Stoneridge (NYSE:SRI) Q1 2020 Earnings Call

0:00 Ladies and gentlemen, welcome to StoneReach first quarter 2020 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If you should require assistance during the conference, please press star then zero on your touch-tone telephone. I would now like to hand the conference over to your host, Mr. Matt Harvest, so you may begin. Great, thank you. 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 someridge.com in the Investors section under Webcasts and Presentations. Joining me on today's call are John Degainer, our President and Chief Executive Officer, and Bob Prokowiak, our Chief Financial Officer.

0:51 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 John and Bob have finished their formal remarks, we will then open up the call to questions. I would ask that you keep your questions to a single follow-up.

1:38 With that, I will turn the call over to John. Thanks, Matt. Good morning, everyone. Let me begin on page three. During our fourth quarter call, I outlined several operating initiatives aimed at improving profitability in 2020 and more specifically, reducing material costs and improving operating efficiency and manufacturing processes to reduce overhead and labor costs. During the first quarter, we executed on those initiatives and the results of the efforts were evident in the performance in the quarter. Our first quarter sales of $183 million resulted in an adjusted gross margin of 25.7%, translating to an adjusted operating margin of 3.3%. Adjusted EPS for the quarter was 20 cents.

2:24 This is inclusive of the COVID-19 impact. Based on estimated customer orders and operating performance prior to the COVID-19 impact, we estimate that the global response to the pandemic impacted quarterly sales by approximately $16 million and impacted adjusted operating income by approximately $4.7 million or 210 basis points. We have taken several actions to temporarily reduce costs in response to the virus to drive financial performance and preserve cash as we adjust to reduce customer demand and federal, state, and local laws impacting our global facilities. Additionally, we took actions to reduce our structural costs based on our longer-term and market outlook and to ensure our resources are aligned with future growth opportunities.

3:12 The future of Stone Ridge has its foundation in talent and technology, and on April 1, we announced that Jim Zizelman joined Stone Ridge to lead our control devices business. Jim will be responsible for driving business performance, product development, innovation strategy, and technical vision for the segment. Jim had previously been consulting for Stone Ridge after a lengthy career with DelphineActive, where he was most recently the Vice President of Engineering and Program Management. And last week, we were awarded a 2020 Automotive News Pace Award from Mirai. Since 1994, The Pace Awards have celebrated superior innovation, technological advancements, and business performance among suppliers. This prestigious award is recognized globally as the industry benchmark for innovation and acknowledges those suppliers that develop a viable solution for future mobility needs and bring it to market.

4:09 Mirai was evaluated by independent Pace Award judges and excelled on its march for innovation, customer acceptance, Competitive Impact, Performance Measures, and Environmental Impact. We are honored to be recognized for the impact MIRAI will have on the industry. Finally, due to the continued uncertainty regarding the expected impact of the pandemic, on March 30, we withdrew our 2020 guidance. We will revisit our 2020 guidance once we have the ability to more clearly define and quantify the expected impact to Stone Ridge. Bob will provide additional details on our expectations for the remainder of the year, including an update on our balance sheet strength and leverage position later in the call. Turning to page four.

4:54 Page four provides additional detail on our quarter to quarter progression on both sales and operating income, highlighting the management team's focus on continuous improvement while managing through the current environment. Revenue in the first quarter was approximately flat compared to the prior quarter. Revenue Growth and Control Devices, primarily related to our actuation and emission sensor product lines, was offset by declines in the aftermarket and mass retail business within Stone Ridge, Brazil. Based on customer orders prior to the global actions taken to combat the virus, we estimate that the impact of COVID-19 on sales was approximately $16 million in the first quarter. Quarter to quarter, adjusted operating margin increased by 50 basis points.

5:39 We estimate the impact of COVID-19 on adjusted operating income to be approximately $4.7 million or 210 basis points. The improvement in operating margin versus the prior quarter was primarily the result of improved gross margin of 170 basis points led by reduced material and overhead costs of 80 and 90 basis points respectively. Quarter to quarter tariff expenses were reduced by approximately $600,000. and electronic component related costs were reduced by approximately $700,000. During the fourth quarter, we outlined a plan to improve adjusted gross margin in 2020 by approximately 130 basis points by reducing material costs, improving manufacturing and delivery processes, and improving operating efficiency.

6:27 During the first quarter, we delivered on those commitments and improved profitability in our facilities. While we expect reductions in volume for the remainder of the year, We also expect that our facilities will continue to execute at a high level and limit controllable costs where possible. On page five, as it relates to reduced production volume expectations, the most recent IHS and LMC information for our OEM and end markets quarterly and for the full year are covered. Given the significant amount of downtime for most of our global customers during the second quarter, IHS and LMC are forecasting declines of approximately 50% in our weighted average end markets in the second quarter, followed by approximately 16% in the third quarter and 14% in the fourth.

7:16 For the year, our weighted average end markets are forecasted to decline by approximately 23% relative to our previously provided guidance. We expect similar disruption in our aftermarket and non-OEM markets, which primarily consist of Orlaco and Stone Ridge, Brazil. Turning to slide six. As a result of both the production and customer production levels, as well as federal, state, and local mandates, each of our production facilities around the world has been impacted to some degree, varying from reduced utilization to full plant idling. As we return to production, we will take the necessary steps to ensure our employees remain safe while we continue to support our global customers.

8:01 In North America, Our facility in Lexington, Ohio, which produces control devices products, has adjusted operations to satisfy ongoing customer demand. The plant has been operating at approximately 40% of typical utilization since late March. Based on conversations with our customers, we expect production schedules to begin to ramp up in the middle of May. Our Juarez, Mexico facility, which supplies both our electronics and control devices segments, has been closed since April 9th in response to local government regulations. Based on ongoing discussions with our customers and with the local government, we expect production to begin in Juarez in mid to late May with a ramp-up period in advance of full production.

8:46 In Europe, each of our facilities primarily support the electronics business. Our facility in Orbo, Sweden, has been operating at approximately 40% of typical utilization since the beginning of April. Commercial vehicle customers generally restarted production in late April, and we expect to ramp up to follow their demand over the next several weeks. Similarly, in Tallinn, Estonia, our facility was idled since the beginning of April and began ramping back up this week. At Stone Ridge, Alaco, and Barneveld, Netherlands, our facility has been running at reduced schedules since the beginning of April due to reduced customer demand from both our on- and off-road customers. We are expecting a ramp-up of production over the summer as our global customers restart and ramp up their production.

9:32 In Brazil, our facility in Manaus was closed for three weeks in early April and restarted in late April on a reduced production schedule in line with customer demand. We continue to monitor the local market and will adjust our production schedules to ensure employee safety and to align with customer demand. In Asia, we are seeing continued ramp-up in our facility in Suzhou, China, We are currently operating at approximately 80% of capacity as local customers are back online following similar shutdowns. We continue to experience reduced demand for exported products to Europe and India and expect to see a ramp up as those customers resume production. Finally, our joint venture facility in Pune, India is currently idled and is expected to restart in mid to late May.

10:23 Where production has been limited by customer demand, rather than regulation or employee safety concerns, we are taking advantage of downtime to make cost-saving progress in some areas that were not possible while we were running at full production, and to ensure that we are prepared to ramp up efficiently and evenly as the customers come back. We are optimizing our inventory levels, including the balance between finished goods and raw materials in each facility to better prepare for customer ramp-ups and schedule variation. We have completed preventive and required maintenance that could have otherwise required downtime in the plants. And finally, we have completed training programs for our employees who would not typically have had the opportunity to complete those programs when we are running at full production. We are focused on controlling the factors that we can control and putting ourselves in the best possible position to efficiently ramp up production around the world.

11:17 And we are committed to ensuring the safety of our employees and complying with all regulations and suggested guidelines while serving our global customers who may in many cases be essential businesses or support essential businesses. We will continue to adjust our production schedules and operations as required while limiting the impact on our employees where possible. Turning to slide seven. Our leadership team, cost focus and conservative balance sheet have prepared us for the current market turbulence. That said, we have taken additional actions to reduce costs in order both Thank you for joining us. In addition to these temporary cost reductions, earlier this week we reduced our global salary workforce by approximately 5%.

12:29 A portion of these reductions were planned as part of our continuous transformation of the business to ensure our resources and cost structure remained aligned with the best opportunities for the company moving forward. However, as a result of the expected impact of COVID-19, in some functions we expanded our planned reductions to adjust for our revised market outlook. I want to be clear. These reductions were not simply evenly spread throughout the organization and were strategically focused to align resources with opportunities and to drive future profitability and growth. These reductions will not impact our ability to launch the programs that comprise our substantial backlog or preclude us from investing in the technologies that are the future of the company. We expect that these more permanent actions will result in $3.5 to $4 million of savings this year with an annualized impact of approximately $5 to $6 million beyond 2020.

13:24 Given that the cost reductions occurred primarily in the second quarter, we do not expect to recognize the full impact of these reductions during the second quarter. However, we should see the full impact for the second half of the year. As a result, we expect that our second quarter decremental contribution margin will be on the high end of previously discussed 2.5 to 3 times EBITDA margin range. Finally, although we were well positioned for a downturn and our balance sheet remains strong, we have taken additional actions to preserve cash flow in the short term and optimize our working capital position as we ramp back up to normal production levels. Bob will discuss our leverage position and expectations for cash flow in further detail later in the call. Turning to page eight. We recently welcomed Jim Zizelman to the team as president of the control devices business. Jim's background aligns well with our strategic plan as he brings experience in both vehicle components and system development, as well as overall technology strategy. Jim has deep experience developing products for global customers, growing profitable businesses, and creating high-performance organizations.

14:30 Jim is responsible for driving business performance, commercial relationships, product development, our innovation strategy, and technical vision within the segment. Jim will also be a valuable addition to the Stone Ridge leadership team. Prior to taking the role, Jim was a consultant for StrongBridge, and prior to that, Jim spent more than 20 years with DelphineActive, where most recently he was the Vice President of Engineering and Program Management. Turning to page nine. In summary, in the first quarter, we delivered our operational goals of driving reduced material and overhead costs through very specific operational initiatives, resulting in improved gross margin quarter to quarter. We took decisive actions to respond to reduced customer demands in our facilities, and right size our cost structure with a focus on 2020 and beyond.

15:16 We will continue to execute on the things that we can control and respond effectively and efficiently to the changing macroeconomic environment. Our long-term strategy remains robust and we remain well positioned to outperform our underlying markets. With that, I'll turn it over to Bob to discuss our financial results in more detail. Thanks, John. Turning to slide 11. Sales in the first quarter were $183 million, a decrease of less than $1 million relative to the prior quarter. We estimate that COVID-19 impacted sales by approximately $16 million. Adjusted operating income was $6 million or 3.3% of sales, which was an increase of 50 basis points versus the prior quarter.

16:01 We estimate that adjusted operating income was impacted by $4.7 million or 210 basis points as a result of the pandemic. I'll provide additional details on segment performance, including our estimates of the impact of COVID-19 on each segment during the quarter in the subsequent slides. On March 30th, we would view our 2020 guidance due to the continued uncertainty surrounding the COVID-19 pandemic. Based upon the latest LMC and IHS projections, Our weighted average end markets are expected to decline by 23% relative to our previously provided midpoint sales guidance of $760 million. As we have discussed previously, we expect incremental and decremental contribution margins on volume changes to be approximately 2.5 to 3 times our EBITDA margins, or approximately 25 to 30%.

16:55 As a result of the $8 million of cost reduction actions John outlined for 2020, We expect the decremental impact to be on the low end of that range. Our balance sheet and liquidity remains strong as we currently have over $320 million in cash and undrawn commitments on our current revolver with no significant debt maturities in the near future. I will provide additional color on our liquidity position and available capital later in the call. Page 12 summarizes our key financial metrics specific to control devices. as well as our estimate of the impact of COVID-19 on the segment during the quarter. Control device sales of $98.2 million increased by 5% relative to the full quarter of 2019.

17:42 This was driven primarily by our actuation and emission sensing product lines. We estimate that the COVID-19 pandemic reduced control device sales by approximately $10.9 million during the quarter. We estimate that control devices operating income was negatively impacted by $3.3 million, or approximately 200 basis points during the quarter as a result of COVID-19. As discussed on our fourth quarter call, we remain focused on improving operational performance and reducing tariff-related expenses. During the quarter, this resulted in a 100 basis point improvement in overhead at control devices and savings of approximately $600,000 in tariff expenses relative to the prior quarter. As John outlined previously, we expect our primary control devices and markets to decline by approximately 25% relative to previously provided guidance in 2020.

18:35 Building on the operational improvements implemented in the first quarter, we expect continued progress on controllable operational factors despite reductions in overall segment volumes. Page 13 summarizes our key financial metrics specific to electronics, as well as our estimate of the impact of COVID-19 on the segments during the quarter. Electronic sales of $79.8 million were approximately flat relative to the fourth quarter of 2019. We estimate that the COVID-19 pandemic reduced electronic sales by approximately $4.5 million 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.

19:24 This improvement was driven primarily by reduced material costs of 90 basis points and improved overhead costs of 140 basis points during the quarter, leading to 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 of COVID-19. In addition to the improvement in overhead, we remain focused on reducing electronic component related expenses. During the quarter, this resulted in a reduction of approximately $700,000 relative to the prior quarter. As John outlined previously, we expect our primary electronics end markets to decline by 30 to 40% relative to previously provided guidance for the year.

20:11 Despite improving gross margin, we expect these 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 summarizes our key financial metrics specific to Stonehenge, Brazil, as well as our estimate of the impact of COVID-19 on the segment during the quarter, which was relatively limited. Stonehenge, Brazil, sales of $14.6 million declined 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 and mass retail products relative to the fourth quarter of last year due in part to seasonality surrounding the holidays.

20:57 The fourth quarter is typically the strongest revenue quarter for Stone Ridge, Brazil. Foreign currency reduced sales during the quarter by $700,000 or almost 5%. Currency exchange rates continue to have a negative impact in Brazil and we expect continued pressure due to continued unfavorable currency movements during the second quarter. Although Stoner to Brazil had limited impact from COVID-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.

21:47 The improvement in gross margin is partially offset by reduced leverage on SG&A 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 had net debt of approximately $60 million, or approximately 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 COVID-19 pandemic, we drew an additional $25 million on our existing credit facility. As of the end of the quarter, we had net debt of approximately $82.5 million, a 1.1 times trailing 12-month adjusted EBITDA, and cash of approximately $81.3 million.

22:35 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 completed a share repurchase program on March 6th resulting in the company buying back almost 243,000 shares for approximately $5 million. The company is temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration and magnitude of the COVID-19 pandemic. Our credit facility includes a net debt to EBITDA covenant of three and a half times, which includes restrictions on foreign cash and EBITDA adjustments in the calculation for compliance purposes. Including those restrictions, our current net debt compliance ratio is approximately 1.6 times trailing 12-month EBITDA.

23:28 Based on current IHS 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. Stone Ridge remains well positioned with relatively low leverage and significant available capital to withstand this downturn. Moving to slide 15, in closing, I would like to reiterate that we are pleased with the operational improvements we drove during the first quarter and expect that the actions we have taken will reduce the impact of COVID-19 for the company as we ramp our production levels back up over the course of the year.

24:19 That said, we expect continued and significant headwinds related to the global impact of the virus and will continue to respond decisively as the macroeconomic environment evolves. Snow Ridge is committed to driving shareholder value and that focus remains at the forefront of all of our strategic initiatives. I will open up the call to questions. Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchtone telephone. Again, the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. So your first question will come from the line of Mr. Justin Long from Stevens. So please proceed. Your line is now live.

25:05 Thanks, and good morning, everyone. Good morning, Justin. So I wanted to start by looking at the balance sheet, and Bob, maybe going to some of your commentary at the end. I was curious, you know, based on what you laid out in terms of in-market expectations and decremental margins, you know, what you're expecting from a cash flow or a cash burn perspective over the remainder of the year as you make that comment that, You feel like you'll remain in compliance with your covenants? Sure, Justin, and thank you so much for the question. So first of all, where I'd like to start with that is let me give you, you know, if you look at the assumptions that we have, and we talk about them in the presentation, so if you look at our primary end markets, so if you look at North America, so North America passed CAR for this year.

25:54 If you look at the data, it's forecast to be down about 25%, commercial vehicle down about 44%, and if you look at Europe, for this year. It's down about 25% as well for past car and commercial vehicle. You're down about 38%. If you look at the IHS, the LMC, and the ACT assumptions on commercial vehicle and passenger car for the rest of the year, and you flow them through, we're forecasting about a $15 to $20 million burn rate in the second quarter, and then about, I would say, less than $20 million for the second half based upon the current based upon the current IHS and LMC and ACT assumptions. Okay. That's helpful. And then circling back to the cost reductions, I wanted to specifically focus on the structural cost reductions that you mentioned, John. How should we think about the longevity of those cost reductions? Is this You know, you're saying that, you know, in 2021, you're not expecting the end markets to come back significantly.

27:04 So these are costs that will continue to, you know, come out of the business or, you know, I'm just trying to think, you know, when we return to growth mode at some point, are these headcount reductions going to have to come back to support that? Or are these, you know, over the long term structural cost reductions, you know, the next three plus years? Yeah, so Justin, thanks for the question. I think the answer is it's both. As we've talked to you over all of these calls, we've said that we would adjust our costs in response to sales changes. We've demonstrated that over five years in different situations.

27:52 I think the way to think about it is within our facilities, our direct-indirect laborers and sort of our plant-based SG&A move with sales. But then you get into engineering and you get 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 follow StoneRidge is we've continued to refine our structure and we've continued to transform the business both from the footprint, our product portfolio and the team. So what we have done is we've sized the business for what we see going forward with both commercial vehicle and past car volumes.

28:38 We have also taken this opportunity to structure the business as we see the appropriate organizational structure to support our growth, execute what 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 the way we've approached this. So I don't see the need from some of those more sticky costs to increment them back up as the revenue comes back up. We see it as a thinning opportunity. Makes sense. Helpful. And then just lastly, there was no mention of Mirai, and I know there are bigger issues in front of us right now, but I'm just wondering if there was an update on Mirai, some of the discussions that you're having in terms of new contracts, and is there anything that you see out there that's going to impact the timing of those product launches that you've already laid out?

29:43 So, Thanks, Justin, and certainly we would have loved to talk a lot more about Mirai considering the PACE award, but given the turbulence of what's going on right now, we didn't think it was appropriate to spend all that time on that. First and foremost, we continue to add more fleets to our trials, and we continue to get very strong positive feedback both from the fleet owners and from 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 refinement over the air updates and other things that they need to have this be a more important tool as part of their safety and efficiency package. And those trial partners also become very important advocates for us with the OEs.

30:38 Most of them are planning additional deployments in the second half of the year. But the challenge that we have from a COVID timing is many of these businesses are essential businesses, some of them the food service business, and they don't want anybody external near their trucks. So some of them have delayed installs, some of them have delayed delivery of new trucks, and that does impact our rollout. But what we are seeing is they continue to work with us. We continue to have great conversations. We had some feedback from one of the One of the initial fleets, they did their own SAE-certified fuel efficiency test and found that they got 2.6% to 2.7% fuel economy improvement. So, you know, we talked about the safety benefit.

31:26 We're seeing in real life, on real trucks, the fuel economy benefit, and the fleet partners that we're working with are continuing to be excited about what we're trying to do and what we're working on and how to integrate it 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 based on the current situation. Makes sense. I appreciate the time this morning. Thank you, Justin. For sure. Thank you, Seth. And presenters, your next question will come from the line of Mr. Scott Kemper from TL King. Sir, your line is now live. Please proceed. Good morning, and thanks for taking my questions.

32:11 Good morning, Scott. Good morning. On the topic of, I guess, backlog and new products, I guess we were set to have a significant amount of new stuff coming out of backlog, I guess, within the next few quarters. Aside from Mirai, could you maybe talk about some of the other contracts and other launches, whether they've been delayed, canceled outright, and just the general timing of when we can expect some of those coming out? So, Scott, what we have seen in general is that our customers have maintained their program timing. We can't talk about the magnitude of the backlog size because the volumes are turbulent, but as far as the program launches and the program timing, first, we haven't lost any programs, most importantly, and they haven't canceled any programs. Secondly...

33:07 For all of the major programs, be they instrument cluster programs, be they OEMIRI programs, be they actuation programs, be they other things in both control devices and in electronics, those programs remain on track. And what we've done is we've used this time to actually bolster our product development and make sure that we are absolutely ready, both in our facilities and in our engineering activities, that Our launches are flawless. So we feel confident about our backlog. We feel confident about the programs that we're working on. We're excited about the future state. Scott, you know that even before the COVID challenge, 2020 was a flat year and a year of preparation for launch.

33:53 We're still in that same situation. Yeah, Scott, I just want to add to that. If you think about what we've discussed, Obviously, we've held guidance for the balance of the year, but if you look at the new product launches with Mirai, with our Park by Wire launch, and our Instrument Cluster program, which is one of the largest awards in the company history, and three years of record new business wins, we're extremely excited about the future. We're waiting to see where the dust has been settled around overall global market volumes, but when you layer on that incremental new business, we're and you look at the assets that we're taping, the right size, our cost structure, we're very excited about the future.

34:39 Got it. And this is a very helpful slide about all the different end markets with regard to production. But what was, can you just give us for Q2 your total expectation of, you know, production declines and just going forward, how closely should we peg Our expectations for sales to these production changes for Stone Ridge. Yes, Scott, thanks for the question. It's an important question. We talked about the 23% for the full year, but obviously the largest impact of that 23% weighted average will be during the second quarter. So we are forecasting right now, based upon the third-party data, that our weighted average end markets will be down 50% versus our average.

35:27 versus our original guidance for Q2. And the way to think about it, Scott, is the way we've always talked about the business is two and a half to three times from a contribution margin perspective on incrementals and decrementals. Now, for us, the second quarter is going to be more towards the higher end of that two and a half to three range because We've taken cost reduction actions during the quarter, but we're not going to see the full impact of those actions because we took them during the quarter. So you'll see the full impact of those. And you just can't address that fact. Right, right. So you'll see the full impact of those in Q3 and Q4, but we've taken those actions during the quarter, so we'll be more towards the three-time range on defermentals in the second quarter, and then that'll get better as we see the full impact of the cost reductions.

36:18 Yeah, and just as far as modeling for sales, how closely aligned will you be with these production forecast declines? Close, yes. Okay. All right, that's all I have right now. Thank you. Thank you, Scott. Thank you, sir. And again, ladies and gentlemen, if you have a question at this time, please press star, then the number one key on your touchstone telethon. Presenters, your next question will come from the line of Mr. Chris Stanhorn from D. Riley. So please proceed. Your line is now live. Good morning, everyone. Thanks for taking my call and hope everyone's well. Good morning, Chris, and we hope you're all well as well. Thank you so much.

37:03 You know, I was wondering if you could comment on your supply chain and if you're seeing any disruption there and, you know, how that might impact things going forward. Sure. Chris, it's 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've monitored where that risk is really since the situation started in China. Our team feels pretty good about the majority of our supply base. We have a couple that are – that are at risk, but the operations and procurement teams are well on top of it, and we believe that we're well positioned to restart and ramp up and follow our customers. So it's 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 be proactive and be ready for the ramp up.

38:07 Got it. And then... You know, maybe prior to the disruption mid-March and ongoing, could you comment on the award activity and maybe how it was progressing and if it did progress through March? Yeah. So, Chris, as you know, the award activity is not linear. It's lumpy, and particularly with some of the large awards like the most recent Murai Awards, they come in big chunks. And So there wasn't anything that was material in the quarter that would change our backlog or that would be worthy of significant press releases or conversation.

38:52 But what we see, and as I said to Scott earlier, we have not lost any business. Everything that we have competed for, we have felt like we've done very well, and we're confident that as our customers come back and recognize that in some situations our customers shut down, including their procurement organizations shut down. 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've reacted, the way in which we've worked with our customers, and the way in which we have positioned the organization sets us up very well as they come back that we're and many, many, many, many, many, many, many, many, many, many, many, many, many, as more and more fleets and are seeing the extremely compelling value proposition that Mirai provides to them.

40:12 Got it. Makes sense. Thank you for that. And then, you know, lastly for 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, Chris, in the latter part of last year, we talked about a series of OEM wins. instrument clusters, connectivity modules, and actually some OE audio. And those things have been in the process of a ramp-up, and it's really a transformation with regard to Stone Ridge, Brazil, from an aftermarket business into much more aligned with Stone Ridge's overall business, which has an aftermarket side but also has an OE side. and the other thing that isn't as apparent in these quarters is the importance of the technical capabilities in Stone Ridge, Brazil to help our global product development and help as we launch and accelerate these launches in connectivity or in Mirai or in other areas.

41:20 We're using the global footprint and the global capabilities there. So the Stone Ridge, Brazil team is doing a fantastic job of transforming itself from a product standpoint and contributing to the global product development side. And I would also say our facility in Manaus, 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, Chris. Appreciate it. Thank you, sir. And I am showing no further questions at this time. I would now like to turn the conference back to Mr. John DeGainer.

42:05 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 focused deployment of our available resources. Our management team will respond effectively and efficiently to manage and control variables that we can impact And again, thank you everyone for participating. This concludes today's conference. You may now disconnect. Stay safe and have a lovely day.