings Call Transcript & Summary

Good afternoon. I'm pleased to be able to welcome Stoneridge back again to Deutsche Bank's Global Automotive conference. Stoneridge is an independent designer and manufacturer of highly engineered electrical and electric components, modules and systems, principally for the automotive, commercial vehicle, motorcycle, agricultural and off-highway vehicle markets. Joining me today will be President and CEO, Jon DeGaynor; EVP and CFO, Bob Krakowiak; and Head of IR and Business Development, Matt Horvath. And with that, I will hand off to the Stoneridge team to present.

Thank you, Brian, and thank you to everybody who's on the phone. We appreciate your interest in Stoneridge. And as Brian said, we're a 55-year-old company here in July. But really, a company that has gone through a fairly material transformation in the last 5 years, but even in the last 18 -- 12 to 18 months with the exit of certain product lines and with the expansion and the development in other areas. So we have continued to rotate our portfolio and focus on how we develop products that address the mega trends that drive our 2 primary end markets, being the passenger car and the light truck end market as well as the commercial vehicle end market and those mega trends being safety, fuel economy and emissions and then, really, electronics and connectivity, basically vehicle intelligence. And everything we do is focused on what -- how do we bring our core competencies, our electrical and electronics core competencies into the products that we make to solve those problems and to do it more and more every day with systems and subsystems as opposed to discrete components. So if you watch the trend lines at Stoneridge from a product perspective and you look at the announcements and you look at the way we've moved, it really is -- been a consistent series of steps in that path, most recently highlighted with our MirrorEye activity and the PACE Award that we won about 10 weeks ago. The transformation of the company also is driven by and demonstrated by performance. And that comes down to how we execute on our programs, how we execute with our engineering team and how we execute in our plants and our supply chains. And one of the challenges with that transformation from a performance perspective is it gets a little bit lost in what's happened with this exogenous shock with COVID-19. So if you think about and look at the Q1 data and look at really where we were Q4 versus Q1 2020 -- Q4 2019 to Q1 2020, many of the changes that we had made and the performance that we are improving in the plants and what we're seeing in the supply chain were coming to fore up until the point where we needed to shut things down. So the -- with all of that and with that transformation, the company has been anticipating market challenges. And we are -- we were positioned, from a balance sheet perspective, to deal with that. And it's allowed us to continue with our transformation road map. It's allowed us in some areas to use the crisis as a chance to accelerate our transformation while staying focused on technology and staying focused on supporting our customers. And we're really excited to talk to you a little bit more about where we go from there. But Bob and Matt, if you want to add a bit more?

No. You know what, Jon, I think we've got -- we have limited amount of time. So I think we can go right to Q&A.

Excellent. I will kick off the Q&A, and from a fireside presentation format here. And then as part of ticking through the questions, we'll save some time at the end for open audience questions that can be posted through the dashboard of the conference website. So really, the first point that I would like to have you speak to, Jon, is just providing more of an overview on the expected impacts of COVID-19 and how Stoneridge has responded from both a production and from a cost perspective.

So as I said, Brian, first, while we weren't expecting this sort of an exogenous shock, we've been -- we kept a very conservative approach. One, very focused on performance. But secondly, a very conservative approach with regard to our balance sheet, so that we were prepared when that stuff happened. And that then has allowed us to flex the organization and address either where customer production levels have changed or where federal state and local mandates have caused us to close our facilities. But really, we've adjusted with the customers, while at the same time, continuing to work on making the business better, which is continuing to drive our engineering activities, working to make our plants better. And in some situations, actually building some inventories, utilizing our capabilities by building some inventories to stabilize our supply chain as we look at the ramp-up. In addition to adjusting to the customers, what we've done is we've taken some longer-term actions to restructure the company and set ourselves up not only for addressing the near-term challenge, but the long-term challenge. We took both temporary and permanent cost reductions that will have an impact in 2020 of $3.5 million to $4 million and will have a much more significant impact, $5 million to $6 million, on a run rate basis. So we -- what we've sought to do is protect our organization, protect the things that we see are the future, adjust to the customers and adjust to the market needs in COVID, but at the same time, stay focused on the prize, which is the future state and the technologies that we're working on.

Excellent. Can you also speak to -- although the company, like many others, has withdrawn annual guidance, you have provided some expectations for the remainder of 2020 from a top line and operating margin perspective. Can you walk through some of those expectations?

Yes. Brian, this is Bob. I'd be happy to do that. So yes -- so we talked quite a bit about this on the first quarter call. And really -- and we've talked about this with investors at length over the past several years about our business and how our business ramps up and ramps down with incremental and decremental volumes. So when we were on the first quarter call, we talked about the first quarter call -- we talked about on the first quarter call, we expected the kind of weighted average end markets to be down about 50% in the second quarter. And normally, our contribution margins are in the 2.5 to 3x on EBITDA, on incremental and decremental EBITDA. So we talked a little bit about the fact that the contribution -- the decrementals were going to be a little bit higher in the second quarter because we announced some actions where we took some workforce reductions. In Q2, we eliminated about 5% of our salaried workforce. So the incrementals will be higher in the second quarter, and then we would -- with the actions that we've taken, the temporary cost reduction actions and the structural cost reduction, the $7.5 million to $8.5 million of annual reductions, will get the full impact of those in the second half of the year. So I just think, over time, the way that we've talked about the business, investors that understand the company and our margin profile, we didn't give specific guidance, but we use IHS and LMC and ACT for our volumes, provided some insight on where those 3 firms thought the industry was headed for the balance of the year, and then just applying those decrementals and incrementals to our margin profile, gives a reasonable picture of how we saw the rest of the year.

That's very helpful. And maybe just to continue with that theme, can you talk a little bit about the expectations for cash flow for the remainder of the year, and an update on current liquidity and balance sheet position?

Yes. So we -- the first quarter, we ended the -- we ended the first quarter with about $320 million of liquidity available, just in terms of the cash on the balance sheet plus availability on the credit facility. In terms of our outlook for the balance of the year, I gave some conservative guidance for the second quarter that we were looking at a $15 million to $20 million use of cash in the second quarter, and basically around that range as well for the second half of the year. I will tell you that was early on -- that was earlier in this crisis. That was a conservative number. We do expect to perform better than the $15 million to $20 million in the second quarter, and still waiting to see really how the dust settles and how the OEMs ramp-up in the second half of the year. But this is a -- it's a leadership team that we're very proud. We've responded quickly, taking 5% of our salaried workforce out and $5 million to $6 million worth of structural cost reductions that will benefit us for next year. And we've also exited -- announced the exit of some unprofitable product lines and we're still looking at additional opportunities. So there's still things out there. We're turning over every rock and really getting in front of -- trying to get in front of this and use this particular situation right now that we're in with the pandemic as an opportunity to make sure that the business is positioned very strongly when volumes return to their normal levels.

And just on that last point, as you talk about coming out of COVID-19, industry volumes normalizing, how do you see Stoneridge performing as part of that in terms of -- number of the actions you've taken now in terms of being able to make those sustainable and then really drive leverage going forward, operating leverage that is.

Yes. We feel really -- Jon, do you want…

Yes. Bob, let me -- yes, let me start with that, and then I'll -- and then you can cover what I missed. We're really excited about what the organic growth for the company looks like going forward. We talk a lot about MirrorEye, but it's our ramp of our Park-by-Wire programs, there's ramp-up of driver information systems programs, and there's ramp-up of some global telematics programs that -- I mean, we knew before the crisis that 2019, 2020 would be transformational years, where there are a whole series of programs that we won that go to our significant backlog that we were finishing development and starting the launch in this calendar year. As the market comes back, and as we have continued -- been able to continue to invest in the engineering and the development activities, we're incredibly excited about the organic growth and the ability to really drive performance for our shareholders and demonstrate to our customers our commitment to them through these prices. So we're excited about where it's going. We've had no program cancellations. We're certain that there will be some delays in some situations, but no program cancellations, which means we're confident in where we're going with regard to our organic growth as well.

Great. And Jon, I just wanted to add to that a little bit. Just to talk a little bit about our -- Brian, about our market expectations. So as I mentioned before, we use IHS and LMC. And if you look at what's in our thinking for the balance of this year and for next year, so our outlook, if you look at our primary end markets, the North America passenger car last year was about 44% of our sales. And if you look at the current IHS projections, it's at 12.2 million units this year, which is down about 25% versus 2019. And then next year at 14.9 million units or up about 23% next year. And then next for us would be European commercial vehicle. That's down about 38% this year at 348,000 units, going to 506,000 next year, that's up 45% next year. Been looking at the North America commercial vehicle, which is our next largest market. North American commercial vehicle is down 44% this year, 355,000 units versus last year, going to 448,000 units next year. So that's up 26%. And then China, pass car is about 5% of our sales and growing pretty rapidly. So China pass car is down 15% this year and going to be up 10% next year to about 22.7 million units. So that gives you a little bit of an idea of what's in our thinking and what's in -- and then the other thing that's really important to understand, Brian, is our new business awards. We've had 3 years of around $200 million of peak annual revenue awards. And those are going to start rolling in as well. We have a new instrument cluster program, commercial vehicle instrument cluster program. That was a conquest award that's basically new business for Stoneridge. We've got our first MirrorEye launch next year. And then we have the annualization of some of our Park-by-Wire programs and telematics programs as well that are new programs for the company that are going to drive some significant revenue growth for us as well.

Excellent. So we have about 20 minutes to go in this. I'm going to ask a couple of MirrorEye questions, then I'll open up to the audience for any questions, then I'll come back to some other questions I have. But just on the MirrorEye topic specifically, and again, congratulations again on the PACE Award from Automotive News. I mean the bar and the recognition is truly unique and differentiated there and speaks to the high bar in terms of being able to be positioned on that front. I wanted to see if you can give us a further update on MirrorEye, including on the commercial side, retrofitting, pre-wire OEM awards. I know, Bob, you just referenced, obviously, new business, and that's going to be coming on online here. That's been award over the last several years, but could you give us some more color on MirrorEye? And then I'll follow up on a couple of other points away from that.

So the -- what I would like to say is for those that don't know the MirrorEye story, MirrorEye is a camera mirror system that allows us to replace the side mirrors on a truck. It addresses -- when we think about the mega trends, it addresses safety. It addresses fuel economy and it addresses vehicle intelligence, and I'll talk about those in just a second. It weaves together as many of our core competencies, but it also weaves together multiple paths to market and multiple paths for product development. So we have historically always approached things like this with going directly to the OE customer. And in this situation, we did that. And -- but what we did in addition is we went to the -- if you will, the end user, the fleets and the drivers and we did retrofit trials to make sure that the product that we had developed not only met technical specifications, but really met the needs of the driver. And if the COVID-19 crisis showed anything, it's the importance of commercial trucking in the U.S. and really the importance of that driver. And so we've developed this product with that driver in mind, how to make things safer. So our path to market is with retrofit. And there we're the only ones with the FMCSA exemption that allows mirrors to be taken off the truck and to put the cameras on or you can take -- physically take the mirrors off because they're regulated, then with what we refer to as both pre-wire and pre-install, so where somebody can [ bogey ] a truck with the wiring system setup for MirrorEye, and it makes the installation and the retrofit faster. And then thirdly, obviously, the OE programs. And what the investors on the phone should understand is these 3 things tie together. Fleets, when they adopt something, they create tremendous pull and OEs do not want to do things like retrofits and do not want to do things like post-line install. So the fact that they are looking at those activities would tell you how the fleets view this technology. From an OE program, we've won 50% of the awarded programs, and basically, every program in North America that's been awarded and about 1/3 of the overall market in Europe. In North America, it's about 75% of the overall market. And the -- 25% of that market has not yet been awarded. So we feel very good about our technology position. We feel very good about market acceptance. We have about 9 million miles of fleet trials, and we continue to expand the number of vehicles and the number of fleets with whom we are working, although the COVID crisis has slowed some of that down. But we feel very good about MirrorEye and light maintenance and also what it means as a technology platform.

That's very helpful, Jon. And as part of that, and again, MirrorEye is a key driver in terms of growth profile from a Stoneridge perspective. However, there are several other growth drivers when you talk -- look more broadly across the platform. Can you speak to some of those and help the audience understand what else is here beyond MirrorEye in terms of the momentum?

For sure. And we talked a little bit about that, Brian, with some of the new programs and the other things, our Park-by-Wire, which is a -- for investors that know the Stoneridge story, is really a follow-on to the core competencies of our Shift-by-Wire programs. And we have those programs that are ramping up and expanding with driver information and telematics, and I'll come back to that in just a second. But what you also see with the growth engines that we see within the company, we see actuation broadly between drivetrain and powertrain actuation, Park-by-Wire being one front axle disconnect. And basically, on the fly disconnect torque that allows torque vectoring that fits in current drivetrains. It fits in hybrid drivetrains and it fits in electric drivetrains as well as some of our emissions actuation, evaporative emissions, in particular, and the actuation and evaporative emission systems that were -- both of those are -- both sides are growing significantly. What you will note, if you look at our website and look at our announcements is we've made a change in leadership and brought a leader, Jim Zizelman in to run Control Devices. And Jim has a tremendous depth of product development and new business growth, primarily in the Delphi and Aptiv space, but he is a renowned powertrain expert and really knows how to drive product growth there. So within Control Devices, we feel great about where we're going from an actuation and emissions actuation side. With regard to our Electronics business, and really, I look at Stoneridge Brazil as part of the Electronics business as we think about where the future growth is. It's connectivity, V2X, it's driver information systems, which is basically communication to that driver is the path to communicate to the driver, and now with MirrorEye, the ability to communicate to the outside world and communicate to the drive around what's going on. Over time, those technologies come more and more together. You start being able to add driver monitoring and event recording and other aspects to this. So we see a series of platforms for growth, and MirrorEye is just one piece of it.

That was very helpful. Let me take a pause here, and just ask the audience for any questions that they may have. [Operator Instructions] While I'm waiting for some of those to queue up, in the meanwhile, Jon let me -- and Bob and Matt, let me go on to the next question, which was, last week you announced the exit of your soot sensor product line and wanted to ask you to provide some additional color on that exit decision, how you may think about any continued portfolio management going forward.

So yes -- Jon?

No, go ahead, Bob.

Yes. So really, the decision on soot is -- was really if you look at the evolution of the market, it changed quite a bit from when that product was first awarded to Stoneridge, especially as the passenger car application has fallen out of favor over the past few years. So we've never really -- we've never seen it hit the volume threshold that we were expecting when the program was first launched. And candidly, we actually look -- we looked at our product portfolio and said what are some things that we can do now given the current pandemic situation if the facilities aren't running at full capacity, which we haven't had the luxury of because our facilities have been very busy prior to the pandemic. What are some things that we can do in terms of exiting some potential unprofitable product lines, and that really stimulates the conversation around this is really an opportunity for us to get out of a product that never met the volume thresholds that we expected. So we announced that we were going to exit it a couple of weeks ago. Last year, it was about $26 million in revenue and it lost about $1.2 million of EBITDA line. And we are extremely focused as a leadership team to get our banks built and to be out of that business as soon as we possibly can. Jon, I don't know if you want to add anything to that?

I think for investors, they should just understand that we're proactive in dealing with these issues. And we're watching what the market is doing. In any situation where we see the trends change, soot being an example of that, we will react. And that's what we did.

Yes. And Brian, just the last thing I would say on that is we don't -- as we look at the -- across the rest of the portfolio, we do not see anything significant out there that we would -- any additional significant changes. There's a few things where we have some service parts and some relatively low runners that we may be able to do some last time buys or to do some things that -- just small incremental change to improve the footprint of our facilities, reduce our number -- reduce the supply base and just, overall, continue to focus on the path of becoming more efficient as a company.

That's great. No, certainly, well understood. [Operator Instructions]. Let me ask one more here as it relates to just thinking about -- you talked about capital upfront. I know, Bob, you talked about just liquidity, balance sheet position and cash flow outlook. But as you kind of -- yes, it's [ worked a ton ] for you today, but I think more of a forward view about that capital deployment question with organic, inorganic growth as well as return to capital, if you could comment on that.

Sure, Brian. I'll be happy to do that. So if you look at Stoneridge, Stoneridge has always been a company that's run a relatively conservative capital structure. And so we've been buyers of our stock, first of all. So we bought back $50 million in stock last year. We announced another $50 million share repurchase program earlier this year and began that program right after the first quarter call. And then when the pandemic hit, we basically suspended the program, but we actually -- we were in the market buying back as recently as March before the pandemic hit. So we've suspended that. And we are still out looking for opportunities. But the good news for us, and we've said this, is that we really like our portfolio of products. We are not looking to add another leg to the stool. You're not going to see this leadership team send out a press release indicating that we're basically making a right turn and heading into a new business. We really like what we have. We're going to continue to look for opportunities to deploy our capital. It's obviously a little more challenging in the current environment. So we're not going to -- we will not sacrifice having a conservative capital structure, making sure that we have the appropriate amount of liquidity. That's always been paramount to our Board and for the leadership team here. So -- but we are still keeping our eyes open. And to the extent there's opportunities for -- even if they're not outright acquisition, but if there's opportunities for joint ventures, and to look at the complementary technologies to our telematics systems and our driver information systems and our camera mirror systems, and actuation as well. We're looking across the board for opportunities to grow the business that way as well.

Excellent. Well, look, at this stage, I don't show any further questions from the audience. What I'd ask, Jon, Bob and Matt, if you have any closing comments, otherwise, we can conclude here.

Well, I just want to thank, Brian, you for the opportunity and those on the phone for interest in Stoneridge. Understand that we're committed to lead this business and continue to drive the transformation of the company and drive long-term value for the shareholders, and we appreciate your interest in the company.

Thank you very much, Brian. We appreciate the time.

Thanks.

And on behalf of Deutsche Bank, we very much appreciate the Stoneridge team joining us again today at the conference. And thank you again for the audience participation as well. Good day.