Stoneridge, Inc.

Good morning and welcome to the Stone Ridge First Quarter 2022 conference call. My name is Zanara and I'll be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press 01 on your touchtone phone. As a reminder, this conference is being recorded. I'll now turn the call over to Ms. Kelly Harvey, Director of Investor Relations. Ms. Harvey, you may begin.

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 stoneridge.com in the Investors section under Webcast and Presentation. Joining me on today's call are John DeGainer, our President and Chief Executive Officer, and Matt Horvath, 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-Q, which was filed with the Securities and Exchange Commission under the heading Forward-Looking Statements. During today's call, we will 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 open up the call to questions. I would ask that you keep your question to a single follow-up. With that, I will turn the call over to John.

Thanks, Kelly, and good morning, everyone. Let me begin on page three. In the first quarter, we continued to navigate through the challenges resulting from the global pandemic, including continued supply chain disruptions, production volatility, and rising material costs. We focused on responding to fluctuating production schedules, limited component availability, managing our cost structure, and continuing to engage with our customers and suppliers on cost recovery actions. These actions resulted in improved financial performance during the quarter. Our first quarter adjusted sales of $196.6 million resulted in an adjusted gross margin of 21.1%, translating to an adjusted operating margin of negative 1.5%. Adjusted EPS for the quarter was negative 27 cents. During the first quarter, we made significant progress with the majority of our customers on pricing actions to offset a large portion of the incremental material and supply chain costs we are focusing or forecasting for 2022. These negotiations resulted in increased pricing that offset approximately 90% of the incremental material costs we incurred during the quarter relative to the fourth quarter of last year. The price increases agreed upon in the first quarter will continue to provide relief related to incremental material costs going forward. Additionally, we continue to pass spot purchases through to our OEM customers, offsetting more than $24 million in spot buys. We will continue to evaluate macroeconomic conditions and expect ongoing discussions with our customers regarding price increases as necessary. This morning, we are confirming our full-year revenue and adjusted EPS guidance. We are raising our midpoint adjusted gross operating and EBITDA margin expectations by 25 basis points to account for the continued impact of pricing actions taken in the first quarter. Our adjusted EPS guidance reflects the expectation of continued strong margin performance offset by expected incremental tax expense due to our forecasted geographic mix of earnings. Matt will provide additional detail on our full year guidance later in the call. Finally, while we continue to work to efficiently execute and respond to market externalities, we are also focused on the growth initiatives that will drive long-term profitable growth in 2022 and beyond. During the quarter, we continue to make progress with our mirror eye platform, focusing on our first OEM program launch in Europe. and continued expansion of our retrofit programs with some of the largest fleets in North America. I will provide additional details on our fleet activities and OEM take rates later in the call. Page 4 summarizes our key financial metrics relative to the prior quarter. During the quarter, we saw improved stability in customer production volumes in our passenger vehicle end markets and continued strong performance in our commercial vehicle and off-highway end markets. Thank you for joining us. First quarter gross margin declined by 170 basis points relative to the fourth quarter of 2021, primarily due to continued and incremental supply chain related costs net of customer recoveries. Given the price and cost recovery actions taken in the first quarter and the expectation of continued volume improvement as the year progresses, we expect that first quarter gross margin will be the trough with sequential improvement going forward. During the quarter, we entered into agreements with several of our key OEM customers, resulting in price increases and other cost recoveries that significantly benefited first quarter performance and will continue to offset incremental material costs. We have made significant strides in stabilizing margins. Adjusted operating margin improved 260 basis points relative to the fourth quarter of 2021, primarily due to the favorable impact of engineering recoveries related to the timing of customer funding and lower SG&A costs. The pricing and supply chain actions taken in the first quarter contributed to improved performance for the quarter and will provide us with a strong foundation to drive significantly improved financial performance in 2022, despite our expectation of ongoing macroeconomic challenges. Slide five provides an update on the supply chain related costs and actions taken to offset these costs during the quarter. Similar to the second half of 2021, We continue to pass through material spot buy purchases to our customers. During the quarter, we offset $24.4 million of the $25 million of gross spot buy costs. We expect to continue to offset a significant majority of spot buy related costs going forward. As expected, gross supply chain related costs continued to increase in the first quarter. Excluding spot buys, we were able to offset approximately 90% of the incremental supply chain costs from Thank you for joining us. due to the actions we took in the first quarter and will continue to take to offset incremental supply chain related costs as necessary. Turning to page six, we continue to see strong momentum with our mirror eye platform in both OEM and retrofit and markets. As discussed during our fourth quarter call, we launched the first OEM mirror eye program in late 2021. The check rates on this first OEM program remain strong as we have delivered over 2,500 systems to date. We are optimistic that the tape rate will continue to expand as supply chain issues subside. Similarly, we continue to expand our retrofit activity with existing and new customers. We are announcing several Mirai retrofit expansions with some of the largest fleets in North America. First, we are announcing the expansion of retrofit programs at Schneider and Maverick to customers that we have talked about previously. Schneider is expanding their retrofit programs across new divisions, operating units, and locations. In addition, we have seen continued growth with Maverick, where we have installed over 550 systems to date, representing a large portion of the newer trucks in their fleet. Maverick has been vocal in the trucking community about the safety benefits they are seeing with the system, which has driven the rapid expansion of installations on their vehicles as they target installing Mirai systems across their entire fleet. We expect to install over 1,000 systems on Maverick trucks by the end of 2022. Finally, we are announcing a new partnership with Nussbaum, who has also expanded their fleet evaluations and have the expectation of continued expansion across their fleet. Retrograde expansions with new and existing fleet partners demonstrate Mirai's ability to improve safety, driver satisfaction, and fuel efficiency. We are excited about the continued market adoption and expect to have additional and incremental fleet announcements with both our existing main partners and new partners in the coming quarters. We believe that continued retrofit expansion and strong initial OEM take rates are strong indicators of future performance for the system. We will continue to invest the necessary resources and effort to expand on our current successes and accelerate mirrorized adoption through all of our channels. Turning to page seven. In summary, our performance for the first quarter demonstrates our ability to execute despite the many challenges we still face related to global supply chains. During the quarter, we entered into agreements with the majority of our customers to offset a large portion of the incremental material and supply chain related costs we are forecasting for 2022 through agreed upon price increases and other cost recovery actions. In addition, we remain committed to delivering on our strategic priorities and continuously improving the business to drive strong financial performance. While we continue to work to efficiently execute and respond to market externalities, We are also focused on the growth initiatives that will drive long-term profitable growth in 2022 and beyond. With that, I'll turn it over to Matt to discuss our financial results in more detail. Thanks, John.

Turning to slide nine, adjusted sales in the first quarter were approximately $197 million, an increase of 7.5% relative to the prior quarter. Adjusted operating loss was $3 million, or negative 1.5% of adjusted sales, which improved 260 basis points versus the prior quarter. The improvement in margin performance is primarily due to pricing actions taken in the first quarter offsetting incremental material costs, reduced SG&A costs, and favorable net engineering costs due to timing of customer recoveries. I will provide additional detail on segment performance and a brief discussion on expectations for each segment for the remainder of 2022 on the subsequent slides. As John discussed earlier in the call, we are maintaining our full year 2022 revenue and adjusted EPS guidance. We are raising our midpoint adjusted gross, operating, and EBITDA margin expectations by 25 basis points to account for the favorable impact of pricing actions taken in the first quarter. However, we expect offsetting incremental tax expenses to result in adjusted EPS guidance in line with our previously outlined expectations of negative 15 cents to positive 10 cents. Page 10 summarizes our key financial metrics specific to control devices. Control Devices first quarter sales were approximately $85 million, an increase of 6.4% compared to the fourth quarter of 2021. This was primarily due to relatively improved stability in our OEM production schedules compared to the prior quarter, as well as incremental revenue from recently launched powertrain actuation programs. Adjusted operating income was $6.8 million for the quarter, or 8% of adjusted sales. Adjusted operating margin increased by approximately 300 basis points versus the fourth quarter of 2021, . As discussed during our fourth quarter call, in 2022, we expect control devices sales and operating margin to continue to improve sequentially throughout the year as we take advantage of incremental volume and execute on our initiatives to offset incremental material costs. We continue to expect inflationary material costs to put pressure on the segment's performance. However, as a result of customer agreed price increases during the quarter, we expect to continue to offset a large portion of the incremental material and supply chain related costs in 2022. Lastly, we have and will continue to invest in the development of programs and product platforms that are targeted to electrified drive train architectures to drive future growth for the segment. Page 11 summarizes our key financial metrics specific to electronics. Electronics first quarter sales were approximately $108 million, an increase of 12.2% versus the fourth quarter of 2021, which was primarily driven by higher sales in our off-highway vehicle end markets and continued ramp-up and expansion of our digital driver information systems. Adjusted operating loss improved by approximately $2 million relative to the fourth quarter of 2021, an increase of approximately 240 basis points, primarily due to pricing actions taken in the first quarter as well as favorable net engineering spend due to the timing of customer recoveries. We continue to expect strong revenue growth in 2022 with strong demand across our end markets as well as the launch and ramp up of several large programs including our first two OEM MIRAI programs and the continued growth in MIRAI retrofit as John discussed previously. Operating income is expected to improve as we stabilize gross margin with cost recovery actions and carefully control our operating expenses to ensure strong fixed cost leverage with revenue growth. We continue to expect that electronics margins will expand sequentially in 2022 and expect above break-even operating income for the segment this year. Page 12 summarizes our key financial metrics specific to Stone Ridge, Brazil. Stone Ridge, Brazil's first quarter sales decreased by $2 million or approximately 13.9% relative to the fourth quarter of 2021 as a result of typical sales seasonality in the first quarter of the year, partially offset by favorable foreign exchange rates. Adjusted operating income improved by approximately 190 basis points relative to the fourth quarter, primarily due to lower direct material costs as a result of favorable mix, and lower cost of imported materials as a result of the strengthening of the Brazilian HAI against the U.S. dollar during the quarter. Despite continued macroeconomic challenges in Brazil, we expect revenue and operating margin to remain approximately flat in 2022 relative to the prior year. We remain focused on the ramp up of local OEM business and efficient management of variable costs to offset continued economic headwinds. Page 13 summarizes our expectations for full year adjusted EPS. As discussed earlier on the call, we are maintaining our full-year adjusted EPS guidance of negative 15 to positive 10 cents. We are maintaining our revenue guidance range of 860 to 900 million dollars. We expect that material availability and global logistics dynamics will continue to create the possibility for volatile production schedules. Similarly, it should be noted that third-party production forecasts continue to reflect production risk in both the passenger car and commercial vehicle end markets, and have reduced their expectations for production relative to prior forecasts. That said, our customers are forecasting demand to remain strong across our end markets and have indicated strong production volumes in the forward-looking forecasts that they provide to us for production planning purposes. Additionally, we expect to continue to outperform the market based on the continued ramp-up of our recently launched programs and continued strength in our aftermarket and non-OE businesses, including Mirai Retrofit. As discussed in detail earlier in the call, we expect gross margin improvement relative to our prior expectations driven largely by material cost recovery from price and supply chain actions taken in the quarter. As a result, we offset a significant portion of incremental material cost within the quarter and expect to continue to offset a significant portion of forecasted material cost increases for the remainder of the year. We expect our operating expenses to remain stable relative to our prior expectations which will drive net improvements to both operating and EBITDA margins. As a result, we are raising our midpoint guidance for adjusted gross, operating, and EBITDA margins by 25 basis points. Finally, we expect incremental tax expense of approximately $2 million due to tax on the incremental operating income previously discussed as well as our updated forecast for a geographical mix of earnings and U.S. tax on foreign operations. Based on current market conditions and customer forecasts, We are expecting second quarter revenue of $200 to $210 million and sequential adjusted EPS improvement of 5 to 7 cents relative to the first quarter. While we have experienced logistic challenges related to the response to COVID-19 outbreaks in China, as well as continued material availability challenges earlier in the second quarter, we are seeing production continue to ramp up, driving our expectations for sequential growth in both revenue and adjusted EPS. Moving to slide 14, in closing, I want to reiterate that we are pleased with our performance during the first quarter despite the continued macroeconomic challenges. We expect to continue to efficiently execute and respond to the continued supply chain headwinds and take advantage of the forecasted strong demand as production schedules continue to stabilize throughout 2022. StoneRidge is committed to driving shareholder value, and that focus remains at the forefront of all of our strategic initiatives. With that, I will open up the call to questions.

Thank you. We will now begin the question and answer session. If you have a question, please press 01 on your touchtone phone. If you wish to be removed from the queue, please press 02. Once again, if you have a question, please press 01 on your touchtone phone. Waiting on standby for any questions. And our first question comes from Justin Long. Please go ahead. Your line is open.

Thanks and good morning. Hi, Justin. So I wanted to start with a question on the 2022 guidance. I know the revenue range didn't change, but is there a way you could speak to the mirror eye assumption within that revenue guidance? And just given some of the commercial momentum that it seems like you've seen, has that expectation for mirror eye revenue in 2022 changed at all versus the beginning of the year?

Yeah, Justin, obviously we're really excited about the momentum, the continued momentum of MIRAI. You know, we're seeing forecasted take rates, or I'm sorry, take rates in the OEM space remain strong. And obviously we're excited about some of the incremental announcements we've made this quarter and expect to continue to make on the retrofit side. We have incorporated some of that upside into the guidance. Obviously we've kept the range a little bit broader than we historically have at this point in the year to account for. both some potential for volatility in the second half of the year given supply chain, you know, continued supply chain disruptions or the possibility of that, but also to offset that, you know, some of the upside that we're seeing on Mirai in both of our channels. So we have incorporated some of that upside in the guidance and expect to continue to talk about that momentum as the year progresses here.

Okay, and just given the supply chain constraints, I mean, we're all well aware of those challenges, but is that driving any of this commercial momentum in MirrorEye or people pulling forward orders in an effort to just kind of get in the backlog that could build pretty substantially over the next six to 12 months?

Yeah, what I would say, Justin, is I think it's actually the opposite way. both from the take rates on the OE side as well as from our retrofit installation rates are constraints from a supply chain perspective. And whether that is semiconductor side is actually constraining us. The take rates, I believe, would be higher if we didn't have the constraints. Now, what I can say to you is the supply chain challenges and what it means, particularly in North American fleets with regard to driver retention and driver attraction is accelerating retrofit activities. Maverick's move and some of the other moves that you see and the people who are looking at what Maverick is doing, not only do they do it from a safety standpoint, but they're making these decisions because it allows them to attract drivers with the best technology out there. It allows them to take younger drivers and get them well-trained and make sure that they're safe. So the stress that's in the supply chain, as we see it throughout the entire supply chain, creates more market need, but the semiconductor challenge constrains us a bit.

Okay, that's helpful. Thanks, John. And just to follow up on the guidance cadence that you talked about, Matt, so if I just look at what you reported in the first quarter of I think about your guidance for the second quarter, and I just take the midpoint of the full year guidance. It implies back half of this year, we're going to see revenue per quarter jump up to $240 million or so versus just a touch over $200 million. potentially here in the second quarter. As you think about that kind of back half ramp, and obviously that's flowing through to EPS as well, could you just speak to your visibility on that ramp?

Yeah, so Justin, there's a couple of components to that. One is obviously forecasted production by our customers. We're seeing really strong forecasted production in the third and fourth quarter in particular. You know, the good news is we're seeing strong demand The challenge is that procuring material to support that demand has been the issue for the first half of the year, and we're expecting some continued stability and sequential improvements that drive the level of revenue that you just outlined. And similarly, you know, some of the things that, you know, we've got our own self-help, right? We've got the continued ramp-up of some really exciting driver information systems. that are getting really good pull-through with the customers that we're working with on those systems. Obviously, the Mirai retrofit momentum is, you know, the snowball is rolling downhill a little bit here, and we're getting some really good momentum on the retrofit side. And the Mirai take rates remain really strong. When you add that to the fact, like we talked about last quarter, that we are on some of the passenger car platforms, particularly the electrified vehicle platforms that are really seeing strong demand and winning in the marketplace, We're getting some pull-through that is not just peanut butter spread overall of the production in North America and Europe. So, you know, we do expect macroeconomics to improve and see production tailwind, but we've also got our own self-help story there to facilitate some of that growth in the third and fourth quarters, both on programs that we've already announced and have good visibility to, and also on some of the things that are gaining momentum, like the retrofit programs and, you know, the continued demand on some of those electrified vehicle passenger car platforms.

Okay, and just to follow up on that kind of second half ramp versus first half ramp from a revenue perspective, is the majority of that coming from electronics, or is there any way you could give us a little bit more color on how much of that pickup is electronics versus control devices?

Yeah, Justin, you know, if you look at where the, like, if you think about what we just talked about, where the areas of opportunity are, we've got continued ramp-up in programs that we've launched in the electronic segment, particularly in the digital driver information systems, and we've got ramp-up on the existing Mirai as well as the next OEM Mirai launch. and the retrofit adoption improvement over the second half. So I think if you think about it that way, while there's growth, obviously, in both, the relative growth is probably more related to electronics in the second half than control devices.

Okay. Got it. I'll leave it at that. Appreciate your time.

Thanks, Justin. Thanks, Justin.

Thank you, and I'm not showing any further questions at this time. I'd like to turn the call back over to Mr. John DeGainer.

Thank you, and thanks everybody for your participation in today's call. I want to conclude by saying first, I'm really proud of the Stone Ridge team and their dedication and hard work during this incredibly challenging time. I can assure you for our investors that our company is committed to driving shareholder value through our operating results through profitable new business and really 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 plan management performance. We're confident that our actions will result in continued success for 2022 and beyond. Thank you.

Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.