Q1 2020 Earnings Call
Electronic sales and 79.8 million were approximately flat relative to the fourth quarter of 2019.
We estimate that the cobot 19 pandemic reduced electronic sales by approximately four and a half million dollars during the quarter.
Although reported sales were flat relative to the prior quarter adjusted operating income improved by $1.9 million, resulting in adjusted operating margin improvement of 230 basis points.
This improvement was driven primarily by reduced mature material costs or 90 basis points and improve overhead costs of 140 basis points during the quarter, leading the gross margin improvement of 240 basis points.
We estimate that electronics adjusted operating income was negatively impacted by $1.3 million or 140 basis points during the quarter as a result, a corporate 19.
In addition to the improvement in overhead we remain focused on reducing electronica port related expenses.
The quarter. This resulted in a reduction of approximately $700000 relative to the prior quarter.
As Dan outlined previously we expect our primary electronics end markets to decline by 30% to 40% relative to previously provided guidance for the year.
Despite improving gross margin, we expect a significant reductions in forecasted volumes to create downward pressure on fixed cost leverage and segment operating margin for the remainder of the year.
Page 14 summarized our key financial metrics, specifically stoneridge, Brazil, as well as our estimate of the impact of coal to 19 on the segment during the quarter, which was relatively limited.
So in Brazil sales of $14.6 million decline relative to the fourth quarter, despite significant growth in our OEM product lines in Brazil.
OEM growth was offset by reduced demand for our aftermarket in mass retail products relative to the fourth quarter of last year.
Due in part to seasonality surrounding the holidays.
The fourth quarter is typically the strongest revenue quarter for Stoneridge, Brazil.
Foreign currency reduced sales during during the quarter by $700000 or almost 5%.
Currency exchange rates continue to have a negative impact in Brazil.
We expect continued pressure due to continued unfavorable currency movements during the second quarter.
Although storage, Brazil had limited impact from corporate 19 during the first quarter, we expect it will become more impactful during the second quarter and for the remainder of the year.
Despite reduced sales relative to the prior quarter adjusted operating income remained flat, resulting in adjusted operating margin improvement of 50 basis points.
This improvement was driven primarily by improved material costs, leading the gross margin improvement of 470 basis points.
The improvement in gross margin was partially offset by reduced leverage on SDMA and design and development costs, resulting in a 50 basis point improvement in adjusted operating margin.
Turning to page 15.
At the end of 2019, we have net debt of approximately $60 million or approximately <unk> 0.7 times, our trailing 12 month adjusted EBITDA.
During the fourth quarter in order to support operations in response to the expected disruption caused by the global corporate 19 pandemic.
We drew an additional $25 million on our existing credit facility.
As of the ended the quarter, we had net debt of approximately $82.5 million or 1.1 times trailing 12 month, adjusted EBITDA and cash of approximately $81.3 million.
We had we had approximately $239 million of Undrawn commitments, resulting in over 320 million of liquidity at the end of the first quarter.
During the first quarter. We also continue to share repurchase program on March six resulting in the company buying back almost 243000 shares for approximately $5 million.
The company's temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration magnitude of the corporate pension pandemic.
Our credit facility includes a net debt to EBITDA covenant of 3.5 times, which includes restrictions on foreign cash and EBITDA adjustments in the calculation for compliance purposes, including those restrictions are current net debt compliance ratio is approximately 1.6 times trailing 12 month EBITDA.
Based on current based on current Hs and LMC estimates and our expectations for future cash flow, we do not expect to exceed our compliance ratio in 2020, despite our expectations for significantly reduced EBITDA relative to our prior guidance.
We will continue to take the appropriate actions to ensure that our cost structure is right sized for our current outlook and to ensure we effectively manage our cash position as we navigate through this unprecedented event stoneridge remains well positioned with relatively low leverage and significant available capital to withstand this downturn.
Moving to slide 16.
In closing I would like to reiterate that we're pleased with the operational improvements we grow during the first quarter and expect that the actions. We have taken will reduce the impact of Coca 19 for the company as we ramp up production levels back up over the course of the year.
That said, we expect continued as significant headwinds related to the global impact of the virus and we'll continue to respond decisively as the macroeconomic environment evolves.
Storage is committed to driving shareholder value and that focus remains at the forefront of all of our strategic initiatives with that I will open up call for questions.
Thank you, Sir ladies and gentlemen, if you have a question of this during these past describing the number one key on your Touchstone counting county, again that still I guess the number one key I touched on Palestine. If your question you asked and answered as you wish him of yourself from the can you please that accounting.
So your first question will come from the line of Mr., Justin long from Stephens Associates. Your line is our line.
Thanks, and good morning, everyone.
Good morning question.
So I wanted to start by looking at the balance sheet and Bob maybe going said Premier commentary at the end I was curious and based on what you laid out in terms of end market expectations and decremental margins, what you're expecting from a cash flow or cash burn.
Perspective over the remainder of be areas you made that comment that you feel like you will remain in compliance with your covenants.
Sure adjusting the big sourced with question. So first of all right, let's start with that as let me give you. If you look at the assumptions that we have and we talk about going in the presentation. So we look at our primary end markets. If you look at North America, So North America pass car with this year.
If you look at the data sets its forecast to be down about 25% commercial vehicle down about 44% and if you look to Europe for this year things, it's about down about 25% as well for past higher and commercial vehicle Europe down about 38%.
If you look at.
If you could have the I, just LMC and the act assumptions on commercial vehicle and passenger car for the rest of the year any flow them through we're forecasting.
Part of $15 million to $20 million burn rate.
In the second quarter, and then about I would say less less than less than 20 million for the second half based upon the current.
Based upon the current HSN, LMC and an eight and ask assumptions.
Okay. That's helpful and then circling back to that.
Cost during that Chen I wanted to specifically focused on the structural cost reductions that you mentioned, John how should we think about the longevity of those cost reductions exists.
You are saying that you know in 2021, you're not expecting the end markets to come back significantly so neither costs that.
We'll continue to come out of the business or.
I'm just trying to think when we return to growth mode. At some point are these headcount reductions going out to come back to set forth that where are these over the long term structural cost reductions the next three plus years.
Yes, so Justin.
Thanks for the question and I think the answer is it's both the as we as we've talked to you over all of these calls we've said that we would adjust our.
We will adjust our costs and thought in in response to sales changes we've demonstrated that over five years.
And in different.
In different situations I think the way to think about it is within the within our facilities.
Our direct indirect labors and sort of our plant based estimating move with sales.
And but then you get into engineering and is it into other structures that are less flexible, but also then changes to those are more or less permanent.
And what you've seen.
As you as you follow Stoneridges, we've continued to refine our structure, we've continued to transform the business both from.
The the footprint our product portfolio and the team so.
What we have done as Weve side, just size the business for what we see going forward with both commercial vehicle and pass car volumes.
We have also taken this opportunity to restructure the business as we see the appropriate organizational structure to support our growth execute execute we have going forward and the opportunities that we have going forward while at the same time getting better all the time and using this opportunity to get better and that's.
That's the way we've approached this so I don't see.
The need from from some of those more sticky costs to increment them back up.
As the revenue comes back up we see it as a funding opportunity.
Makes sense that's helpful. And then just lastly, and there was no mention of mere I know, they're bigger issues that in front of US right now, but I. Just wondering if there was an update on mirroreye some of the discussions youre, having in terms of new contracts and.
Is there anything that you see out there that's.
Going to impact the timing of Ddos product launches that you've already laid out.
So the thing thanks session and certainly we would have loved to talk a lot more about mirroreye, considering the pace award, but given the turbulence of this what's going on right. Now we didn't think it was property to spend all that time on that.
First and foremost we continue to add more fleets to our to our trials and we continue to to get very strong positive feedback both from the fleet owners and on the drivers.
Secondly, those who are in the current trial program are excited about the product and they've actually been a good source for additional features and product to refine that over the year updates and other things that they need to have this be a more important tool as part of their safety and efficiency package.
And.
There are they those trial partners also become very important.
Advocates for us would be always.
The.
Most of them are planning additional deployments in the second half of the year, but the challenge that that we have from a cobot timing is.
Many as many of these businesses are essential businesses some of them the foodservice business and they don't want anybody external near their trucks. So some of them have delayed install some of them have delayed delivery of new new trucks and that does impact our rollout, but what we are seeing as they continue to work where.
Yes, we continue to have great conversations we had some feedback from one of the one of the initial fleets. They did their own essay East certified fuel efficiency test and found that they got 2.6% to 2.7% fuel economy improvement. So we've talked about the safety benefit we're seeing in real life on real time.
Alex the fuel economy benefit and the fleet partners that were working with our.
Our continuing to be excited about what we're trying to do and what we're working on and how to integrated into their vehicles. So we're optimistic about this but we're also recognizing that there are going to be some delays right now just basis based on the current situation.
Makes sense I appreciate the time this morning.
Thank you Justin for short.
Thank you Sir and affected your next question will come from your line of Mr., Scott Stember from C.L. King. Your line is not a line. Please proceed.
Good morning, Thanks for taking my questions.
Good morning scattering.
On the topic of I guess backlog and new products I guess, we reset to have a.
Significant amount of new stuff coming out of backlog I guess, what the next few quarters.
Aside from here I can you maybe talk about some of the other contracts and other launches whether they've been delayed.
Cancelled or outright and just.
The general timing.
But we could expect some of those coming out.
So Scott what we've seen in general is that our customers have maintained their program timing.
We can't talk about the magnitude of this is the magnitude of the backlog size because the volumes are our turbulent but as far as the program launches in the program timing first we haven't lost any programs, most importantly, and they haven't cancel many programs secondly.
For all of the major programs will be the instrument cluster programs be they OE near eye programs be they actuation programs to be the other things in both control devices in electronics those programs remain on track.
And what we've done as we use this time.
To actually bolster our product development and and make sure that we are absolutely ready both in our facilities and in our engineering activities that are launches are flawless. So we feel confident about our backlog we feel confident about the product programs that were working on we're excited about that.
Feature state Scott you know that even before the Kobin Challenge 20, net 2020 was flat year on a year of preparation for launch we're still on that same situation.
Yes got I, just wanted to add Iceland add to that if you think about what we what we discussed.
Lastly, we would help guide for the balance of year, but if you look at the new product launches with Mirroreye with our up with a part by way of launch in our instrument cluster program, which is one of the largest.
Awards in company history in three years of record new business wins.
We're extremely excited about future, we'll wait and see where the dust settle around overall overall global market volumes, but when you layer on that incremental new business. We're on and you look at the actions that were taken to rightsize our cost structure.
Very excited about future.
Got it and there's a very helpful slide about all the different end markets with regards to production, but what was just give us for Q2 your total expectation of Oh.
Of production declines and.
Just going forward how closely should we peg.
Expectations for sales through these production.
Changes for Stoneridge.
Yes. Thanks for the question. So it's an important question, we've talked about the 23% for the full year, but obviously the largest impact of that 20% weighted average is going to be will be during the second quarter. So we are we are forecasting right now based upon the third party data that our weighted average end markets or will be down 50% versus our.
There's some versus our original guidance for us for Q2, and the way to think about it.
That is the way we've always talked about the business is 2.5 to three times from the contribution margin perspective on incremental Decrementals now for US. The second quarter is that would be more towards the higher end to that too and have to three range. Because we've taken we've taken cost reduction actions during the quarter, but we're not going to see the full impact.
But those actions because it took them during the quarter. So you'll see the full impact those and you just can't adjust that spread so you'll see that you'll see the full impact of those in Q3 before but we've taken those actions during the quarter. So we'll be more towards the towards the lead time range on on Decrementals in the second quarter, and then that'll that'll get better is as we see before.
Compared to the of the cost reductions.
Yeah, and just as far as modeling for sales are closely aligned we you'd be good.
Production forecast declines.
Close yes.
Okay.
Alright, Thats all I have right now thank you.
Yes, Thank you got exactly.
Thank you, Phil and again, ladies and gentlemen, if you have a question at this time. Please press Star then the number one key I touched on California dissented. Your next question will come from the line as Mr., Chris family from B. Riley 50, 50 trying to sell line.
Good morning, everyone. Thanks for taking my call and help everyone's wealth.
Good morning person, we hope you all wells as well thank you so much.
You know I was wondering if you could comment on your supply chain and if you're seeing any disruption there and how that might impact things going forward.
Chris This is John good morning.
We monitor the supply chain as well as our operations on a daily basis, and we have had a war room set up with sort of critical suppliers and we monitored where that risk is really sense. The situation started in China.
Our team feels pretty good about the majority of our supply base, we have a couple that are.
That our at risk, but the operations and procurement teams are well on top of it we believe that we're well positioned to restart and ramp up and follow our customers. So we.
We as our goal to make sure that we're able to follow our customers and that we don't become the constraint to their ramp up.
And I'm really pleased with the way our organization is working together to to be proactive and be ready for the ramp up.
Got it and then.
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Maybe prior to the disruption to mid March and ongoing you Creek could you comment on the award activity and maybe how is progressing and if it did progress through March.
Yes so.
Chris is you know the award activity is not linear.
It's lumpy in particularly with some of the large awards like the most recent Mirroreye awards that come in big chunks and.
So there wasn't anything that was material in the quarter.
That that would change our backlog or would be.
That would be worthy of significant press releases or conversation, but what we what we see and as I said to Scott earlier, we've not lost any business everything that we have competed for we we have we felt like we've we've done very well and.
Meant that as our customers come back and recognize and in some situations are customer shutdown, including their procurement organizations shutdown.
So some decisions just did not happen during this period of time, we're absolutely confident in the way in which we've worked with our customers the way in which we reacted the way in which we've worked with our customers and the way in which we have positioned the organization set this up very well as they come back that work that we're better positioned as a partner to them. Even then we.
Were before the crisis and Chris one thing that I'd like to add to that but I think is important.
It's about the testing in the fuel economy, I think to be the overall view on mirroreye versus the take rates that we that we've incorporated or backlog, just just continue to a better and better as well. So that's that's obviously going to be media big opportunity of those given the size of those programs in the.
Before we take rates to continue to improve as.
More and more fleets and.
Our sandy RC indeed extremely compelling value proposition at year end provides to them.
Got it makes sense. Thank you for that and then lastly from me the OEM sales in Brazil Big increase there I'm just curious what was driving that was it share gains was it new launches.
So if you remember if you remember Chris in the latter part of last year, we talked about a series of OEM wins.
Instrument clusters connectivity modules and actually some only audio.
And those things have been in the process of will ramp up and it's really a transformation.
With regard to stoneridge, Brazil from a.
Aftermarket business into much more aligned with Stoneridges overall business, which at which has a.
And aftermarket side, but also has an OE side and the other thing that isn't isn't parent in these quarters is.
The importance of the technical capabilities and Stoneridge, Brazil to help help our our global product development and help as we as we launch and accelerate these launches and connectivity or in mirroreye or in other areas. We're using the global footprints in the global capabilities. There. So the stoneridge, Brazil team is doing a fantastic.
Job of transforming itself.
From a product standpoint, and contributing to the the global product development side and I would also say.
Our facility in the house from protecting the people in a very challenged place is being recognized for the great things that they're doing to take care of their employees here as well.
Great. Thank you so much for the time this morning, and stay safe and stay healthy. Thanks, guys. Appreciate it.
Thank you Sam and I am showing no further questions at this time I would now like to turn the conference that syndication bikini.
Well I want to thank all of you 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 operating results profitable new business and focus deployment of our available resources.
Our management team will respond effectively and efficiently to manage and control variables that we can impact and continue to drive financial performance. We're confident that our actions will result in continued success in 2020 and beyond thanks very much.
And again, thank everyone for participating. This concludes today's conference you may now disconnect they face and have a leap day.
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