Stoneridge, Inc. (NYSE:SRI) Q1 2022 Earnings Conference Call May 5, 2022 9:00 AM ET

Company Participants

Kelly Harvey - Director, Investor Relations
Jon DeGaynor - President & Chief Executive Officer
Matt Horvath - Chief Financial Officer

Conference Call Participants

Justin Long - Stephens Inc.

Operator

Good morning and welcome to the Stoneridge First Quarter 2022 Conference Call. My name is Anera and I'll be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded.

I will now turn the call over to Ms. Kelly Harvey, Director of Investor Relations. Ms. Harvey, you may begin.

Kelly Harvey

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 Jon DeGaynor, 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 Jon and Matt have finished their formal remarks, we will open up the call to questions. [Operator Instructions]

With that, I will turn the call over to Jon.

Jon DeGaynor

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 $0.27.

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 continued to make progress with our MirrorEye 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 four 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. In addition the continued ramp-up of new programs in particular our powertrain actuation and digital driver information systems contributed to higher sales during the quarter.

First quarter sales were favorably impacted by price increases of approximately $6 million. As a result of these factors, we experienced adjusted revenue growth of 7.5% relative to the fourth quarter of 2021.

Consistent with our expectations, 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 5 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 by 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, primarily due to price increases agreed upon with our customers.

We expect these agreements to result in continued relief related to incremental material costs going forward and provide margin stability for the remainder of the year. We recognize there is continued risk in the overall supply chain market -- in the overall supply chain as market externalities continue to drive increased material costs.

Overall, we expect to improve margins and reduce margin risk in 2022 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 6. We continue to see strong momentum with our MirrorEye platform in both OEM and retrofit end markets. As discussed, during our fourth quarter call, we launched the first OEM MirrorEye program in late 2021. The take rates on this first OEM program remains strong as we have delivered over 2,500 systems to-date. We are optimistic that the take 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 MirrorEye retrofit expansions with some of the largest fleets in North America. First, we're announcing the expansion of retrofit programs at Schneider and Maverick, two 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 MirrorEye systems across their entire fleet. We expect to install over 1000 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. Retrofit expansions with new and existing fleet partners demonstrate MirrorEye'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 name 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 MirrorEye's adoption through all of our channels.

Turning to page 7. 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.

Matt Horvath

Thanks Jon. Turning to slide 9, 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 Jon 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 $0.15 to positive $0.10.

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, driven by lower SG&A costs.

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 drivetrain 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 MirrorEye programs, and the continued growth in MirrorEye retrofit as Jon 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 breakeven operating income for the segment this year.

Page 12 summarizes our key financial metrics specific to Stoneridge Brazil. Stoneridge 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 reais against the US 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 $0.15 to positive $0.10. We are maintaining our revenue guidance range of $860 million to $900 million. 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 forecast 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 and the forward-looking forecast 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 MirrorEye 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 costs 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 improvement 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 US tax on foreign operations. Based on current market conditions and customer forecasts, we are expecting second quarter revenue of $200 million to $210 million, and sequential adjusted EPS improvement of $0.05 to $0.07 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.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Justin Long. Please go ahead. Your line is open.

Justin Long

Thanks and good morning.

Matt Horvath

Good morning, Justin.

Justin Long

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 MirrorEye assumption within that revenue guidance? And just given some of the commercial momentum that it seems like you've seen has that expectation for MirrorEye revenue in 2022 changed at all versus the beginning of the year?

Matt Horvath

Yes. Justin, obviously, we're really excited about the momentum -- the continued momentum of MirrorEye. We're seeing forecasted take rates -- or I'm sorry take rates in the OEM, space remains 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 --continued supply chain disruptions or the possibility of that. But also to offset that some of the upside that we're seeing on MirrorEye in both of our channels. So we have incorporated some of that upside in the guidance and expect to continue to talk about that that momentum as the year progresses here.

Justin Long

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? Are people pulling forward orders in an effort to just kind of get in the backlog that could build pretty substantially over the next 6 months to 12 months?

Jon DeGaynor

Yes. What I would say Justin is I think it's actually the opposite way both from a take rate on the OE side as well as from our retrofit installation rates. Our constraints from a supply chain perspective and where the 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.

Justin Long

Okay. That's helpful. Thanks, Jon. And just a follow-up on the guidance cadence that you talked about Matt. So if I just look at what you reported in the first quarter, I'd 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?

Matt Horvath

Yes. 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. 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 to drive the level of revenue that you just outlined. And similarly, some of the things that -- 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 MirrorEye retrofit momentum is the snowball is rolling down the hill a little bit here, and we're getting some really good momentum on the retrofit side, and the MirrorEye 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 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 too and also on some of the things that are gaining momentum like the retrofit programs and the continued demand on some of those electrified vehicle passenger car platforms.

Justin Long

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?

Matt Horvath

Yes, Justin. If you look at where -- 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 Electronics segment, particularly in the digital driver information systems. And we've got ramp up on the existing MirrorEye as well as the next OEM MirrorEye 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 weighted to Electronics in the second half than Control Devices.

Justin Long

Okay. Got it. I’ll leave it at that. Appreciate the time.

Matt Horvath

Thanks, Justin.

Jon DeGaynor

Thanks, Justin.

Operator

Thank you. And I'm not showing any further questions at this time. I'd like to turn the call back over to Mr. Jon DeGaynor.

Jon DeGaynor

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 Stoneridge 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 financial performance. We're confident that our actions will result in continued success for 2022 and beyond. Thank you.

Operator

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