Stoneridge, Inc.

Good day and thank you for standing by. Welcome to the Stone Ridge fourth quarter 2023 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your 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 2023 results. The release and accompanying presentation was filed with the SEC and is posted on our website at stoneridge.com in the investor section under webcasts and presentations. Joining me on today's call are Jim Sizzleman, our President and Chief Executive Officer, and Matt Horvath, our Chief Financial Officer. During today's call, we will be referring to certain non-GAAP financial measures. Please see slide two for a more detailed description of these non-GAAP measures and an appendix in the appendix for a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. In addition, 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 later this week with the Securities and Exchange Commission under the heading Forward-Looking Statements. After Jim and Matt have finished their formal remarks, we will open up the call to questions. And with that, I will hand the call over to Jim.

Thank you, Kelly, and good morning, everyone. Let me begin on page four. I am extremely proud of our progress in 2023. We delivered on our financial commitments throughout the year driven by an unwavering focus to both execute our long-term strategy and drive continuous operational improvements. Although the supply chain environment continued to improve, the transportation industry continued to face many challenges throughout the year, including the UAW strike, higher interest costs, and the slower than expected penetration rate for electric vehicle platforms. However, by focusing on the execution of our major program launches, continuous improvement in our manufacturing facilities, and the execution of operating expense initiatives to both reduce cost and improve efficiency, we were able to navigate through these challenges. And as a result, we achieved full year sales, operating performance, and adjusted EPS in line with the expectations we set We set forth at the beginning of the year, and we're not done yet. Throughout this process, we've identified multiple areas for further improvement and expect our efforts to continue to drive long-term profitable revenue growth and significant earnings expansion going forward. I will discuss some of our key priorities for 2024 in further detail later in the call. Our fourth quarter adjusted EPS of 12 cents was in line with the expectations we outlined on the third quarter call, and it's a two cent sequential improvement compared to the third quarter. And Matt will provide further detail on the fourth quarter results later in the call. We continue to focus on product platforms that will drive future growth. In 2023, we continue to build momentum with our MIRAI programs with continued strong take rates with the DOF program in Europe, and the launch of our first OEM program in North America with Kenworth. Earlier this week, we announced our next program will be launching with Volvo in Europe mid-year and will be our largest program based on the current expected take rate of approximately 45%. In addition, we will also be launching with Volvo in North America in 2025. Also earlier this month, we announced the extension of our FMCSA exemption for an additional five years, which will allow our North American fleet partners to remove their traditional mirrors on Mirai-equipped vehicles. And finally today, we are announcing retrofit expansions with several new fleets. I'll provide a more extensive Mirai update later in the call. In 2023, we also launched our next-generation tachograph, the Smart 2, that provides incremental capabilities to conform with the most recent EU mobility package standards. As mentioned on previous calls, both the OEM and aftermarket retrofit channels provide significant growth opportunities for StoneRidge over the next several years. And this morning, we are updating our long-term financial targets to include our strong OEM backlog, aftermarket and non-OE growth opportunities, and substantial margin expansion through our five-year plan. Our five-year awarded business backlog of $3.5 billion supports a five-year compound annual growth rate of almost 10% based on our midpoint targets. This results in midpoint targeted revenue of $1.45 billion, targeted midpoint EBITDA margin of 13%, and targeted midpoint EBITDA of $190 million by 2028. Page 5 summarizes our key financial metrics for the full year 2023 compared to the prior year. We started the year with a challenging first quarter due to the lingering effects of the supply chain constraints and material cost headwinds. In response, we focused on driving gross margin improvement and successfully negotiated customer price increases, resulting in adjustments both retroactively and related to sales going forward. In the second half of the year, we navigated through the impact of the UAW strike, which in total reduced sales by approximately $6.4 million, operating income by approximately $2.1 million, and adjusted EPS by approximately 5 cents. Finally, below the line FX and non-cash reductions in equity earnings reduced EPS by an additional 5 cents. Excluding the impact of these items, which are not expected to recur, adjusted EPS would have been above break-even for the full year. Despite these macroeconomic headwinds, we were still able to deliver on our financial commitments through price increases aligned with increased material costs, careful cost control, and the efficient use of engineering resources to ensure our new products launched on time. Overall, we have made significant progress toward our long-term goals in 2023, but we also know there is so much more work that we can and will do to further enhance our performance. We achieved full-year 2023 adjusted sales of $961.2 million, or 14.2% growth compared to the prior year. This growth was driven by improved customer production volumes and StoneRidge-specific growth drivers, including the launch and continued ramp-up of our Mirai OEM programs, the launch of our next-generation tachograph, and despite less vehicle production than we originally expected, the growth of actuation programs on electrified vehicle platforms. Full year adjusted EBITDA margin improved by approximately 150 basis points and $18.3 million versus 2022. And Matt will provide additional detail on our segment level performance later in the call. Now turning to page six. Mirai continued to gain momentum in 2023 as we continued to ramp up production of our previously launched OEM program in Europe with DAF, launched our first North American OEM program with Kenworth, and continued to expand our retrofit and bus applications. Mirai revenue grew by $20 million in 2023 to over $50 million, and it's expected to almost double in 2024 to approximately $100 million. As mentioned earlier on the call, our next Mirai OEM program will be launching with Volvo in Europe mid-year on the Volvo FH Aero. Based on customer communicated volumes, we expect the program to have a take rate of approximately 45%. Volvo has highlighted Mirai on the new FH Aero truck, focusing on the system's ability to improve the aerodynamics of the truck to save energy and reduce carbon footprint, as well as a significantly improved field of view in both good and poor weather conditions. The North American portion of this award is set to launch in early 2025 on Volvo's all-new V&L truck, which marks the North American OEM debut of Mirai's independent wing design, which separates the system from the traditional mirrors. The Volvo Mirai programs in Europe and North America combined are currently estimated at over $60 million of peak annual revenue, making this, again, our largest OEM program to date. These program launches mark yet another step in Storm Ridge's journey to provide industry-leading safety and efficiency technologies. In North America, we are focused on the continued ramp-up of the Kenworth program and the launch of the second nameplate, Peterbilt, which is expected to occur in the middle of the year. We continue to work with our customers and their dealership networks to reach their end customers to drive awareness of the system with the ultimate goal to drive take rate expansion. Overall, we are expecting total Mirai OEM revenue to at least double to approximately $65 million in 2024. Earlier this month, we announced that FMCSA, an agency of the U.S. federal government, granted StoneRidge a five-year extension of our Mirai exemption, which will allow our U.S.-based fleet partners to maximize the safety and fuel economy benefits of the Mirai system by fully removing the traditional mirrors on Mirai-equipped vehicles. These benefits include enhanced real-time visibility from nearly every angle of a commercial truck, which can reduce the frequency and severity of accidents, as well as increase in the fuel savings of approximately 2% to 3% when the traditional mirrors are removed. This fuel savings translates to approximately 5,000 pounds of CO2 reduction annually per vehicle and aligns with the sustainability goals of StoneRidge, our customers, and the fleets. Furthermore, we continue to expand our retrofit applications. Today, we are announcing three additional fleet partnerships with PS Logistics, Stokes Trucking, and Cargo Transporters. These fleets understand the significant safety and fuel economy benefits of Mirai and have committed to equipping all of their long haul trucks with Mirai over time. Together, these three fleets have approximately 4,300 long haul vehicles on the road. In addition, we expect our Mirai bus applications to expand in North America and in Europe in 2024, resulting in approximately $35 million of non-OE Mirai revenue. Our investments in the Mirai platform continues to drive year-over-year growth, strong take-rate expectations, and continued momentum across our end markets and applications. We will continue to invest in the technologies and the adjacent product opportunities to optimize our position in this market and drive technology innovation, improve safety, efficiency, and driver retention for our customers. Turning to page seven, our long-term strategy focused on industry megatrends and drivetrain agnostic technologies continues to drive strong long-term growth prospects. As we have reported in the past, our backlog is the estimated cumulative awarded sales for the next five years using current IHS estimates for production volume assumptions, current foreign currency rates, and current pricing. We have had substantive growth in our commercial vehicle five-year backlog, resulting in year-over-year growth of approximately 5%. In addition, several next-generation OEM commercial vehicle platforms are expected to launch between 2028 and 2030, and as a result, We are expecting incremental award activity for next-generation platforms over the next two years that will impact the back half of the backlog period, including next-generation Mirai systems, driver information systems, and controls and connectivity modules. We expect that these systems will become increasingly more integrated into what would be called the cockpit of the future, and we are preparing for potential programs that could integrate several of our systems. Market dynamics around electric vehicle adoption rates have impacted expectations for current electric vehicle programs and are influencing business award activity on the passenger vehicle side. Most OEMs are now considering a mix of drivetrains that favor more hybrids and internal combustion engines than what was originally expected. Our drivetrain agnostic technology portfolio will permit us to respond effectively to enhance the back half of the backlog for control devices. While we continued to add our medium-term backlog for 2025 through 2027, which grew by approximately 4% relative to last year, our overall backlog remained relatively flat as we continued to pursue new program awards that we expect to impact the outer years. It should also be noted that more of our business is shifting to the aftermarket end markets, which we do not include in the backlog. We have significant opportunity in our aftermarket channels between Mirai retrofit and bus applications, Mirai platform-based products such as the trailer technologies we've discussed previously, and the Smart2 tachograph and our Orlaco branded products as well. Mirai OEM programs are included in backlog at our current customer volume expectations. This considers volumes based on customer expectations either at the time of award or updated based on actual program take rates or expectations. We continue to expect that Mirai take rates on OEM products will improve as the product becomes more widespread and additional OEMs start offering the system on OEM applications. This also represents upside to the existing backlog. We are committed to driving long-term profitable growth and will provide updates on business awards as new platform designs are solidified and business is awarded. Turning to page 8, we remain on track to achieve the 2027 goals we outlined last year at this time, and we are advancing our long-term revenue and EBITDA targets by a year, aligned with our existing backlog, continued opportunities in non-OEM channels, and new business opportunities. Our long-term strategy has resulted in a growth profile that is expected to outperform the market by more than five times over the next five years. From a midpoint of $1 billion expected in 2024, we are anticipating another several years of strong growth driving our long-term revenue target up to a midpoint of $1.45 billion by 2028. As we continue to focus on fixed cost leverage and gross margin improvement through material cost reduction and operational improvements, we expect revenue growth to drive significant EBITDA margin expansion. Based on our 2028 revenue target, we are targeting a midpoint EBITDA margin of 13%. This EBITDA margin expansion will be driven by our expectation of continued contribution margin of 25% to 30%, a favorable mix primarily aligned with growth in our aftermarket products, and continued leverage on our operating cost structure as we scale. Overall, Storm Ridge is well positioned to significantly outpace our weighted average end markets and drive margin expansion and earnings growth through our long-range plan. Turning to page nine, we remain focused as a company to achieve our goals both in 2024 and going forward. One year into the CEO role, I am proud of what we have accomplished here. We have delivered results consistent with what we promised. And as I have stated several times on this call, my focus remains on executing on our long-term strategy to drive sustainable performance and achieve our long-term targets as well. As we look forward to this year, we have a lot to be excited about. Our 2024 revenue is expected to grow by 4%, while our underlying end markets are expected to decline by approximately 5%. To continue this growth, we are focused on leveraging our global footprint to service our global customers and win new business. In control devices, we're focused on business development aligned with industry trends, including growing our core product portfolio aligned with drivetrain agnostic technologies and product applications. In electronics, we're focused on new product development, continued momentum with our existing products and technologies, and continued expansion of our products into more substantial platforms that will drive long-term sustainable growth. We are focused on gross margin expansion through material cost improvement and enterprise-wide operational excellence. Both our product line and program management organizations have been centralized, streamlined, and redesigned to specifically focus on pricing, built-in quality, material cost improvement, and manufacturing efficiency. We are focused on reducing material costs through engineering changes, supply chain strategy, and continued conversations with our customers where the price-to-material relationship still requires attention. As a result of these focused efforts, our midpoint guidance includes 140 basis points of gross margin improvement in 2024. We are also focused on leveraging our global footprint to maximize our capabilities and output. Specifically, we are better utilizing our existing talent by refining our global engineering structure and investing in capabilities and capacity that will allow us to both expand margins and continue the pace of development that has fueled our backlog and forward growth profile. Similarly, we took actions last year to centralize many of our global functions and drive synergies between our business units from both a cost and efficiency perspective. We will continue to evaluate and optimize our organizational structure, and as a result of these actions, we expect 170 basis points of operating margin improvement in 2024 and continued strong growth going forward. We're also focused on efficient cash generation. More specifically, historical supply chain challenges coupled with strong production forecasts have driven inventory levels that are greater than what we have had historically. we're focused on reducing inventory to improve working capital and generate more cash. In some cases, this will take some time as we burn down the extra material we bought when supply chains were more volatile or when production volumes were estimated to be greater than the current views. In other cases, we're working to manage engineering changes and work with our suppliers to more quickly reduce the existing balances. We are targeting an improvement in inventory in 2020, over 2023, that would align us with our historical averages and provide a runway for continued improvement going forward. And finally, we're focused on efficient capital deployment while maintaining an appropriate capital structure. This includes prioritizing our organic investment opportunities with a focus on return on engineering and investing in technology to develop new products for customers that will facilitate future growth. In 2024, we are targeting approximately $40 million of capital focused primarily on supporting organic growth initiatives. 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 plan that StoneRidge has in place and driving our company-wide priorities to achieve our goals. Given our focus, we will execute at a high level, resulting in strong margin expansion on growth that will continue to outpace our underlying end markets. Now turning to page 10, and in summary, we remain focused on implementing our long-term strategy to drive sustainable profitable growth by focusing on technologies that are drivetrain agnostic, winning business in critical growth areas, and expanding on our existing opportunities. As evidenced by our progress made this year, this team is focused on strong execution and careful cost control to continue to drive margin improvement. The actions we took resulted in a successful 2023, and we look forward to continuing that momentum with top-line growth above market and earnings expansion in 2024. Now, with that, I'll turn it over to Matt to discuss our financial results and guidance in more detail.