Stoneridge, Inc.

Good day, and thank you for standing by. Welcome to the Stonebridge fourth quarter 2022 conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that this call is being recorded, and I would now like to hand the conference over to our speaker today, Kelly Harvey, Director of Investor Relations. Please go ahead.

Good morning, everyone. And thank you for joining us to discuss our fourth quarter and full year 2022 results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted to our website at stonebridge.com in the investor section under webcast and presentation. Joining me on today's call are Jim Ziselman, 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-K, which will be filed today 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 Jim and Matt have finished their formal remarks, we will open up the call to questions. Turning to page three, I would like to introduce Jim Zizzleman, who was recently appointed as President and Chief Executive Officer of Stone Ridge, and was also appointed to the Stone Ridge Board of Directors effective January 30th. After a year of consulting with the company, Jim joined StoneRidge almost three years ago as president of the control devices division and has played an integral role in developing and executing on the strategic priorities, product development, and technical vision for both control devices and StoneRidge more broadly. Jim brings a wealth of knowledge and experience, and we are fortunate to have a proven business leader and experienced executive step into the CEO role.

Thank you, Kelly. I am fortunate enough to have already spent a significant amount of time at the company as president of the Control Devices Division and as a member of the executive staff where I was able to have a broad impact on the overall strategic direction of the company. I focused on aligning the segment with industry megatrends while sustaining strong margins during challenging macroeconomic conditions by placing a key focus on rigor and discipline across all elements of the business. I look forward to working closely with our board, our senior leadership team, and our dedicated global teams as we continue to execute on a strong long-term strategy focused on sustainable, profitable growth. Turning to page four. With my transition to CEO, Rajay Kesed was appointed as president of the control devices business. Rajay was most recently the vice president of sales and product line management for control devices, where during his three-year tenure, he demonstrated the leadership and strategic thinking that has helped advance the division's priorities and performance. Rajay was responsible for overseeing a number of divestitures of non-core business, that helped shape the control devices portfolio to better align with industry megatrends that will drive growth going forward. In his new role, Rajay will be responsible for driving business performance, commercial relationships, product development, and our continued innovation strategy within the segment. Turning to page five. In the fourth quarter, we continue to see sequential revenue improvement with 5.2% growth compared to the third quarter and EBITDA margin expansion of 100 basis points, excluding an adjustment related to a prior quarter correction. This 10 cent correction was driven by the FX impact on non-operating gain recorded in the second quarter related to a derivative security and not material to our operations or baseline operating performance. Matt will provide further detail later in the call. Excluding this correction, adjusted earnings per share was 11 cents, which was an 8 cent increase over the prior quarter. Overall, 2022 sales increased by 12% relative to 2021, while EBITDA increased by over 25%. We expect this trend to continue as we are guiding midpoint revenue growth of approximately 16% in 2023, with EBITDA growth of over 75% and even a margin expansion of approximately 210 basis points based on our midpoint guidance. Most importantly, we continue to focus on the product platforms that will drive future growth. Our first OEM MIRAI program launched over a year ago in Europe and has significantly outperformed original expectations with a take rate of approximately 40% going into 2023. Our next MIRAI program launches in North America in the second quarter of this year with a customer expected take rate of approximately 10%. This morning, I am pleased to announce that our second European OEM partner has increased their forecasted take rate from 25% originally to approximately 45% based on expected market demand. This program is expected to launch in 2024. Similarly, we continue to expand our retrofit applications and develop technologies in adjacent markets that will continue to drive our future growth. Earlier this week, we announced a partnership with KLLM Transport Services and Frozen Food Express, detailing their intention to equip approximately 1,000 new and existing vehicles with Mirai this year. Similarly, we announced a partnership with Grody Industries to introduce the industry's first wired rear-view trailer camera. I will discuss these applications and provide more detail on our progress with the NearEye platform later in the call. As a result of continued success in our core products, this morning we are updating our long-term financial targets to include strong backlog growth, our expectations of significant top-line outperformance relative to our end markets, and substantial market expansion through our five-year plan. Our five-year awarded business backlog grew by 6% in 2022 to $3.6 billion, supporting a five-year compound annual growth rate of more than 7.5%, resulting in a targeted revenue of $1.3 to $1.5 billion and targeted EBITDA margin of 11.5 to 13.5% by 2027. Page six summarizes our key financial metrics by quarter for 2022 and compared to both the full year 2021 and our midpoint guidance for 2023. The global macroeconomic environment continued to provide a challenging backdrop for the industry in 2022. Throughout the year, our revenue grew quarterly as material constraints began to ease and customer production volumes became less volatile. 2022 adjusted sales outperformed our underlying end markets by four times. This was driven by key program launches and expansions, including our part-by-wire programs, digital instrumentation cluster programs, and our first OEM near-eye program in Europe. During the year, we were able to mitigate a significant amount of the material headwinds we experienced through incremental price, driving strong EBITDA margin progression throughout the year. This resulted in base operated adjusted EBITDA margin expansion of 440 basis points in the fourth quarter relative to the first quarter. We expect continued strong growth in 2023 and EBITDA margin expansion despite sustained elevated material costs and rapidly increasing labor costs. We continue to negotiate with our customers to offset incremental material costs with price adjustments and other supply chain improvement strategies. Similarly, we remain focused on operating cost control to leverage our existing cost structure and expand operating margins as revenue continues to grow. And Matt will provide additional detail on our 23 guidance also later in the call. Turning to page seven. we have made a significant investment in Mirai platform over the last several years as it is a key element to our long-range plan. We are seeing the benefits of these investments as Mirai drove approximately $34 million in sales in 22 and is expected to approximately double to $60 million in sales in 2023. Market demand continues to be strong for the first OEM near-eye program. We are expecting year-over-year revenue growth for this program as new model truck volumes continue to increase and current take rates annualize. Similarly, our first OEM program in North America is launching early in the second quarter of this year. And although North American customer has not updated take rate assumptions for this program yet, based on the momentum we are seeing in North American retrofit, as well as the first OEM program we believe there is upside to the take rate assumption in 2023. That said, our guidance reflects customer-forecasted take rates resulting in approximately $6 million of sales related to the North American program this year, again, at a take rate of approximately 10%. Looking forward, we continue to build momentum around our future program launches as our customer for the next OEM programs launching in Europe in 2024 has updated their take rate assumptions from approximately 25% to approximately 45% based on their anticipated . This aligns well with our first OEM launch in Europe and reflects the expectation of continued outperformance relative to our originally quoted take rates for our OEM Mirai programs. As mentioned, we announced a partnership with KLLM Transport Services and Frozen Food Express, detailing their intention to equip approximately 1,000 vehicles with Mirai this year. Together, those fleets represent approximately 3,500 vehicles on the road. Their decision to equip Mirai on new and existing trucks is a demonstration of the tremendous value proposition that Mirai brings to the market. Based on this announcement, as well as the continued expansion of existing trials with some of our largest current fleet partners, we are expecting significant growth in the retrofit market in 2023. Similarly, demand continues to be strong for the system on bus applications, and we are expecting continued growth in this market in 2023 as well. Overall, we are expecting retrofit and bus-related near-eye revenue to grow from approximately $9 million in 2022 to over $20 million this year. And in addition to our current markets and applications, want to talk further on our partnership with grody industries to introduce our vision systems to commercial vehicle trailer applications as we introduce not only the very first wired rear view camera in the industry but also the ability to add additional cameras throughout and within the trailer this application utilizes industry standard trailer to tractor connection technology which maximizes the speed of implementation in addition Through innovation brought forward by StoneRidge, the added trailer cameras, including the rearview camera, will be fully functional, utilizing only the existing wiring in the trailer. While this product is still early in the commercialization strategy, we are seeing a very significant interest from fleets and expect that this product will continue to expand our Mirai platform and provide incremental opportunities going forward. We have not currently included any benefits from this product in our 2023 guidance, although commercialization of this product may be possible this year. Our investment in MirrorEye platform is paying off with substantial year-over-year growth, improved future take-rate expectations, and continued momentum across our end markets and applications. We will continue to invest in the technologies and adjacent product opportunities to optimize our position in this market and drive technology innovation, improve safety, and driver retention for our customers. Turning to page eight. Our long-term strategy focused on transforming our portfolio to align with industry megatrends continues to drive strong long-term growth prospects. Our five-year backlog at the end of 2022 grew by 6% versus the prior year. Mirai contributed to growth in our backlog as OEM takeaways continued to trend up and program launches contributed positively to the five-year window. Digital driver information systems continued to ramp up and expand in 2023. Similarly, our connectivity programs continued to grow, driven by our SMART2 tachograph program, which will launch later this year. This program not only contributes meaningfully to our backlog, but also represents a significant aftermarket opportunity as regulatory requirements will drive retrofit applications for this product over the next several years. This retrofit opportunity, similar to the Mirai retrofit opportunity, is not represented in this backlog. They are not awarded OEM programs. Incremental Mirai penetration rates, particularly in North American programs where customer forecasted take rates lag our European programs, could have a significant positive impact on our backlog. Finally, control devices contributed to our backlog with program expansions for our park-by-wire actuation programs and continued growth in our electrification-focused sensor applications. While 100% of our electronics portfolio is currently drivetrain agnostic, the continued progression in control devices will drive our targets to at least 90% of total product portfolio being drivetrain agnostic by 2027. We have been successful in aligning our portfolio with industry megatrends, and that strategy is paying off as our backlog continues to grow year over year as we expand existing programs, leverage the Mirai platform, and win new business. Turning to page nine. We are updating our long-term revenue and EBITDA targets aligned with our updated five-year backlog in current market conditions. Our long-term strategy has resulted in a growth profile that is expected to outperform the market by two to three times over the next five years and positions us for consistent, strong growth, resulting in substantial EBITDA margin expansion. From a midpoint of $975 million expected in 2023, we are anticipating another several years of strong growth, resulting in a long-term revenue target of $1.3 to $1.5 billion by 2027. Based on our 2027 revenue target, we are targeting an EBITDA margin between 11.5 and 13.5%. This EBITDA margin expansion will be driven by our expectation of continued contribution margin 25% to 30%, a favorable mix primarily aligned with growth in our aftermarket products and continued leverage on our existing fixed cost structure. Over the last four years, I helped craft the overall strategy of the company and provided overarching support to each segment. Now, as the CEO, I will focus on executing on that long-term strategy to drive sustainable performance and achieve our long-term targets. Turning to slide 10, we remain focused on certain key priorities as a company, and more specifically, within each segment to achieve our goals within this year and going forward. As we look forward to this year, we have a lot to be excited about. Overarchingly, we are focused on flawless execution of our major program launches, continuous improvement in our manufacturing facilities, and prudent cost control. control devices we will continue to focus on growing our core product portfolio aligned with powertrain electrification we will continue to invest in our actuation business as we anticipate greater opportunities as powertrains become increasingly electrified during driven by the expected growth in our actuation business and the rotation of our temperature sensing applications we expect that control devices will continue to deliver a strong margin profile on long-term growth that will outpace our underlying end markets. In electronics, our focus remains on executing on program launches, particularly our MirrorEye programs and our Smart2 Tachograph programs, launching this year. With the significant investment we have already made in MirrorEye, we will continue to expand our vision and safety platforms. We are focused on driving advanced development through a refined and more cost-effective global engineering structure, allowing us to both expand margins and continue the pace of development that has fueled our backlog and forward growth profile. Finally, StoneRidge Brazil will focus on continuing to grow our OEM capabilities in region to better support our global customers. This will drive steady future growth and provide a platform to continue to rotate our local portfolio to more closely align with our global business. Similarly, we will continue to leverage the talent and capabilities of our growing engineering team in Brazil to better support our global initiatives and more cost efficiently support our current programs and drive future growth. Each of our segments plays a critical role in helping us achieve our long-term targets. I am committed to continuing to execute on the long-term plans Storm Ridge has in place, as well as driving our company-wide priorities to achieve our goals. With the right focus, we will execute at a high level, resulting in strong margin expansion on growth that will continue to outpace our underlying end markets. Turning to page 11, in summary, we remain focused on implementing our long-term strategy to drive sustainable profitable growth and shareholder value creation. And with that, I will turn it over to Matt to discuss our financial results and guidance in more detail. Thanks, Jim.

Turning to slide 13, sales in the fourth quarter were approximately $225.2 million, an increase of 5.2% relative to the third quarter. Operating income was $6 million, or 2.7% of adjusted sales. More specifically, control devices sales were approximately $86 million, which was a decrease of approximately 3.9% compared to the third quarter, resulting in operating income of $5.5 million or 6.4% of sales. Electronics adjusted sales of $134.8 million increased by 15% compared to the third quarter, resulting in operating income of $4.9 million or 3.7% of sales. Stone Ridge, Brazil's sales of $13.1 million decreased 5.5% compared to the third quarter, resulting in operating income of $800,000, or 6.4% of sales. This morning, we are establishing guidance for our 2023 financial performance. We are guiding 2023 revenue to a midpoint of $975 million, implying an increase of approximately 16% versus our 2022 revenue, which is more than 13 times our underlying weighted average end market growth. Despite continued pressure on gross margin, we are expecting to leverage our existing cost structure to drive overall margin expansion on substantial growth. We are guiding adjusted gross margin to a midpoint of 20.9%, adjusted operating income to a midpoint of 1.9%, and adjusted EBITDA to a midpoint of $54.6 million, or 5.6% of sales. Our midpoint guidance implies EBITDA margin expansion of 210 basis points and almost $29 million relative to 2022. As a result, we are guiding to a midpoint of break-even adjusted earnings per share for 2023. I will provide additional color on the drivers of expected sales and adjusted earnings per share performance later in the call. Turning to page 14, before we discuss the factors impacting operating performance in the quarter, I'd like to provide some detail on a prior quarter correction that impacted the fourth quarter. In the second quarter of 2022, the company unwound two net investment hedges driven by favorable FX movements, and recognized a net gain of approximately $3.7 million of other non-operating income or adjusted earnings per share of 10 cents. In the fourth quarter, the company determined we had incorrectly recognized the net gain in the income statement and reclassified the gain to other comprehensive income, resulting in reduced earnings of $3.7 million or 10 cents in the fourth quarter. On our third quarter earnings call, we guided our fourth quarter EPS to a midpoint of 24 cents with an expected revenue midpoint of $239 million. Reduced production volumes from customers, material constraints, and our inability to reduce our short-term backlog as quickly as previously expected resulted in a 7-cent headwind relative to our previously provided guidance. This was primarily due to lower customer production in our North American passenger car end market, COVID-related shutdowns in China impacting customer demand, and material constraints impacting production for our off-highway products. These factors drove revenue underperformance of approximately $14 million versus our prior expectations. That said, commercial vehicle demand has remained strong, with sales volumes outperforming prior expectations. During the fourth quarter, we absorbed higher material, labor, and other manufacturing costs versus previous expectations. Incremental manufacturing costs were primarily driven by unexpected premium freight costs, manufacturing inefficiencies, and incremental labor costs. That said, we partially offset these incremental costs through reduced operating expenses, including the reduction of our annual incentive compensation program. Although fourth quarter performance was lower than previous expectations, we have the ability to retime a portion of that performance through the reduction of a strong backlog in early 2023 and continued cost recovery actions. We will continue to focus on improved manufacturing performance to drive margin expansion. Page 17 summarizes our key financial metrics specific to control devices. Control devices fourth quarter sales declined by $3.5 million versus the third quarter, due to reduced customer production volumes in North America and China, partially offset by incremental revenue from the ramp-up in production of actuation programs and incremental price. Fourth quarter operating income declined by 200 basis points compared to the third quarter of 2022, primarily due to higher material costs as a result of unfavorable sales mix during the quarter. Full-year sales of $345.3 million were approximately in line with 2021. Full-year operating income of $23.5 million, or 6.9% of sales, was also in line with the prior year, excluding divested products. As discussed on previous calls, we continue to transform our product portfolio to align with future growth opportunities. We expect continued revenue growth in 2023 for control devices as North American passenger car production continues to recover. Our actuation programs on several electrified vehicle platforms are continuing to see demand that outpaces the underlying market, resulting in planned production expansions that will drive above-market top-line growth in 2023. In 2023, we expect control devices sales and operating margin to improve relative to last year as we take advantage of incremental revenue and focus on continued supply chain improvements. Page 16 summarizes our key financial metrics specific to electronics. Electronics' fourth quarter sales increased by $17.5 million, or 15% compared to the third quarter. Full-year sales were $475.4 million, which was an increase of approximately 24% compared to the prior year, primarily driven by the continued ramp-up of several key program launches, including the first Mirai program and the ramp-up of large programs related to our digital driver information systems. Fourth quarter performance would have been even stronger but material limitations contributed to reduced sales in our off-highway vision and safety products. We are expecting these material issues to subside as we move through the first quarter of 2023 and expect to be able to make up some portion of the lost production early this year. We expect continued strong sales in 2023 due to the continued ramp-up of these programs and the launch of our second MIRAI program at the beginning of the second quarter in North America. Fourth quarter adjusted operating income declined by 90 basis points, due to the continued impact of elevated material labor costs, partially offset by fixed cost leverage from higher sales. Operating margins improved in the second half of 2022 due to successful negotiations with customers to recover incremental costs through price recovery and other supply chain actions. Full year adjusted out and 30 basis points versus 2021, largely due to strong contribution margin from substantial incremental revenue. Looking forward, we will continue to focus on flawless execution of new program launches and ramp-ups. Although we expect margins to continue to be challenged in the first half of the year, we plan to recover a significant portion of these incremental costs through supply chain improvements and customer price recovery actions. As a result, we expect continued margin expansion in 2023. Electronics is well positioned to take advantage of significant future growth and margin expansion as a result of a strong product portfolio a substantial backlog of awarded programs, a focus on an efficient long-term cost structure, and continued expansion of our opportunities related to the Mirai platform. Page 17 summarizes our key financial metrics specific to Stone Ridge, Brazil. Stone Ridge, Brazil's four-year sales total approximately $52.3 million, a decrease of $4.5 million, or 5.5% relative to the prior year, primarily due to lower sales volumes partially offset by the favorable impact of foreign currency. Full-year adjusted operating income increased by approximately 50 basis points relative to the prior year, primarily driven by lower SG&A spend, resulting in an adjusted operating margin of 5.1%. Today, we are excited to announce a new business award for infotainment systems to one of the market leaders of OEM commercial vehicles in Brazil. This award is expected to launch in 2024, with a peak annual revenue of approximately $4 million which represents approximately 7.6% of total 2022 sales for the segment. This is not only financially significant for the segment, but it furthers our expansion of local OEM programs to better support our global customers. We are successfully shifting our portfolio in Brazil to more closely align with our global growth initiatives. Despite continued macroeconomic challenges in Brazil, we expect revenue and operating margins to remain stable in 2023. We remain focused on utilizing local engineering resources to support our global electronics business as we continue to focus on a more cost-efficient global engineering footprint. Turning to page 18, fourth quarter net debt was $114.5 million, a decrease of approximately $22 million from the third quarter, driven primarily by strong cash performance at the end of the year. At the beginning of 2023, we anticipated that continued material cost and production headwinds forecasted for the first half of the year would result in a relatively lower EBITDA and work with our bank group to amend our existing credit facility. The amendment modified the first quarter of the year to include a 4.75 times leverage ratio and second quarter of 2023 to include a 4.25 times leverage ratio with an interest coverage ratio of three times in both quarters. The amendment returns to a three and a half times leverage ratio and interest coverage ratio going forward. We are confident the company has ample liquidity and flexibility to operate in the current macroeconomic conditions. As we move into 2023, we remain focused on efficient cash management to help return our leverage ratios to more normalized rates as we continue to improve financial performance and expand our earnings with substantial growth. We expect our net debt to EBITDA ratio to return to a more normalized level by the end of the year. We are targeting a leverage ratio under two and a half times. We will continue to strengthen our balance sheet, helping to provide a steady foundation that will allow us to capitalize on our long-term opportunities. Turning to page 19, we expect strong growth in 2023, driving midpoint revenue guidance to $975 million, or 16% year-over-year growth. Based on current IHS forecasts, we are expecting market production to drive approximately $10 million of growth, or 1.2% in our weighted average end markets year-over-year. Driven by our specific growth opportunities, we are expecting to outperform our underlying weighted average end markets by approximately 13 times in 2023. we continue to significantly outpace our underlying end markets, creating a runway for sustainable long-term growth. In the first quarter of the year, we are still seeing the residual impacts of reduced demand in China, driven by the ramp-up in COVID-19 at the end of 2022. Similarly, material availability challenges in our off-highway products led to substantially reduced sales in January relative to our normalized run rate. As such, while we expect to recover a portion of these reductions in the quarter and more in the second quarter, we are expecting quarterly revenue to be approximately flat to the fourth quarter of 2022 and the first quarter of 2023. Looking beyond the first quarter, we are expecting approximately 5% to 10% growth from the first to second quarter as material availability improves, our first OEM Mirai program launches in North America, and our newly installed SMT line in Europe drives short-term backlog reductions. This would imply revenue of $225 million in the first quarter and $235 to $245 million in the second quarter. Page 20 summarizes our expectations for full year adjusted earnings per share in 2023 relative to 2022. We are expecting contribution margins aligned with our historical averages of 25 to 30% on roughly $117 million of non-price revenue growth in 2023 resulting in 87 cents of incremental EPS this year. As supply chain volatility eases and the production environment normalizes, we expect to continue to drive improved performance in our manufacturing facilities. We expect operational improvement through reduced overtime due to stability in production schedules, continuous improvement activities, and leverage on fixed costs. Partially offsetting the incremental EPS driven by strong volumes and continued manufacturing and operating improvement is a significant burden related to incremental labor costs from 2022 to 2023. Inflationary pressure has driven annual labor increases above our historical average. Similarly, we expect a normalization of our annual incentive cost programs back to targeted levels in 2023 after they were reduced in 2022. As a result, we are forecasting a 42-cent headwind relative to 2022 related to labor costs. We do not expect the same relative level of annual incremental costs going forward as inflation subsides and our top-line growth outpaces structural cost growth to drive fixed cost leverage. Finally, we are expecting incremental interest expense in 2023 as rising interest rates continue to impact the interest rate on our credit facility and an increased average annual debt balance relative to last year. We expect incremental interest of approximately $5.5 million relative to 2022 or approximately 15 cents. As I discussed previously, we remain committed to reducing our debt balance to reduce our interest burden and drive expanded earnings. As a result, we are expecting approximately break-even adjusted EPS in 2023. Despite a challenging macroeconomic backdrop, we continue to drive significantly above market growth, margin expansion, and substantial earnings growth year over year. Finally, similar to our expectations of revenue growth over the course of the year, we expect that adjusted EPS will follow a similar cadence. The challenges we faced in December related to production volumes, particularly in our off-highway business in China, persisted through January. We have seen significant production ramp up in February and are forecasting even better sales in March, which should drive an improved sales trajectory into the second quarter. A slow start to production, incremental annual labor costs, and material costs that remain elevated will result in depressed margins for the first quarter. That said, we continue to negotiate appropriate price increases with our customers to offset these costs. However, we expect the impact of price recoveries to lag these incremental costs. We expect that this will result in a below break-even operating margin for the first quarter and EPS of approximately negative 30 cents. This assumes that as we continue negotiations with customers regarding price increases, we will recognize only a minimal impact of incremental prices in the first quarter with the expectation that we will recognize retroactive price increases as these negotiations are completed. We expect that production normalization and growth, along with negotiated retroactive price increases, will drive above break-even operating performance in the second quarter with VPS of approximately negative 10 cents. We are expecting to exit the second quarter with gross operating and EBITDA margins that exceed our annual guidance as revenue continues to ramp up over the second half of the year. Additionally, as is typical with new program launches, We expect margins to improve as our recently launched and to be launched programs continue to mature this year and going forward. This should result in much stronger second half earnings performance and a trajectory on both the top and bottom line that will drive continued earning expansion in 2024. We are focused on driving earnings growth in 2023 through efficient manufacturing processes, aggressive but appropriate price negotiations, and prudent management of our fixed cost structure. Moving to slide 21, we expect significant revenue growth, EBITDA margin expansion, and adjusted EPS growth in 2023 as we continue to focus on opportunities to recover and improve gross margin, execute on a cost structure aligned with current market conditions, and flex our variable cost structure efficiently should macroeconomic conditions change. Longer term, Stonehenge remains well positioned to significantly outpace our underlying markets due to the strength of our awarded business backlogs and our product portfolio aligned with industry megatrends. Our contributions on incremental revenue, our ability to leverage our existing fixed cost structure, and our continued focus on material cost improvement, price, and supply chain strategy provide a strong foundation for the long-term targets of $1.3 to $1.5 billion of revenue and an 11.5 to 13.5% EBITDA margin by 2027. As always, driving shareholder value is at the forefront of all of Stone Ridge's strategic initiatives. With that, I will open up the call for questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your phone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment, please, as we compile the Q&A roster. Our first question will come from Justin Long of Stevens. Your line is open.

Thanks and good morning.

Hey, Justin.

Hey, so I just wanted to take a step back. You know, the company's results have obviously been pretty volatile recently. And while revenue performance seems to be a bright spot as you outperform the market, there's been a struggle taking this to the bottom line. Jim, as you step into the CEO role, What are the steps you plan to take to, number one, improve the predictability of earnings, and number two, improve the profitability of this company?

Thanks, Justin, for the question. I think the steps I'm taking actually will address both of those concerns. And where I'm focused more so going forward is on execution, driving rigor and discipline in the company across all elements of the business, you know, making sure that we have a program management focus. By doing so, you know, we will seriously minimize the potential for any surprises that has historically had the opportunity to creep in, you know, to our members. I think by holding us accountable to these, I'll say, elevated elements in rigor and discipline across all elements of the business, I think that we'll – more successfully drive excellence in execution and, again, drive out issues that have, again, historically crept in.

Okay. And I guess, secondly, when I look at the 2023 guidance, your implied contribution margins are in the high teens, just using the midpoint of the outlook. I know you called out the wage inflation and incentive comp, but I feel like those are headwinds that you probably saw coming on the horizon for a while. So I guess my question is, why not get more aggressive with price? And it sounds like you are pushing price, but is there more of an opportunity just in response to the higher supply chain costs and the higher labor costs that you're seeing in addition to the fact that the company's margin profile is below target?

Yeah, Justin, thanks for the question. The contribution margins next year are definitely influenced by a significantly increased burden on inflationary labor costs. So while we could see some of that coming, it is substantially greater than what we've experienced in prior years across the business. Now that said, like you suggested, as those conditions change, like I said in the prepared remarks, we are taking aggressive but appropriate actions with our customers and even beyond that with our supply chain, with engineering design of existing products to make sure that we are recovering those costs but also maximizing our opportunity to improve margin as we go forward. Like we've said previously, we have expected incremental costs. We do expect that our recovery will lag those costs. But as you saw last year, we were extremely successful in offsetting those costs through the playbook that we ran with customers, supply chain, and product engineering. So there is certainly that opportunity to continue to be aggressive, and we are in all of those cases, that we expect will drive a run rate for the second half of the year that is significantly improved to the first, similar to what we saw last year, and provides a really good trajectory as we head into continued growth beyond next year.

Okay, and as I think about what you said about the first half versus the second half, so from an EPS perspective, first half guidance is negative 40 cents, which implies second half of positive 40 cents to get to the midpoint of the guidance. How much of that improvement first half to second half is just a function of price versus other items? I mean, I know the implied revenue guidance is a little bit better in the second half, but maybe you could just give us a sense for your level of visibility essentially into the second half.

Yeah, so Justin, it's a great question. We have a lot of visibility on the top line because like we've talked about in the past, a good portion of that is is OEM programs that are obviously awarded and have visibility into production volumes. We've obviously seen macroeconomic conditions be volatile over the last 18 months, so I wouldn't say that we have perfect visibility there, but we have good visibility to that top-line growth, including the launch of the North American MIRAI program and the SMART II program, which are both incremental this year as we go into the second half. So top line, you know, there is still some variability, obviously, in aftermarket or non-OE products, but top line, we've got pretty good visibility to the cadence of our expectations there. That does drive incremental contribution, obviously, you know, in line with those historical averages as we go through the quarters of the year because the incremental labor costs will have already been considered in the beginning of the year. We do expect, and there is assumption of incremental price that obviously impacts, you know, We believe retroactively once those price negotiations are complete, again, similar to last year, but will impact the second half of the year as well on incremental volume. So it does have a compounding effect as you increase price.

Got it. Thanks. And I guess last one for me is on the board. There have been some changes recently. You've talked about this refreshment strategy, but can you share what the catalyst was for to drive these changes and why this is the right timing in the midst of a CEO transition as well?

Yeah, so, Justin, I'll take the first start, and then maybe Jim can chime in. I don't want to speak for the board. I'm not on the board. But you can see that there's been a progression of board transformation over the last several years. That starts with the appointment of Frank Sklarsky. who is our audit committee chairman and has continued now with the announcement of our most recent board member, Carson. So I think you've seen the board has been very clear with their expectation of continued transformation to align expertise with the business, and they've delivered on that over the last several years. Jim, I don't know, being on the board, if you have any

I think it is a normal, natural progression. The board is very cognizant of its tenure. They're also very cognizant of the skills necessary in a business that is changing dramatically. We're going from an automotive parts company to a systems company, more technology-focused company, and sometimes skills required to ensure that you've got good support of the management team from the directors and the board, sometimes that needs some refreshment. And the board is very cognizant of that. and is willing to allow for those adjustments and provisions to be made.

Okay, understood. Thanks for the time.

Thanks, Justin. Good talking with you. Appreciate the questions.

Thank you. And one moment, please, for our next question. Our next question will come from Gary Pesapino of Barrington Research. Your line is open.

Good morning, Matt, Jim, Kelly. A couple of questions. Hey, Gary. First of all, on the rate of revenue that you're projecting for the MiraEye business, does that, given that level of volume that you're doing, does that become adjusted EBITDA margin accretive to bottom line results in 2023? Or does it flatline it? Or is it lower than... you know, what you're looking at.

Gary, I would say with a ramp up in that program that percentage-wise is so substantial year over year, you will see accretive EBITDA performance from that level of growth. And we expect that level of growth to continue, obviously, as we are increasing the forecasted take rates on the second European launch substantially, almost double. and obviously have a relatively lower take rate on the first North American program currently forecasted that we rightfully so are optimistic around, given what we're seeing in other OEM products, our first OEM program, and the Mirai retrofit momentum in North America. So it will have an accretive impact this year, and I expect that that will continue and accelerate because of the substantial growth opportunity in not only this program but this platform, this vision and safety platform going forward.

Okay. And I want to get back to some of those new endeavors with Mirai in a second. But what I want to direct your attention to is the sales guidance for this year. And I guess the prior question was what is your confidence level in that sales guidance? So if you're looking at a $10 million lift from IHS production forecast, which that could very much move around. That's just based on what production could be. but the 108 to 138 of specific growth and price recoveries, how much of that is actually in the books and how much of that has to come from maybe increased, better than increased production rates, better than increased price recoveries. I'm just trying to get an idea of, you know, the visibility, the confidence you have in these numbers, because as the other analysts mentioned, You know, the numbers have been all over the place. It's a situation where you start the year off with a certain cadence of guidance, and then as the year goes by, things are less than what we initially expected.

Yeah, I appreciate the question, Gary. So I would say a couple of things. One, the Stone Ridge-specific drivers there do not require some incremental market performance versus what production levels are showing or are or any sort of price outperformance. It's what we expect from a price perspective and what the market is suggesting from a production perspective. Those things are much more related to content that is specific to us on those vehicles. So, for example, our digital driver information systems are annualizing at very high rates as the new model trucks ramp up. That provides a significant annualized tailwind versus last year. You know, we talked about Mirai. So, Gary, to your comment on predictability, It obviously relies on production volumes, but it is specifically driven year over year by something that is specific to us, not just peanut buttered to production volumes. Similarly, on the MIRAI programs, we talked about all of the incremental revenue there. It's driven by a new program. It's driven by the annualization of higher take rates for a full year on full year production volume for our existing program and the expectation that we will continue the momentum we're seeing in the retrofit market. So of those things, the retrofit market obviously has more variability, but is also a relatively smaller portion of that overall revenue pie. So if you think about the relative rank of volatility, that's how I would think there for Mirai. And then similarly, we're launching a new connectivity product with Smart2. We're seeing the ramp-up of some of those recently launched connectivity programs, and we're seeing continued expansion on the actuation side. You know, we talked a little bit about some of the platforms that we're on, for example, with Park by Wire, right, and those electrified vehicle platforms. For example, the Mach-E, we've talked about that historically being one of our largest content vehicles. That platform for Ford is performing tremendously. So it's Stone Ridge-specific growth, Gary, around... forecastable OEM content that's growing, some variability from the aftermarket, although less so than the OEM side, and being on the right platforms with the right customers to facilitate that growth versus the underlying weighted average end market.

Okay, that's very helpful. So I want to get back to the near-eye slide, slide seven on my presentation. So this partnership with Grody Industries, industry to introduce the first wired rear view trailer camera. I mean, that strikes me as interesting and possibly a big breakthrough for this product overall, because there's got to be more trailers out in the market than there are, you know, the trucks that drive them. Is that a correct assumption on my part? Yeah, Gary, that is in fact correct. Everything you said actually is correct and in line with what we're thinking. First off, we do think this is a major breakthrough and a real opportunity for us to expand the Mirai platform. And there are just a very, very large number of trailers out there in the market. Right now, best estimation for trailers existing in the U.S. is 6 million. And also, if you look at the yearly production in just the U.S. for new trailers, it's about $300,000 a year. So this is a very substantive market. And you think about the technology and what it can bring here with looking directly behind the trailer, looking inside the trailer. There's a lot of things that the driver could benefit from seeing relative to you know, risk mitigation, you know, relative to product he's carrying, but also, you know, relative to safety. So, you know, this is a major step forward. And, you know, the technology itself, there's so much innovation in this. I mean, oftentimes people say, well, you're just adding a camera back there. But think about what we're talking here. You know, adding several cameras without the need to add any additional wiring to the trailer. The innovation really is around how we've encoded the signal of the camera to be pushed through the power lines and the existing wiring harness in the trailer up to a connector that's exactly the same as the connector today to drive the signal into the cab itself. It's an extreme innovation. We were at the TMC exhibition in Orlando, Florida this week, and we saw extreme interest by... trucking companies and trailer companies relative to this technology. So we are very optimistic about the expansion of Mirai based on this new addition to the family.

Yeah, Gary, I would add to that. When you think about the speed of implementation there, because it uses existing technology that's already on the tractor or the trailer, There's a benefit of speed of implementation, but also this is more broadly, Gary, this is a testament to the significant investment we have made over the last several years in this platform. You're seeing these things start to pay off, not only in the OEM programs and the retrofit aligned with the Mirai product, but this vision and safety commercial vehicle platform in total. So developing these capabilities and these technologies and applying them in the right way as we work with the fleets to better understand value proposition and where these things are applied most beneficially to the fleet, to our ultimate end customer, is driving the adoption and development of these advanced technologies that we agree with you, we think are changing the industry.

So as I look at this, I mean, you can actually port the technology and the actual product itself. I don't know how much you have to – reconfigure it to be on a trailer versus a truck. But in terms of actually having this product out in the market, how long would you anticipate that event to occur from now? Okay. So I think you're asking, Gary, when would we anticipate the introduction of such a technology into the market? Well, exactly. Yeah. Yeah. Yeah, so I think in volume, you start to see it next year, early part of next year. As I said, you know, as we were speaking, there's some opportunity perhaps for some trial fleets or something of that nature as we get to the tail end of this year. But, you know, pure commercial sales in the next year. That's most likely. Okay. So really this partnership with Grody Industries is kind of more or less like a... I mean, Grody is what? Is that a trailer company, or what is that? They're a harness. I don't want to misrepresent them, but they're essentially a harness and lighting company, so they don't really produce the trailers. They provide the electric structure in the trailer. Okay, okay. Thank you very much. Thank you, Gary. Appreciate it. Thank you.

Again, to ask a question, please press star 11 on your phone and wait for your name to be announced. Stand by as we compile the Q&A roster. I'm seeing no further questions in the queue. I would now like to turn the conference back to Jim Ziselman for closing remarks.

Well, thank you, everyone, for joining us for the call. I know your time is very important, and we truly appreciate your willingness to engage us today. You couldn't be more excited, I think as you can tell, about our industry-changing product platforms and the growth it brings to our company. Our focus is now on rigorous and disciplined execution, which will bring the performance we outlined today. So thanks again, everyone.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.