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spk00: Ladies and gentlemen, thank you for standing by and welcome to the Stone Ridge Four 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 any further assistance during the conference, please press star zero on your touchtone telephone. I would now like to turn the conference over to your host, Mr. Matt Horvath. Executive Director of Investor Relations and Corporate Strategy. Thank you. Please go ahead.
spk04: Great. Thank you, Stacey. Good morning, everyone, and thank you for joining us to discuss our fourth quarter and full year 2020 results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted on our website at www.stonridge.com in the Investor section under Webcast and Presentations. Joining me on today's call are John DeGainer, our President and Chief Executive Officer, and Bob Kukowiec, 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 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 you that you please keep your questions to a single follow-up. With that, I will turn the call over to John.
spk03: Thanks, Matt, and good morning, everyone. I'd like to start by reflecting on the global health crisis we encountered over the last year. We have and will continue to put the health and safety of our employees and their families at the forefront of every decision we make. I recognize that the situation continues to be challenging for many, and I want to thank our employees for their continued dedication to Stone Ridge during this period. I'm really proud of our accomplishments this past year and our ability to adapt and respond to this crisis, both from a business perspective but also as a team and a member of the global business community. Before we discuss our earnings materials, as you may have seen, yesterday we announced that Frank Sklarsky has joined StoneRidge's Board of Directors. Frank's impressive background includes being the CEO of several large multinational companies including ConAgra, Eastman Kodak, Tyco, and most recently PPG. Frank was also a member of Harman's International Board of Directors. Additionally, Frank has a significant amount of transportation experience as part of Chrysler for over 20 years. I'd like to take a minute to welcome Frank to the board, and I look forward to working with him as we continue to transform StoneRidge. Let me begin on page three. In 2020, we effectively navigated through the challenges brought on by the global pandemic. We adapted our business to current market conditions and managed our cost structure efficiently throughout the year. We focused our efforts on continuous improvement throughout our manufacturing facilities, resulting in strong margin performance as global volumes recovered. Our 2020 adjusted sales of $648 million resulted in an adjusted gross margin of 24.4%, translating to an adjusted operating margin of $2.1 million, or 0.3% of sales. Adjusted EPS for the year was negative 3 cents. While managing through the crisis, We continue to transform our portfolio and footprint, positioning the company for long-term profitable growth. During the second quarter, we announced our intention to exit the sensor product line by the first half of 2021 in order to focus our engineering resources on the highest growth opportunities. We remain on track to complete that exit. We've secured a lease with a premium tenant for our recated Canton, Massachusetts facility and have engaged a third-party advisor to assist us in reviewing strategic alternatives for the building, which could include a divestiture in the first half of the year. Most importantly, despite the external challenges, we continue to invest in the resources necessary not only to support the significant number of program launches in 2021, but also to continue to develop the technologies and product platforms that will drive future growth. we continue to expand our Mirai platform, preparing for OEM launches later in 2021, expanding our retrofit programs despite the challenges caused by COVID, and continuing to invest in complementary technologies, as we will discuss in additional detail later in the call. Looking into 2021, we expect continued strength in our end markets to help drive strong top-line performance. This morning, we are providing midpoint revenue guidance of approximately $780 million, This represents growth over market of approximately 5% in 2021, driven by significant program launches, including a large driver information systems program and our first two OEM near-eye programs. This morning, we are guiding to a midpoint gross margin of 26.25%, or approximately 185 basis points better than 2020. We expect some additional expenses related to global supply chain disruptions, particularly in the first half of the year, which have been considered in our guidance. As a result, we are guiding operating margin to a midpoint of 3.9%, resulting in an EPS midpoint of 68 cents and an EBITDA margin midpoint of 8.4%, or 260 basis points better than 2020. Excluding the impacts of currency, the global supply chain disruption, and the discontinued sit-censor business, our 2021 guidance implies contribution margin on incremental revenue of 32% relative to 2020. Bob will provide additional detail on our revenue and adjusted EPS guidance, and I will discuss some of the drivers of our improved margin later in the call. Finally, this morning we are updating our long-term financial targets based on our strong backlog of awarded business, current market conditions, and our continued focus on operational improvement. We expect a five-year compound annual growth rate of at least 10%. resulting in over $925 million of revenue in 2023 and at least $1.1 billion of revenue in 2025. Based on our booked business, we also expect that approximately 85% of our targeted revenue in 2025 will be drivetrain agnostic. This highlights the continued importance of our portfolio rotation and focused investment in the engineering resources that have and will continue to align our growth strategy with industry megatrends. Based on continued strong contribution on incremental revenue, as well as continued operational improvement and fixed cost leverage, we expect an EBITDA margin of at least 15% by 2025. I'll discuss the drivers of our long-term financial targets in more detail later in the call. Page four summarizes our key financial metrics quarterly for 2020 and for the full year compared to 2019. Looking at the quarterly comparison, the global pandemic significantly impacted our second quarter results due to prolonged shutdowns and significant reductions in production across our global end markets. During the second half of the year, we experienced strong top-line growth as a result of the broad recovery. By continuing to focus on reducing material costs and the efficient ramp-up of production facilities, we were able to capture third- and fourth-quarter adjusted gross margins that were even better than the first quarter of the year. which created good momentum as we moved into 2021. The structural cost actions taken in the first half of the year positioned the company to improve adjusted operating margin in the second half of the year, resulting in strong incremental margins as global production returned to a more normalized state. Turning to page five, as a result of the global pandemic, we took several actions to temporarily reduce costs in an effort to drive 2020 financial performance and preserve cash. Additionally, we took actions to reduce our structural costs based on our current outlook and to align our resources with the greatest opportunities for growth. We continued to fully support the investments required to ensure the successful launch of several large programs scheduled for 2021 and developed the technologies and platforms that will drive future growth. These actions resulted in an efficient and an effective ramp down in the second quarter followed by contribution margins in the third and the fourth quarters at or above the high end of our targeted range. Due to this strong operating performance and our continued focus on working capital management and cash preservation, we're able to effectively manage our operating cash flow, resulting in a continued strong balance sheet. Looking into 2021, we expect continued strong production based on our current forecast and expect that the base business will continue to deliver strong financial performance. That said, we are starting to see the impacts of global supply chain disruptions as some of our customers have announced reduced production schedules. I'll discuss the potential impacts from this global issue in additional detail later on the call. In 2021, we will focus on continuing to transform our global engineering footprint to increase our capabilities and engineering capacity without adding additional incremental costs over the long term. This will be critical as we focus on reducing pre-programmed launch costs and increasing the capabilities and capacity to develop systems and technologies that will fuel our growth. Moving to slide six. Based on the most recent IHS and LMC forecasts, our primary end markets are expected to increase significantly in 2021 as the global industry rebounds from the decline in 2020 production. As we have previously noted, our end market exposure on the passenger car side continues to be more heavily weighted toward SUVs, CUVs, and light trucks versus traditional passenger cars. Traditional passenger car platforms only comprise approximately 8% of our total revenue, while light truck, SUV, and CUV platforms comprise 41% of our total revenue and over 80% of our total passenger car vehicle exposure. This is up significantly from prior years. Overall, we expect our weighted average OEM end markets to increase by approximately 15.3%. Turning to slide 7, as I mentioned previously, several of our customers have recently announced reduced production schedules in response to global supply chain disruptions, primarily related to electronic component shortages and other raw materials. We expect that once the supply chain disruptions subside, the OEMs will be able to make up production in these platforms based on current market demand. We are not seeing the same type of reduced production schedules in our commercial vehicle end markets, and due to OEM production capacity and expected demand, we do not expect a significant impact on commercial vehicle revenue in 2021 as a result of these disruptions. That said, while we do not expect a significant revenue impact, we do expect that increased material costs and increased expediting and premium freight costs will create a gross margin headwind, particularly in the first half of the year, that we do not expect to be able to make up as production normalizes in the second half. We expect that these incremental costs will impact our margin by $2.5 million, focused in the first half of the year. We continue to monitor the global supply chain and impact on our OEM customers to ensure that we respond efficiently and effectively to any disruptions. we remain committed to delivering on our commitments to our OEM partners despite the logistics challenges we expect in the first half of the year. Turning to page eight, despite the expected impact of global supply chain disruptions, we expect continued gross margin and operating margin improvement in 2021. We expect continued manufacturing efficiencies, particularly related to fixed cost leverage, efficient direct labor utilization, and reduction in quality-related costs. As a result, we are expecting gross margin to improve by 135 to 235 basis points in 2021. That said, there are several external factors unfavorably impacting our 2021 expectations. Based on current forecasted exchange rates for the year, we expect foreign currency headwinds from material cost purchases and certain operating expenses. That unfavorable impact of foreign currency on operating income is expected to be approximately $2.3 million. We expect that the actions we took in 2020 to right-size our cost structure will continue to benefit us as revenue increases significantly in 2021. As it relates to our design and development expenses, with a number of large programs launching in 2021, we are expecting some incremental engineering expenses to support these launches. Similarly, to capitalize on our strong market position in several key product areas, including Mirai and adjacent technologies, we will continue to invest and advanced development resources to support future technologies and platforms. As I will discuss later in the call, we remain focused not only on increasing our engineering capabilities and capacity, but also on improving our global footprint and overall cost structure to more cost-efficiently support these initiatives. Turning to page nine, we expect that our continued investment in engineering resources will accelerate the results that we are seeing already with Mirai. This morning, we are announcing that two additional fleets have indicated their intention to roll Mirai out across their fleet, bringing the total number of fleets that have initiated plans to fully adopt Mirai to three. We expect that these fleets will install Mirai systems on new vehicles as part of their regular fleet refreshment program. The decision to expand Mirai across their fleets was due in large part to data compiled by our fleet partners proving the safety benefits of the system. Although the analysis is still in the early stages, one of our fleet partners reduced expected incidents by more than 30% over a 3 million mile test versus a comparable pool of vehicles without Mirai. Validation of the significant positive safety impact for our systems and our partners' fleets is a critical step in the accelerated penetration we expect for our systems going forward. We are in active fleet evaluations with 24 fleets that represent approximately 85,000 trucks on the road and expect to announce expansion in both the number of fleets and the depth of adoption in current fleets over the coming months. In addition to the success we are having with our fleet partners, we are preparing for our first OEM program launches later this year, where we continue to get positive feedback from our customers. Our OEM partners are beginning to understand the increases in customer demand that we are seeing with the fleets due in large part to the safety data we just outlined in addition to the demand in Europe primarily driven by the notable fuel savings on Mirai equipped vehicles. As a result, we are in discussions with one of our OEM customers to expand the expected volumes for Mirai in European applications. We believe that the work we are doing with the fleets is driving increased end customer demand, creating an expectation of stronger than expected pull-through from the OEMs. As a reminder, our backlog only includes approximately $76 million in peak annual revenue for awarded OEM programs. Increased penetration could result in several hundred million dollars of additional revenue annually. As we continue to work with our fleet partners, we believe that adding additional capabilities to the system will help the system apply to even more customers and a broader range of commercial vehicle applications. We have the lead position in this commercialization of camera mirror systems, and we must continue to invest in this technology platform to take advantage of that position to recognize the potentially significant long-term benefits of the system for Stone Ridge shareholders. Page 10 provides an overview of our key areas of focus for advanced development and engineering resources going forward. As I have discussed on many calls in the past, our most precious resource is our engineering capability and capacity. While we continue to increase our capabilities as we go forward, we expect that the actions we will take in 2021 will allow us to expand our capacity without materially increasing our cost structure over the long term. We will accelerate the transformation of our engineering organization to focus on a more capable global footprint and add resources in lower-cost countries to complement our existing resources. we expect that our engineering footprint will be more evenly split between high, medium, and low-cost countries versus our current split. We've already begun this transformation and have increased our capabilities in our existing footprint. We've also partnered with existing engineering organizations in lower-cost countries to bridge the gap while we structurally change our footprint. These changes will result in some short-term incremental costs. However, we expect that once complete, our capabilities will be better aligned with our growth objectives and strategic direction, and our footprint will result in a more efficient and improved cost structure. As a result of this rotation, we will accelerate the development of advanced technologies and systems focused in several key areas in both our control devices segment and our global electronics business. As we've discussed in the past, our control devices segment has several actuation applications that position us well to take advantage of the continued electrification of the drivetrain. In 2021, we expect that approximately 30% of our actuation revenue will be on hybrid or fully electric platforms. We continue to focus on product development and systems capabilities to expand in those areas. Our transmission and axle-based actuation systems will provide the technical competencies to execute this expansion. Additionally, as an adjacency to our core competencies, we have explored other electrified actuation applications where our capabilities may provide a competitive advantage, including electric park brake applications. We believe that investments in these areas will drive strong growth opportunities. While we focus on continued portfolio rotation and control devices, we are focused on taking advantage of our already strong market positions throughout our electronics portfolio. This includes increasing mirror eye penetration in both the OEM and retrofit applications and expanding our connectivity capabilities to more closely integrate these systems. Our continued investment in these advanced technologies will not only drive increased mirror eye penetration, but an increase in overall content per vehicle across our product portfolio. We remain focused on our capabilities to connect our devices to the driver, the fleet, and the world around them. For a company of our size, it is critical that we maintain our competitive advantage with investments in the current and future technologies, systems, and platforms that will keep us ahead of the largest competitors in our space. StoneRidge is well positioned in each of our core product platforms, and our global transformation of the engineering organization will maintain and accelerate that advantage. Turning to page 11. This morning, we are updating our long-term revenue target to reflect current market conditions and updated expectations for the next several years. Based on our strong backlog of awarded business, our expectations of continued success in the market, and our ability to build on the investments that we have made in advanced technologies. From a midpoint of $780 million this year, we expect at least $925 million of revenue in 2023 and over $1.1 billion in revenue in 2025, which implies a compound annual growth rate of over 10% through 2025. This compares to a market growth of approximately 2.1% over that same period, which implies five times market growth and almost 8% growth over market relative to our weighted average end markets. Our long-term revenue targets include OEM near-eye programs at customer quoted take rates of 10% to 15% and a relatively modest amount of annual retrofit systems by 2025. We believe that our continued investment in advanced technologies will improve mirror eye take rates and retrofit penetration, which could drive revenue up to $1.5 billion in 2025 based on full penetration of the system for the OEMs that have currently awarded us programs. While we do not expect 100% penetration across every platform and every OEM by 2025, that favorable feedback from both our OEM partners and our fleet partners suggest that it is not unreasonable to expect take rates to exceed customer quoted rates. As I discussed previously, we are already seeing increases in adoption rates with certain of our fleet partners and expect that trend to continue as more fleets reach their testing hurdles. Similarly, we believe that continued changes in the regulatory and safety environment can contribute to take rates that exceed those currently considered in our backlog. This opportunity highlights why it is so critical that we take advantage of our market-leading position with Mirai and invest in the resources necessary to recognize these opportunities and drive long-term value for our shareholders. Turning to page 12. This morning, we are also updating our long-term EBITDA target to reflect our long-term revenue target and our expectation of continuous improvement and significant margin expansion through 2025. As we have discussed in the past, we remain focused on reducing material costs and expect these continuous improvement activities to offset typical annual price downs. Similarly, as we outlined on this call, we will continue to require investment in engineering resources to launch our significant backlog of awarded programs and develop the technologies and systems that will drive future growth. We will work to offset these investments as we rotate a geographic footprint to complement our existing resources with resources in lower-cost countries. We expect that this continued investment in our transformation of the global engineering organization will result in a compound annual growth rate related to incremental engineering expenses of less than 5% from 2021 to 2025 without limiting our ability to maintain our competitive advantage in several key technologies. As it relates to our contribution margin, we expect to continue to leverage our existing SG&A structure and fixed overhead to significantly improve EBITDA margins by 2025. By continuing to thin our fixed costs and focusing on reducing manufacturing complexity and improving manufacturing efficiency, we expect to derive strong contribution on incremental revenue. As a result of these drivers of long-term margin expansion, we expect EBITDA margin in 2025 to be at least 15% relative to the midpoint of our 2021 guidance of approximately 8.4%. Turning to Phase 13, I'm pleased with the company's performance. Our leadership team was able to efficiently and effectively adapt to a challenging environment in 2020, resulting in strong financial performance. In addition, we managed cash during the year to maintain a strong balance sheet. Looking forward to 2021, new program launches are expected to drive market outperformance, resulting in midpoint revenue guidance of $780 million. We will continue to invest in the technical resources that will support our significant backlog of awarded programs and develop the technologies and systems that will drive future growth while improving our cost structure and global footprint. We remain committed to executing on our strategic priorities and continuously improving the business to drive strong financial performance and stable long-term profitable growth. We remain focused on our Mirali retrofit and free wire opportunities as well as our first two OEM program launches, and look forward to sharing more good news across our commercial paths to market in coming months. With that, I'll turn it over to Bob to discuss our financial results in more detail. Thank you, John.
spk05: Turning to slide 15, sales in the fourth quarter were approximately $190 million, an increase of 7.9% relative to the third quarter. Adjusted operating income was $7 million, or 3.7% of sales. More specifically, control devices sales was approximately $100 million, which was a decrease of half of a percent compared to the third quarter, resulting in adjusted operating income of $12.6 million or 12.6% of sales. Electronic sales of $84 million increased by 19.5% compared to the third quarter. resulting in adjusted operating income of $4.3 million or 5.2% of sales. Stoverage Brazil sales of $13.3 million, an increase of 3.4% compared to the third quarter, resulted in adjusted operating income of $100,000 or 1.1% of sales. This morning we are providing guidance for our 2021 financial performance. First, it is important to note that our 2021 guidance includes our current expectations of the potential impact of the global supply chain disruptions that John discussed earlier. I would also note that this is an evolving situation, and our guidance is based on current market conditions and expectations. We are guiding 2021 revenue to a midpoint of $780 million, implying an increase of approximately $132 million, or 20%, versus our 2020 revenue, including the discontinued sensor product lines. Our guidance assumes that the SWIT sensor product lines will contribute approximately $13 million in revenue in 2021 and a few pennies of adjusted EPS. As discussed previously, we expect continued gross margin improvement in 2021 through a continued focus on material cost reductions and operational improvements, partially offset by the impact of continued supply chain disruptions. In addition, We are expecting operating margin to increase compared to 2020 due to fixed cost leverage on incremental revenue, partially offset by incremental investments in engineering resources, and the normalization of certain costs primarily related to our wage and benefit programs relative to 2020. We are guiding adjusted gross margin to a midpoint of 26.25%, adjusted operating income to a midpoint of approximately 3.9%, and adjusted EBITDA margin to a midpoint of 8.4%. Finally, we are guiding to a midpoint effective tax rate of 25%, which is up slightly from prior years due to our current expectations of the geographical makeup of our expected earnings. As a result, we are guiding to a midpoint adjusted earnings per share of 68 cents for 2021. I will provide additional color on the drivers of expected sales and adjusted earnings per share performance later in the call. Page 16 summarizes our key financial metrics specific to control devices. Control devices fourth quarter sales were $100 million, an increase of 7.3% compared to Q4 2019 adjusted sales. Fourth quarter sales slightly decreased versus the third quarter. The slight decrease in sales versus the third quarter was primarily driven by typical fourth quarter seasonality offset by continued strong production demand at customer facilities in North America, particularly on light truck, SUV, and CUV platforms. Fourth quarter adjusted operating income increased by 190 basis points versus fourth quarter 2019, which resulted in adjusted operating income of $12.6 million for the quarter, or 12.6% of sales. This results in incremental adjusted contribution margin of approximately 38% on increased sales for that segment. Adjusted operating margin decreased by 60 basis points compared to the third quarter, driven by slightly reduced sales as well as lower gross margin as a result of increased expediting costs associated with the significant ramp up in sales in the second half of the year. As discussed earlier in the call, we continue to transform our manufacturing footprint and product portfolio to align with future growth opportunities. During 2020, we completed the exit of the Canton facility, and as John discussed previously, we are in the process of evaluating strategic alternatives for the building, which could include a divestiture. During the second quarter of 2020, we announced our intention to exit the Soot Center product line. This was a result of our review of the product line's expected financial performance the current market outlook for diesel passenger vehicles, and our strategic decision to focus and align our resources with the greatest opportunities for the company. In 2020, we ramped up and launched new programs in our powertrain actuation product lines in North America and Asia. Our existing park-by-wire programs continue to ramp up in 2020 and will expand into additional platforms in 2022. We will launch a ship-by-wire program in China in the first half of 2021, with expected peak annual revenue of approximately $14 million, with a second ship-by-wire program in China scheduled for launch in 2022. As we look to 2021, we expect controlled devices sales and operating margin to improve relative to 2020 through continued operational improvements in the manufacturing process, driving manufacturing efficiencies. However, we also expect global supply chain disruptions to provide a margin headwind particularly in the first half of this year. Page 17 summarizes our key financial metrics specific to electronics. Electronics four-quarter sales were $84 million, which was an increase of 19.5% compared to the third quarter and 4.5% compared to the fourth quarter of 2019, primarily driven by continued strong commercial vehicle production volumes in both North America and Europe. In addition to the fixed cost leverage benefit of incremental sales on overhead during the quarter, material costs continued to decline as we focused on reducing electronic component costs for the segment. A favorable product mix during the quarter also contributed to improved margin. Fourth quarter SG&A costs as a percentage of sales decreased versus the third quarter of 2020 as a result of increased revenue and several one-time COVID-related reductions offsetting the reinstatement of certain wage and benefit programs. Fourth quarter SG&A costs as a percentage of sales decreased versus the fourth quarter of 2019 due to SG&A cost structure actions taken in the second quarter of 2020, a decrease in travel and other discretionary spending due to COVID, as well as other one-time COVID-related cost reductions. We incurred additional D&D costs in the fourth quarter as a result of our continued investment in advanced engineering and preparations for program launches in 2021. This resulted in an adjusted operating income of $4.3 million, or 5.2% of sales, an increase of 320 basis points relative to the third quarter, and an increase of 390 basis points relative to the fourth quarter of 2019. Looking forward, we expect electronics to drive substantial growth in 2021, driven by an increase in commercial vehicle production forecasts in Europe and North America, as well as the launch of a large global instrument cluster platform, the continued rollout of our Mirai retrofit and pre-wire applications, and the launch of our first two OEM Mirai systems. As discussed earlier during the call, we expect additional engineering costs in 2021 as we continue to focus on advanced development engineering and continue to ramp up support for the large programs that will launch during this year. Page 18 summarizes our key financial metrics specific to Stone Ridge, Brazil. Stormage Brazil's fourth quarter sales totaled approximately $13 million, an increase of a half a million dollars, or 3.4%, relative to the third quarter, as a result of local end markets continuing to recover from the global pandemic. Fourth quarter sales decreased $3.7 million, or 22% compared to Q4 2019, primarily due to the unfavorable impact of foreign exchange. Fourth quarter adjusted operating income decreased by approximately 3.9% or half a million dollars relative to the third quarter. This was primarily driven by an increase in direct material costs due to the impact of foreign currency on material purchases and global supply chain disruptions, partially offset by fixed cost leverage in overhead, resulting in an adjusted operating margin of 1.1%. Fourth quarter adjusted operating margin decreased by 100 basis points compared to the fourth quarter of 2019, primarily due to decreased leverage on operating expenses due to lower revenue, partially offset by higher adjusted gross margin as a result of cost reduction actions focused on reducing overhead costs to align with current market conditions. Despite continued macroeconomic challenges in Brazil, we expect revenue and operating margin to remain approximately flat in 2021 based on current market conditions. We remain focused on utilizing local engineering resources to support our global electronics business and the ramp-up of local OEM business to offset challenging macroeconomic conditions. Turning to page 19, net debt decreased by $13.5 million in the fourth quarter, resulting in net debt of $70 million, or 1.8 times trillion in 12-month adjusted EBITDA. At the end of 2020, we had a cash balance of $74 million and $262 million of undrawn commitments, resulting in over $336 million of liquidity. Our ability to manage the continued ramp-up in production volume during the second half of the year drove strong operating performance resulting in cash generation of over $26.5 million in the second half of the year. As a result of strong cash performance, we were able to reduce the balance on our credit facility an additional $8 million during the fourth quarter. We will continue to take necessary actions to right-size our cost structure, effectively manage our cash position, and ensure a strong balance sheet based on evolving market conditions. Stone Ridge remains well positioned with relatively low leverage and significant available capital. Turning to page 20, we expect that several program launches and the forecasted recovery across our global end markets will contribute to strong top line growth in 2021. As we have discussed previously, the announced exit of our soot sensor product line will create a $20 million revenue headwind in 2021 relative to 2020. Our guidance includes approximately $13 million related to our sub-sensor product lines with very little EPS contribution. We expect this to be offset by favorable currency rates. However, we expect overall unfavorable currency impacts on EPS, as I will discuss on the following slide. Consistent with historical price downs, We expect annual price downs of 1% to 2% in 2021. Finally, we expect market outperformance driven by the annualization of our recently launched Park by Water programs, as well as the launch of a large global driver information system program, our first two Mirai OEM launches, and the continued ramp up of our Mirai retrofit and pre-water programs. As a result, we are expecting $770 to $790 million of revenue in 2021. I would also note that our guidance assumes a relatively insignificant expected annual impact on revenue related to global supply chain disruptions based on current IHS and LMC forecasts. We will continue to monitor the situation and update our guidance as necessary should market conditions change. Due to the launch of several large programs in the second half of the year, a slight shift in passenger car volume from the first half to the second half as a result of current supply chain disruptions and the continued ramp-up of our Mirai retrofit program, we are expecting a first half, second half revenue split of approximately 49% first half, 51% second half, slightly different than our typical seasonality. Similarly, we are expecting that the first quarter will be our lowest revenue quarter of the year, with our current estimate around $180 million, primarily due to the timing of production disruptions. Page 21. summarizes our full year adjusted earnings per share guidance for the year. Our midpoint guidance of $780 million implies incremental revenue of $132 million relative to 2020. Although we have targeted contribution margins on incremental revenue of 25% to 30% historically, we are expecting the high end of that range in 2021 due in part to continuous improvement initiatives in our facilities to improve operating efficiency. As John outlined previously, we expect incremental D&D during the year to create a 16 cent headwind to EPS. As I discussed previously, while we expect a favorable impact of foreign currency rates on revenue, due to our cost structure and geographical makeup of our expenses, we expect forecasted foreign currency rates to negatively impact 2021 adjusted EPS by approximately six cents. In addition, although we don't expect a significant impact on annual revenue, related to the global supply chain disruptions, we do expect incremental material and logistics costs in the first half of the year resulting in an EPS headwind of approximately seven cents. Finally, due to the expected makeup of our earnings, we are guiding our 2021 tax rate to a midpoint of 25% which results in a three cent headwind relative to our recent historical tax rate guidance of 22 and a half percent. These factors are expected to adversely impact 2021 adjusted earnings per share by approximately 16 cents, resulting in our 2021 midpoint adjusted EPS guidance of 68 cents. Similar to revenue performance, we are expecting stronger margin and EPS performance in the second half of the year, driven in part by the expectations of revenue ramp up in the second half and also the reduction of material and logistics related costs due to the global supply chain disruption. Due to the expected revenue performance in the first quarter, as well as the expectation that a significant portion of our incremental material and logistics costs will be incurred during the first quarter, we are expecting break-even adjusted EPS performance in the first quarter. We expect that this will be followed by contribution margin performance at the high end of the targeted range and a relative reduction in material and logistics costs. Based on our guidance, this would imply a split of approximately one-third of our guided adjusted EPS performance in the first half of the year and two-thirds in the second half. Turning to page 22, we continue to maintain a strong five-year backlog at the end of 2020, even with the global pandemic creating delays in customer decisions for new programs. Based on communications with our customers, delayed program decisions are expected to be awarded in 2021, and as such, we expect strong business awards this year. Excluding the discontinued SootSensor product line, the favorable impacts of foreign currency and the estimated 5% impact of changes in production forecasts by IHS and LMC, our backlog remained consistent in 2020 at approximately $3 billion and 5.4 times our 2020 OEM sales. It is also important to note, again, that our backlog assumes only awarded programs at customer assumed take rates where applicable, constant currency and IHS or LMC production volume forecasts. As we have outlined several times in past calls and during the discussion of our long-term targets on this call, incremental near-eye penetration rates could have a significant positive impact on our backlog. As the industry continues to migrate to more electrification in vehicles, it is important to understand that a significant portion of our backlog is either drivetrain agnostic or focused on hybrid or fully electric applications. We estimate that 85% of our 2025 sales will be drivetrain agnostic. We have strong platforms for growth, a robust backlog aligned with industry megatrends, and a clear path to sustainable and significant growth over the next five years. We remain focused on positioning the business for long-term profitable growth through a portfolio focused on industry megatrends and effective management of the variables that we can control. We expect this to result in strong incremental contribution margins as we recognize the growth supported by our strong backlog. we are well positioned to dramatically increase our earnings power with our expected growth over the next several years. To better understand the impact of our portfolio rotation and the adverse impact of certain external factors, slide 23 adjusts our guidance to reflect our expectations for the base business performance in 2021. To help quantify expected contribution margins as we move forward, we have normalized 2021 to exclude the impact of certain external factors including currency headwinds and the adverse impact of the global supply chain issues we have previously discussed. Additionally, we have removed the revenue and earnings related to our discontinued soot sensor business to better reflect the expected contribution of our go-forward portfolio and structure. Excluding these factors, our 2021 guidance implies approximately 30% contribution margin on incremental revenue, which is at the high end of our historically targeted range, despite the incremental investment in engineering that John outlined previously. We remain focused on the factors within our control and positioning the business for sustainable long-term profitable growth. The business awards over the last several years have positioned us to significantly outperform the market with a robust five-year backlog, while the cost structure and footprint actions we have taken have positioned us to take advantage of that growth through strong contribution margins on incremental revenue. This has put us in a position to be able to invest the engineering resources we believe necessary to outperform the long-term targets we outlined today. Moving to slide 24. In closing, I want to reiterate we are pleased with how the company navigated through the global pandemic as we continue to make progress on our transformational initiatives and strategic priorities to drive long-term profitable and sustainable growth. Storm Ridge is committed to driving shareholder value, and that focus remains at the forefront of all of our strategic initiatives. With that, I will open the call to questions.
spk00: Ladies and gentlemen, if you have a question at this time, please press the star, then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Scott Stember from CL King.
spk02: Good morning, guys, and thank you for taking my questions. Good morning, Scott. Good morning, Scott. Given the commentary about, I guess, sales in the quarter, and I guess effectively breaking results in the first quarter. Can you maybe dig into that a little bit deeper? It seems like the supply chain is going to have, obviously, a meaningful impact. Can you maybe just give us a little bit more color on that, talk about incrementals and things like that?
spk05: Sure. I'd be happy to, Scott. Thank you so much for the question. So it's really being driven by, you know, we talked about that we're expecting about $2.5 million of of incremental costs right now based upon the current IHS and LMC forecast and the forecasted disruptions. A good portion of that, about two-thirds of that, is going to be our view on that. We'll incur about two-thirds of that in the first quarter. And then in addition to that, we are seeing some pressure on revenue relative to the fourth quarter. And I talked about in my comments that We see sales of about $180 million for the quarter right now based upon our current outlook. So if you look at our contribution margins on that decremental revenue plus the incremental supply chain costs and some of the currency headwinds that we're seeing, that's basically how you walk your way to the break-even for Q1.
spk02: Okay, got it. And with regards to Mirai, it seems like a lot of good support on the ground level here, but can you just maybe frame out within your guidance for this year what kind of run rate we should be looking for in contribution by the end of the year, and maybe within your 2025 guidance, just maybe that $1.1 billion, you know, rough number, what that includes.
spk03: Scott, thanks for your question. As we said, our OEM programs launch later this year. So in our 2021 guidance, our OEM revenue expectation is actually quite low, around $5 million, and our retrofit revenue is somewhere between $5 and $10 million. So when we talk about the additional penetration and additional fleets deepening and expanding their take rates, we... expect that to be, to continue to hear more of that over the year. But our guidance in 2021 has a very limited OEM level from your eye.
spk05: And Scott, that's primarily due to the timing of the launch. Obviously, it's late in the year.
spk02: Okay. And this last question, I'll jump back in the queue about the footprint for when you go to lower cost areas. I know you guys have been working on that, but it seems as if it's that those efforts are accelerating. Are we talking building facilities in other places, or are we talking outsourcing a little bit more? Just can you break that out for us a little bit?
spk03: Yeah, Scott, we're talking about partnering rather than adding bricks and mortar. You are correct that it is accelerating. It's part of when we talk about continuing to invest in advanced technology and continuing to invest in our team. We made a significant number of organizational changes within 2020 that allowed us, really positioned us to accelerate this transformation. And the actions are not only accelerating, but they're ongoing and they're happening right now in 2021. Got it.
spk02: That's all I have for now. Thank you. Thanks, Scott.
spk00: Again, ladies and gentlemen, if you have a question at this time, please press the star, then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your next question comes from Justin Long.
spk01: Thanks, and good morning. Good morning, Justin. Good morning, Justin. So I wanted to start with a question on D&D. So this year, there's going to be a pretty significant kind of pickup in spending there that seems fairly unique. You gave the guidance beyond 2021 that D&D would grow less than 5% and revenue is going to be growing at 10% plus. So some nice leverage there. Can you just talk a little bit more about why there's such a significant step up in D&D this year, and what gives you confidence in D&D growing at a rate that's less than 5% beyond 2021?
spk03: So, Justin, thanks for the question. There's a series of aspects to it. The first one is the magnitude of the number of launches that we're working on, both in the control devices and on the electronic side of the business. which means you have to have those resources and there's a peak load of resources that are managed there. The second is as we look at transitioning our capabilities, there is an overlap in capabilities. You can't make step function changes in the organization. So there's a period of overlap where as we're changing our footprint mix, there's an overlap in the engineering cost structure. And the third piece is the importance of speed and continue to make our investments in what's next and how do we expand the Mirai platform as an example, our connectivity platform and other of these advanced platforms. We see right now as the time to make those investments to continue to move forward and take advantage of the position that we have in the marketplace. So we We've worked as an organization to be as optimal as possible, but we believe this is the prudent spend of capital or prudent spend of resources in this year.
spk01: Okay, that's helpful perspective. And then I wanted to follow up with a couple quick questions on the longer-term guidance. So you gave the 2023 revenue guide here. Is it fair to say that the market outgrowth between now and then is already secured in the backlog? Just curious if you could comment on the level of visibility you have.
spk05: Yes, Justin. Hi, Bob. I'm happy to comment on that. As you're aware, Justin, we generally win programs two to three years in advance of production. So when you look at that revenue number, So I think it's really important to talk about the way that we do it. We basically take the IHS and the LMC projections. So they're third-party projections. They're not internal projections from Stoneridge. And we get that information by platform, by region, and we build it up at a very granular level. So that number that we have, that midterm guidance number that we talked about today, it is the vast majority of that, 80% of our backlog. 80% of our total revenue is OEM based and that backlog is all book business. So we're more conservative than a lot of other companies when we talk about a backlog because we only talk about book business in our backlog. A number of our competitors and a number of people in the industry if they have over 80% confidence that they're going to win a program or if they're on an existing program, they include that in their backlog. We do not. So we've got line of sight to the numbers that we provided to the Billion One and the 925. And the 925, the lion's share of that is basically already in the bag for us.
spk01: Okay, that's great. And then on the 2025 revenue target, I wanted to clarify – that the MIRAI contribution only includes the $76 million of peak revenue from the OE contracts you've won. Is that correct?
spk05: That is correct, Justin, yes. Okay, so anything incremental in terms of... And there is some retrofit in there as well, yes.
spk01: Can you comment on the significance of that retrofit revenue? Sure.
spk05: I would say it's a modest amount.
spk01: Okay. Great. That's helpful. That's all I had. I appreciate the time. Thanks, Justin.
spk00: I am showing no further questions at this time. I would now like to turn the conference back to John DeGainer for closing comments.
spk03: Thank you, and I want to thank everybody 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 our strong operating results, through our winds of profitable new business, and our focused deployment of our available resources. This management team will respond efficiently and effectively to manage and control the variables that we can impact and continue to drive strong financial performance. We're confident that our actions will result in continued success in 2021 and beyond, and we look forward to talking to you in the next quarter. Thank you.
spk00: Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.
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