Stoneridge, Inc.

Good day and thank you for standing by. Welcome to the Stone Ridge Fourth Quarter 2021 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 anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. I would now like to turn the conference over to your host, John Sandison, Director of FP&A Please go ahead.

Good morning, everyone, and thank you for joining us to discuss our fourth quarter and full year 2021 results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted on our website at www.stoneridge.com in the investor section under webcasts and presentations. Joining me on today's call are John Degainer, our president and chief executive officer, and Matt Horvath, our chief financial officer. Before I 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 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 Matt 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. With that, I will turn the call over to John.

Thank you, John. Good morning, everyone. Let me begin on page three. In 2021, we navigated the direct and indirect challenges created by the global pandemic, including global supply chain related issues. We focused on being responsive to fluctuating production schedules, managing our cost structure, and implementing price and cost recovery actions to drive stronger margin performance as volumes recovered. As a result of our continued focus on supply chain management and our ability to both recover historical costs and pass-through current costs, we were able to offset approximately 78% of the gross supply chain-related costs incurred in the quarter. I want to thank the Stone Ridge team for facing and overcoming the challenges in 2021. In the fourth quarter, the production environment continued to stabilize, driving adjusted sales of $185 million, representing a sequential improvement relative to the third quarter and providing a strong indication of continued top-line improvement as we progress into 2022. Similarly, fourth quarter gross margin of 22.7% and EBITDA margin of 1.3% represented sequential growth for the third quarter. Based on our current view of market conditions and macroeconomic factors, we believe that the third quarter of 2021 will be the trough for strong rates from an EBITDA performance perspective. Our 2021 adjusted sales of $750.5 million resulted in an adjusted gross margin of 22.4%, translating to an adjusted operating loss of $12.2 million or negative 1.6% of sales. Adjusted EPS for the year was a loss of 59 cents. Most importantly, despite the external challenges in 2021, we stayed focused on our strategy and continued to invest in the resources necessary to develop and launch the technologies and product platforms that will drive future growth for StoneRidge. Our strategic focus and alignment with industry megatrends will continue to pay off in 2022 and beyond. This morning, we are providing mid-term revenue guidance of approximately $880 million in 2022, which represents approximately two times market growth driven by significant program launches and the continued ramp up of programs launched in 2021. We expect that continued material challenges in 2022 will put pressure on margins, particularly in the first half of the year. It's important to note that approximately $21 million of our sales growth is related to price recovery to offset the material cost increases we incurred in 2021 or are expecting in 2022. Similarly, we are in negotiations with our customers to adjust contractual annual price downs to reflect current macroeconomic conditions. We are guiding to a midpoint adjusted gross margin of 22% and adjusted operating margin of 1.25% resulting in an EPS midpoint loss of $0.03 and an EBITDA margin midpoint of 5.5% or 230 basis points better than 2021. We are expecting $43 to $54 million of EBITDA in 2022. Matt will provide additional detail on the specific components of our sales and adjusted EPS guidance later in the call. This morning, we are also updating our long-term financial targets based on strong backlog, our expectations of significant top line out performance relative to the market, and substantial margin expansion throughout our five-year plan. Our backlog grew by 13% in 2022, primarily due to new program awards and expansion of existing programs. This supports a five-year compound annual growth rate of more than 9%, resulting in over $1.25 billion of revenue in 2026. We continue to expect contribution margins of 25% to 30% on incremental revenue and have specific initiatives focused on margin recovery relative to material prices, continuous improvement in our manufacturing facilities, and leverage on our existing cost structure as we grow. As a result, we are targeting a needed down margin of 14% in 2026. Page four summarizes our key financial metrics quarterly for 2021 and for the full year compared to 2020. It goes without saying the continued impact of the global pandemic provided a challenging backdrop for the industry and for StoneRidge. Despite this, we effectively managed the impact to our financial performance and showed strong progression from the trough in the third quarter to an improved performance in the fourth quarter. While adjusted sales only increased by $3 million, gross profit improved by $5.3 million with gross margin expanding by 260 basis points. As the year progressed, we offset incrementally more supply chain related costs. However, we still incurred almost $17 million of those costs in 2021 versus 2020. We estimate supply chain related costs negatively impacted our gross margin by 230 basis points in 2021. Turning to slide five, gross supply chain related costs continued to increase in the fourth quarter. However, we were able to effectively offset a large portion of these incremental costs resulting in net costs of just over $5 million. Supply chain disruptions and material cost pressure increased in the fourth quarter. We expect continued material cost challenges and are in negotiations with our customers to offset and recover a portion of both the forecasted continued rise in material costs as well as historical costs. During the quarter, we offset more than $18 million of supply chain-related costs, or approximately 78% of our total exposure. primarily related to spot-by-pass-through and other customer recoveries. We're able to better manage our net supply chain-related costs in the fourth quarter, resulting in a favorable impact of approximately two cents relative to our prior guidance. Turning to page six, we continue to take significant steps with our Mirai platform, particularly in the OEM commercial vehicle and markets, including continued expansion into adjacent markets with significant penetration in the bus market. In late 2021, we launched the first OEM mirror eye program with DAF on their new XG platform. The flagship and award-winning DAF XG Plus platform features both our mirror eye and corner eye systems, as well as our fully configurable digital instrument cluster. The XG has been recognized as an industry leader for its innovative technologies, and we are proud to support DAF as they make mirror eye, the industry's best camera mirror system, available on an OEM platform for the first time. The response from the market for this system is quite strong. Based on current customer forecasts, we are expecting the take rate for Mirai to be at least 35% on the new vehicles as DAF transitions to full production on the new SG platform over the course of 2022. This take rate is currently limited by supply chain constraints. Despite these constraints, this is more than double the originally quoted take rate and provides a meaningful upside to our expectations for this and other European MIRAI OEM programs. Similarly, while our first launch in North America is not expected until the middle of 2022, the initial market reaction from prelaunch activities and our continued retrofit expansion suggests that we should see strong take rates for the North American OEM system as well. That said, consistent with our historical cadence, we will continue to utilize customer forecasted take rates in our backlog calculations while noting that incremental take rates represent upside to the base case scenario. Additionally, this morning we are announcing partnerships to make Mirai available on several OEM bus platforms. First, we are announcing a partnership with Abeco that will make Mirai available as an option on their new Urban Way bus platform. Similarly, we are announcing a partnership with Marco Polo to introduce Mirai as an option on the new GA bus, and a partnership with Quantron to make Mirai standard on their new platform, the Cesaris, a fully electric city bus starting in production in 2022. In North America, we continue to expand our retrofit programs driven by growth with existing customers as well as partnerships with new customers. We believe that the ramp-up of Mirai systems in both the OEM and retrofit markets has hit an inflection point. Our continued expansion with industry-leading plates and OEMs, as well as the strong initial market reaction to the first OEM production system, are all strong indicators of future performance for the product. Our investment in the Mirai platform is beginning to pay off and contribute meaningfully to the financial performance of the company. Turning to page 7. Our backlog of awarded business has grown significantly over the last year. Our top-line growth profile remains strong, with opportunity to grow as Mirai continues to expand. Our five-year backlog at the end of 2021 grew by 13% over the same time last year. This strong growth was driven primarily by continued new program ramp-up and expansion of our powertrain actuation programs, MIRAI, and digital driver information system programs, as well as new program awards related to our SMART II tachograph. As a reminder, our backlog includes only awarded programs over a five-year period at forecasted third-party volumes and quoted take rates. As we've outlined several times, incremental MIRAI penetration rates could have a significant positive impact on our backlog Our current five-year backlog of almost $3.4 billion represents over 5.8 times of 2021 OEM sales. Turning to page eight, 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. From a midpoint of $880 million expected in 2022, we are anticipating another year of strong growth in 2023. Based on current production forecasts, We are expecting approximately $1 billion of revenue in 2023 and over $1.25 billion of revenue in 2026, which implies a compound annual growth rate of over 9% through 2026. This represents approximately four times market growth over that same period. Our long-term revenue targets include OEM near-eye programs at customer quoted take rates and a modest amount of annual retrofit systems through 2026. As I discussed previously, we believe that we are at an inflection point in the potential for Mirai. Incremental take rates could drive revenue up to $1.45 billion in 2026 based on full penetration of the system for the currently awarded OEM programs. While we don't expect that Mirai will be standard equipment on every platform by 2026, we do expect that take rates will continue to improve as more customers see the benefit of the technology. Our long-term strategy has resulted in a growth profile that far exceeds the market and positions us for consistent, strong growth over our five-year plan. Turning to page nine, we are also updating our long-term EBITDA margin target to reflect our approved long-term revenue target as well as current market conditions. As a result of our expectations of strong top-line growth and the continued margin expansion strategies we have in place, we are targeting a 14% EBITDA margin, or approximately $175 million of EBITDA, based on $1.25 billion of revenue by 2026. Before we talk about the drivers of our expected EBITDAO margin expansion, it's important to understand the impact that the current macroeconomic conditions have had on our long-term EBITDAO margin targets. As I outlined previously, this year we experienced almost $17 million of incremental supply chain-related costs. We have contractual price downs in most of our OEM contracts, which in most years we aim to at least offset every year with the inflationary material buys and productivity in our facilities. Overall, we estimate that the impact of unmitigated price downs and incremental material costs over the last two years have created an estimated $40 million headwind to our prior EBITDA margin targets or 320 basement points on revenue of $1.25 billion by 2026. The midpoint of our 2022 guidance implies a 5.5% EBITDA margin for 2022 on midpoint revenue guidance of $880 million. Based on our 2026 target of $1.25 billion, as well as our expectation of continued contribution margin of 25% to 30%, we expect that incremental revenue and continued leverage on our existing fixed cost structure will drive EBITDA margins to over 12.5% by 2026. While nothing has structurally changed in our long-term margin expansion strategy, the opportunity to expand margin up to and beyond our 14% long-term target depends on our ability to implement pricing and material cost recovery strategies. Finally, we expect that outperformance of our revenue target, particularly related to Mirai OEM and retrofit expansion, could lead to incremental margin expansion aligned with our strong contribution margins. Despite the challenges of the last two years and continued short-term challenges in 2022, we remain committed to our long-term strategy and expect revenue growth that will significantly outpace our underlying markets and resulting EBITDA margin expansion to drive substantial value creation going forward. Turning to page 10. In summary, despite the variety of challenges we faced in 2021, I'm proud of the StoneRidge team. We were able to continue to execute on our long-term growth strategy and set the stage for a successful 2022 and beyond. We remain focused on protecting our margin through cost and price recovery actions, while supporting our customers as they launch and ramp up vehicles and platforms with our systems. Looking beyond 2022, supported by continued backlog growth of 13% this year, we are targeting $1.25 billion in revenue by 2026, suggesting four times market growth over the next five years. We expect that this level of growth, combined with our continuous improvement initiatives and specific strategic priorities, will drive EBITDA margin expansion to our long-term target of 14%, by 2026. ERI, in particular, provides a path to outperform these targets based on continued expansion of our retrofit programs and strong take rate for our OEM programs. At StoneRidge, we will continue to capitalize on market opportunities and execute our strategies to deliver shareholder value through long-term profitable growth. With that, I'll turn it over to Matt to discuss our financial results in more detail.