Q2 2021 Stoneridge Inc Earnings Call
[music].
Yeah.
Welcome to this tonne reached second quarter 2021 earnings conference call.
All participants will be in listen only mode.
Do you need assistance. Please sign on the conference specialist by pressing the Star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask the question you May press tied in 1 of your telephone keypad to withdraw your question. Please press Star then 2 please note. This event being recorded I would now like to turn.
The conference over to Kelly Harvey Director of Investor Relations. Please go ahead Ms.
Okay.
Good morning, everyone and thank you for joining us to discuss our second quarter of results.
Release, and accompanying presentation was filed with the I think the yesterday evening and is posted on our website at stoneridge Dot com in the investors section under webcast and presentation joining.
Joining me today on today's call are John the Dana, our President and Chief Executive Officer, and Bob Krakowiak, Our Chief Financial Officer.
Before we begin I need to inform you that certain statements today may be forward looking statements.
We're looking statements include statements that are not historical in nature and include information concerning our future results of our plan.
Although we believe that such statements are based upon reasonable assumption 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 also be referring to certain non-GAAP financial measures.
Please see the appendix for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.
After John and Bob have finished their formal remarks, we will then open up the call to question.
I would ask that you keep your question to a simple follow up with that I will turn the call over to John Thanks, Kelly and good morning, everyone.
Let me begin on page 3.
The call.
During the quarter, we continue to make progress with a mirror I platform preparing for OEM launches and expanding our retrofit programs.
Additionally, the value of the mirror of technology is beginning to resonate in our other end markets, including the bus market, where we have sold over 1500 units of mirror on bus applications year of the date and we recently signed an agreement with the major bus Oems the supply mirror in Europe.
In addition, we continue the transformation of our global footprint during the quarter by completing the sale of our camp, Massachusetts facility for net cash proceeds of $35.2 million.
The cash proceeds from this transaction were used to pay down a revolving credit facility balance further strengthening our balance sheet and creating additional capital of we can use to drive future growth.
Finally, this morning, we are adjusting our full year guidance based on current market conditions and forecasts.
We continue to see strong revenue performance on our guiding to the high end of our previously provided range.
Additionally, based on current production forecast.
Expect significant top line growth to continue into 2022 is a weighted average and markets suggest production growth of 10% next year and we expect to continue to outperform our end markets.
That said, we do expect continued supply chain challenges and the resulting impact on our tax rate to negatively impact our adjusted EPS guidance for 2021 relative to prior expectations I will discuss some of the actions. We are taking the help offset the substantial headwinds later on the call.
Page 4 summarizes our key financial metrics relative to prior quarter results, excluding the divested sit censor business in all periods.
During the quarter, we experienced significant volatility and only on production schedules, primarily in our passenger vehicle and market. However.
However, these headwinds were offset by continued strong performance on a commercial vehicle and off highway and markets.
This resulted in adjusted revenue approximately in line with the prior quarter.
During the second quarter, we continued to experience the unfavourable impacts of component shortages incremental material and logistics costs labor volatility in an unfavorable product mix.
These factors contributed to adjusted gross margin, an operating margin declines of 180, and 300 basis points, respectively relative to the first quarter.
The second quarter included incremental supply chain related costs of approximately $3.7 million, which was $2.5 million higher than previously expected and $1.4 million increase vs. The first quarter.
These incremental costs reduced gross and operating margin.
By 80 basis points relative to the prior quarter.
During the second quarter operating expenses were slightly unfavourable compared to the first quarter, primarily due to planned incremental engineering expenses to support program launches.
This is partially offset by a reduction of annual incentive compensation program costs.
We continue to focus on managing engineering and SG&A costs in consideration of current market conditions, while ensuring that we are structured to support critical program launches and continue to invest in advanced technology development.
While we expect the additional headwinds related to external factors for the remainder of the year. We also expect that our facilities will continue to execute at a high level and they will that we will limit the total costs.
Page 5 summarizes the second quarter drivers of adjusted earnings per share.
As I mentioned earlier or second quarter performance was negatively impacted by external factors, resulting in 13 sense of headwind during the quarter.
This includes increments of supply chain costs unfavorable product mix of.
The incremental COVID-19 related costs and variable cost inefficiencies and the resulting impact on our effective tax rate.
Finally continued volatility in our customer's production schedules drove incremental direct labor costs as we were required of run more overtime and occur higher direct labor wage rates than we previously expected.
As the results of our current forecast reduced our annual incentive program expense, which offset external headwinds by approximately 4 cents during the quarter.
During the quarter, we recognize the inventory obsolescence charge primarily related to previous.
Generations, which impacted results by approximately 3.
Our fleet trials have been critical both of US we expand mirroreye retrofit volumes and also as we continue to develop the system to address the features and functionality that drive the greatest value proposition to our customers.
For example, 1 of the most common of requests from our fleet partners was to integrate video recording.
As a result of changes made to the hardware and and design of the system to accommodate some of the requests were required to obsolete. Some of the older mirror of components as they were no longer utilize on retrofit systems with these improvements to features and functionality now incorporated we do not expect the additional inventory charges as we continue to ramp up near on production.
We continued main control of our operating costs and take actions to offset substantial headwinds. These.
These controls favorably impacted results and approximately offset the inventory adjustments during the quarter.
Turning slide 6.
I would like to provide more detailed update on the specific supply chain disruptions impacting our business. Our current view of of the financial impact of these disruptions for the remainder of the year and the actions that we're taking the offset these incremental costs, while continuing to support on global customers I would like to stress that this is our current view of the situation and as such as the basis for our ups.
2021 guidance that bobble discuss in more detail later on the call we.
We recognize the situation will continue to be dynamic as we move forward in the second half of the year and we are committed to taking necessary actions to offset costs as much as possible.
In summary supply chain disruptions have become incrementally more challenging we continue the incur significant material cost increases in premium freight costs supply chain shortages of also resulted in significant market volatility and only on production schedules. This has resulted in labor labor and other operating inefficiencies during the second quarter.
To combat the price increases and shortages and continue to actively negotiate the sharing of these incremental costs with our suppliers and customers in conjunction with the development strategies to recover these impassively when markets returned to a more normalized state and we continue to look for efficiencies within our overall supply chain to fully offset these incremental costs going.
Forward.
These actions include working with our customers to review review, our product designs and developing a long term supply chain strategy to better optimize the flow of product. For example, we were successful on the second quarter of passing through $2 million of the $5.7 million of increased costs incurred during the quarter.
Based on current market conditions, we have updated our expectations for incremental supply chain costs from approximately $5 million to $5.5 million for the full year as of last quarter to almost double or $9.1 million to $10.3 million for the full year to date, we have already encouraged $6 million of net incremental costs.
We continue to monitor of the global supply chain and the impact on our customers to ensure we respond efficiently and effectively any disruptions.
As it relates to current production volumes slide 7 outlines the most recent IHS on LMT information for our OEM and markets for the remainder of 2021 and 2022.
As we have discussed on previous calls are passenger vehicle customers reduced production schedules on the first half of the year with a more significant impact during the second quarter.
Production in our commercial vehicle and off highway and market remains strong, which we expect to continue to per the balance of the year looking forward current forecasts of production levels have been adjusted for the expectation of continued supply chain related issues issues for the remainder of the year and into 2022.
As a result of the continued global supply chain disruptions passenger car forecast had declined while commercial vehicle forecasts have remained relatively stable or have an approved.
This results in the forecasted decline of approximately 1.6% in our weighted average and markets for the full year 2021 relative to production forecast as of our last call.
Despite the decline.
The decline we are getting to the high end of our previously provided revenue guidance, primarily due to our performance in the first half of the year and the expectation that of a product portfolio will continue to outperform our underlying and markets.
Bob will provide further details on our revenue guidance later on the call.
Looking forward to 2022 weeks.
We expect to continue to strengthen demand on our end markets as IHS on LNC are forecasting that are weighted average and markets will grow by approximately 10% compared to 2021 that growth is expected to be led by the North American passenger car market, where growth is expected to be approximately 16%.
North American and European commercial vehicle markets are expected to grow at 10% and 9% respectively.
We expect to continue to outperform our underlying and markets, which imply of significant growth in 2022 for the company.
With the with the actions we continue to take related to our cost structure and operating efficiency. We are positioned to take advantage of the forecasted growth next year.
Turning to page 8.
We continue to make progress on a mirror of programs and all of our existing and markets on are starting to gain traction an additional and markets as the value proposition premier is translating well too many applications.
This morning, we are announcing that we of sign an agreement with a major OEM bus manufacturer to supply nearby and began accepting orders and Q2 overall, we have already installed <unk> on over 1500 buses in Europe and expect to install systems on approximately 2000 buses by the end of 2021.
This momentum outside of our traditional class a commercial vehicle market shows the true power of <unk> technology to insult fluent safety and efficiency across multiple applications going forward.
Similarly, pre wire orders continued to gain momentum and Q2.
Year to date, we of orders for approximately 500 units with approximately 2200 of those in July.
I'll total per wire orders are still relatively small the progression and growth of the orders suggests increasing acceptance of the technology by fleets across the U S and is a good indication of growing momentum.
This momentum is also gaining the attention of other Oems will continue to work with us to develop <unk> applications.
Finally, our first 2 OEM mirror of programs are expected. The launch later this year in the early 2022. These programs from comprised $29 million of peak annual revenue at 15% estimate of take rates.
While we are not able to speak more specifically on systems until after Oem's officially launched the programs. We are encouraged by the the amount of excitement generated by Arlene on partners for the near our system as to begin their marketing activities related to the new platforms.
We continue to believe that there and customers will see the significant value on your applications and select the have mirror of installed on the trucks directly from the factory.
Turning page 9.
Our electronics segment continues to build momentum and product areas beyond murai as exemplified by several key program launches and of significant New business Award in our connectivity platform and.
In the second quarter, we were proud the support pack or as they launched their new model of 579 truck with stoneridge. His first fully configurable digital driver of information system.
The system, a 15 inch digital display is the largest in this class and enables system diagnostics gauge customization and advanced driver assistant features. Additionally, every conversion conventional class 8 peterbilt truck will feature of this display going forward. This is 1 of the largest program awards and Stoneridge history estimated at 40 million.
Of peak annual revenue.
In the second quarter were awarded our first smart to track Tachograph platform, where the European OEM.
Our next generation tachograph enables over the air software updates to efficiently respond to changing regulatory requirements extending the life of the platform and making sure our customers and their customers have the most current technology of electronics.
Or platform makes drivetime analysis, more flexible and consistent and provides us and provides us with an opportunity to add features and functionality to the platform going forward.
We expect the launch the program of 2023 aligned with new European regulations, requiring advanced features on Tachographs.
With the launches of of previously awarded business and a continued success when a new business such as are smart true Tachograph program. The electronics segment, the setup for significant growth going forward.
Turning to slide 10, Ah control devices business continues to launch programs and when business. The supports the electrification of our customer's vehicles and enables advanced technologies throughout the vehicle.
And the third quarter, we will launch 2 additional parked by wire programs on the Ford in transit and Maverick platforms to add to the launch of the marquee program last fall.
The following up on those programs, we will launch an additional parked by way of program for an electrified light truck platform of 2022.
Finally relaunched the next generation of our shipped by way of programs, where Julia autos, New SUV in China in July of 2021.
These awards comprised of total of $30 million of peak annual revenue per stomach.
As an example of the overall shift from traditional powertrains to electrified applications. It was announced earlier this year that the Ford in transit platform in partnership with Oshkosh trucks was selected as of the replacement for the current United States Postal service fleet as a modified modernise their vehicles electrified powertrains are becoming the standard of the efficiency and we are.
Proud to support forward and all of our global customers is day transition from the internal combustion based powertrains to the electrified powertrain flow.
Forms that will drive future growth.
This morning, we are providing detail on 2 additional business awards within our actuation product line launching in 2023 and 2024. The first a $28 million peak annual revenue Award continues our success supporting 4 by 4 applications with our financial disconnect product on next generation light truck and SUV plan.
Forms the.
The second award for a smart bar product with $11 million of peak annual revenue is applicable to a new more specific and market, where our off road demands required performance in the harshest conditions.
Smart <unk> enables vehicles to operate the wheels on different planes as the traverse rough terrain to ensure maximum traction at all times.
We continue to refine our product Roadmaps and technology development to expand our capabilities and electromechanical actuation to take advantage of the continued growth in the segment.
Finally, this morning, we're announcing the New award in our trailer told product line on multiple electrified light truck and SUV platforms.
Advanced trailer told connection facilitates a fully digitize connection from the trailer to the cockpit, which enables advanced camera technologies unattached trailers, we expect that the continued expansion of the electronic capabilities.
Which helped advanced technologies for our customers will continue to open doors to new opportunities.
Turning the page 11.
In summary, the second quarter was challenging as we continue to face the impact of of the global pandemic and the cash giving the impact it has had on global supply chains.
We remain committed to delivering on our strategic priorities and continuously improving the business, which drive strong financial performance and stable long term profitable growth as we prepare for significant growth in 2022 and beyond and.
Stoneridge, we will continue to execute on the things that we can control and respond effectively and efficiently to of challenging environment. We will maintain our focus on our long term strategy driving continuous improvement and refining our capabilities to deliver shareholder value with that I'll turn it over to Bob to discuss our financial results in more detail.
Thanks, John Kerry.
During the slide 13.
In the second quarter, excluding divested product lines, where approximately $189 million.
Which was in line with the prior quarter.
Adjusted operating loss, excluding the best of the product lines was $2.6 million on negative of 1.4% of adjusted sales.
Which declined 300 basis points vs. The prior quarter.
The reduction in margin performance is primarily due to supply chain related headwinds negatively impacting operating margin by an incremental $1.4 million or approximately 80 basis points during the second quarter.
In addition, the second quarter had higher operating expenses vs. The first quarter, primarily as a result of plan incremental engineering expenses to support program launches.
I will provide additional detail on segment performance and the brief discussion of our expectations for each segment for the remainder of 2021 on the subsequent slides.
As John discussed earlier in the call we are guiding to the high end of our previously provided revenue guidance for the full year based on the first half performance and current production forecast.
Despite our expectation of strong revenue performance the.
This morning, we are reducing our full year 2021, adjusted EPS guidance by 30.
2 of mid point of 25.
Primarily due to higher continued supply chain related costs and an unfavorable income tax rate both during the quarter as well as for the full year.
Page 14 summarizes the drivers of our current 2021 adjusted EPS guidance.
Including the incremental impact in the second quarter, we expect the supply chain related costs will will reduce our adjusted EPS I 11 to 13 per the full year relative to our prior expectations.
This includes continued premiums related to material costs and free.
Offset by our expectations of cost sharing the price increases.
Similarly, we expect that continued supply chain disruptions will create an unusual jurisdictional mix in our earnings of expenses for the remainder of the year.
Creating an 8 to 12 headwind relative to prior full year expectations.
We expect that our 2021 total tax expense will be approximately 5 to $5.5 million, implying the effective tax rate that significantly exceeds our prior guidance.
[laughter].
We expect that his earnings and expenses Normalised in 2022.
Our tax rate will return to a more normalize the level.
Similar to the incremental supply chain cost and tax expense incurred in queue too we have considered the other net performance drivers John outline previously for the quarter and our 4 year guidance.
Finally, while the expect incremental D&B, primarily related to supporting the significant number of new program launches over the next several quarters.
We expect to approximately offset the incremental expenses with reductions to SG&A.
As a result, we expect full year 2021, adjusted EPS to the 20 to 30.
The different perspective on our cadence of earnings for the remainder of the year. We anticipate continued supply chain related expenses. While revenue is expected to continue to grow as we progress through the year.
On incremental revenue, we expect stronger operating performance in the third quarter to be partially offset by continued elevated tax expense.
The resulting in an adjusted EPS for the third quarter at or slightly above breakeven.
Are full of your guidance suggests the second half revenue performance will be slightly weighted to the fourth quarter with adjusted EPS performance also significantly weighted to the fourth quarter.
I want I want to emphasize that are updated guidance is based on our current view of the market conditions and production forecast recognizing that we expect continued volatility of these assumptions for the remainder of the year.
We have also included of modest amount of cost sharing with our customers and suppliers in the updated guidance, which is not guaranteed but we feel is appropriate given the current conditions.
We continue to work to offset the external factors that of impacted our operating performance and position ourselves the best take advantage of future growth as we move into towards the towards too.
Page 15 summarize the key financial metrics specific to control devices.
The control devices second quarter adjusted sales, excluding the divested slipped censor business, where approximately $84 million.
Which is the 30th 5% decline vs. The first quarter of 2021 adjusted sales primarily due to the OEM production shutdowns in the passenger vehicle market as a result of supply chain related issues.
Adjusted operating income, excluding the domestic business was $6 million for the quarter or 71% of adjusted sales.
Adjusted operating income decreased by 400 basis points vs. The first quarter, primarily due to unfavorable leverage on fixed costs as a result of lower sales during the quarter due to volatility in production schedules.
The second quarter included approximately $1 million of net increased material.
<unk>, an expedited costs due to the global supply chain related issues or 120 basis points.
This was consistent with the first quarter of supply chain related impact of approximately $1 million or 100 basis points.
As discussed earlier in the call, we continue to transform our manufacturing footprint and product portfolio to align with future growth opportunities.
During the second quarter.
We completed the sale of the Canton, Massachusetts facility for net cash proceeds of $35.2 million.
As discussed earlier on the call the cash proceeds from this transaction, we used to pay down a revolving credit facility balance, resulting in reduced net debt.
Also discussed earlier on on the call. We successfully launched previously awarded parked by way of programs and several of electrified vehicle platforms with several additional programs launching later this year and in 2022.
In addition earlier today, we announced several new business wins in the control the basis segment, including multiple awards for our activation products and and the reward for an advanced the trailer connector that enabled advanced technologies for our customers.
We continue to expand expect gross margin headwinds as global supply chain issues continue to impact of the business.
We are continuing negotiations with the suppliers and customers to offset incremental costs as we focus on leveraging our existing cost structure to expand margin with revenue growth.
Despite these headwinds control devices remains of well positioned to take advantage of future growth and drive margin expansion.
The page 16 summarizes our key financial metrics specific to electronics.
Electronics, the second quarter sales, where approximately $97 million, an increase of $9, 7% vs. The first quarter of 2021.
Adjusted the operating income decreased by approximately 110 basis points relative to the first quarter per.
Primarily do the material and expediting cost headwinds as a result of continued supply chain issues, which impact of the quarter by 2 and a half million dollars.
250 basis points compared to $1.1 million or 120 basis points during the first quarter.
In addition, as.
As discussed earlier on the call, we recognize an inventory obsolescence charge of $900000.
As discussed earlier in the call, we can product line and our electronics product portfolio will provide us with future growth opportunities through the continued ramp up of a mirror I programs, both on our traditional and markets and new and markets as well as the expansion of our kind of activity capabilities of our smart <unk> of that product.
As we continue to invest in our future.
We require incremental investment in engineering resources to support these technology developments and future program launches we of continued to implement initiatives to ensure efficient use of our ex.
Existing resources and take advantage of of global engineering footprint to limit incremental costs, while we increased capabilities and engineering capacity.
We continue to expect strong revenue growth in the second half of 2021, driven in part by the ramp up of recently launched programs.
Including the Packer digital instrument cluster that launched earlier this year.
We continue to expect gross margin headwinds as global supply chain issues continue to impact of the business.
We continue to work with our customers and suppliers to offset the financial impact of these externalities where possible.
Operating income is expected to improve with the revenue growth despite supply chain related costs headwinds unfavorable product mix and the continued and necessary investment in engineering resources.
Page 17 summarizes are key financial metrics specific the stoneridge, Brazil.
Excluding the favorable foreign exchange rate impact of $500000 Stoneridge, Brazil's second quarter sales increased by $3 million or approximately 26% relative to the first quarter of 2021, primarily due to higher demand and our aftermarket and OEM product lines.
The quarter adjusted the operating margin improved by 1 of $1 million compared to breakeven in the first quarter of 2021, primarily due to lower SG&A costs and fixed cost of leverage on higher sales.
Although our second quarter of financial performance was strong macroeconomic conditions in Brazil remain challenging we.
We will continue to utilize our local engineering resources to support our global electronics business and remain focused on the ramp up of local OEM business to drive growth of the segment.
Turning the page 18.
Net debt decreased by approximately $23 million in the second quarter, resulting in net debt of approximately $75 million or 1.4 times trailing 12 month adjusted EBITDA.
As discussed earlier in the call the reduction in net debt was primarily due to the reduction of the revolving credit facility of balance as a result of the use of cash proceeds from the sale of the canton facility.
Stoneridge remains well positioned with relatively low average and significant available capital.
Moving to slide 19 in closing I am confident that we will continue to do everything within our power to offset the significant incremental external costs. We expect for the remainder of the year as a result of challenging macroeconomic conditions on.
Similarly, we will continue to position the company to take advantage of the growth opportunities both macroeconomically and as a result of a significant backlog of business awards and growing content throughout our portfolio to dry of future profitable growth.
Storage 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 of the questions.
We will now begin the question and answer session true.
Ask the question you May press hard on 1 of your telephone keypad share using the speaker phone. Please pick up your headset before pressing the keys to withdraw your question. Please pressed hard into at this time will pass moment Charlie to assemble on roster.
The first question comes from Kerry first opinion of which Barrington Research. Please scary go ahead.
Hey, good morning, everyone.
Oh good morning, Gary.
I'd like you to maybe comment on some of the supply chain issues. I mean, there's a lot of talk about transitory vs embedded inflation.
What are you guys thinking on that I mean is is.
These kind of step up in the prices of what you are having to pay for inputs through the supply chain are those Glen a hold or do you anticipate that as everything normalizes.
We should see some snapback the reduction in some of the price increases that you are having to deal with right now.
Okay.
Gary I think I think the.
Think the answer is we see both we see overall inflation as well as short term.
Prices based activities. So we do see a level of.
We do see a level of some of it that will normalize just over time as supply chain stabilize and some of it that will be more permanent it's why we're having very transparent conversations with both of our suppliers and our customers on.
Real cost increases and it's Y as we talked about during the call.
Those aspects of this that where we said what 6 million of of the 10 million that we're forecasting for the year, we've already seen as an impact where the impact the recovery will lag the impact.
Because it's some of it is transitory and some of it is more permanent and we're working to offset both of both of those with work with our supply chain on driving efficiencies as well as work with our customers.
From of pricing perspective, Yeah. Let me just added that this is Bob that we're we're seeing things with respect to the industry that that we haven't seen before on some components were getting calls from suppliers.
Day of of.
And they are announcing dramatic dramatic price increases for us and basically telling us per month of product here's the here's the the price. So obviously this does not much we can do in the short in the short run on those types of the on those types of issues, but.
Rest assured we are going out and having conversations with our customers and doing all of the things of the shareholders of respect us trying to recover as much price of of the possibly can.
Okay.
And then in.
In terms of some of the longer term.
Targets that you set.
At the beginning of this year I mean are you still comfortable eagle as of 15% adjusted EBITDA margin by 1 of 2025, given what you are internally doing too.
Position of the company.
On on the product basis, as well as the expense basis.
So so Gary the the way that I respond to that is we are obviously right in the middle of these historic price increases.
We're still there's still lots of work that needs to be done in terms of assessing what is the overall impact on the beat of the company as a result of the inflation and the increase of that we're seeing so we're not we're not commenting on our long term guidance will be in a better position. Once we go through our annual planning process and began of negotiations with the suppliers around around pricing for next year to be able to the.
To be able to say more about that but I will tell you on the on the positive side from of revenue perspective, we've talked about what we're expecting for for 2022.
Weighted average and markets of growing at at the over.
Over 10% and we expect to continue to grow above above the market for the foreseeable future as a result of of all the great work has been done by the sales organs of by the commercial organization with respect to our new business Awards.
And then lastly, then I'll jump off.
Can he made the comment on how some of the squeak trials that you were doing.
From your eye, how they're going in and what number of of units you've got these potential well what number of units Youre doing plead trials with at this point.
So so Gary where we continue to expand our free trials, we don't have any major fleet expansion on announcements to talk about today, but what what we're seeing is we're seeing.
As as we said in previous calls on as we've talked to you about.
The safety of leaders with whom we worked in the originally developed this that's setting the stage and it's and it's slowing down through.
The broader market. So we're seeing some of these midsize fleets.
Coming to us with more interest and so whether it's at the.
National product carriers association or at other events, where we're getting a significant level of interest because they've heard about it based on include the leaders are in the industry that are working with it and we've we've had a a large.
A very positive interest from mid size fleets.
What we also are seeing and probably the most important thing and I talked about it on our script is.
Of the fleets are talking to the OAS and we're hearing feedback from the OAS with regard to the fleets wanting to figure out how to have it on their trucks.
So we talk about we've talked about the pre wire expansion remember of that's just with 1 O E.
And when you have as much expansion is that we had just in a month over month basis. It gives you a sense for the level of interest that is coming from the fleet that's going.
Can't get it on the road trucks and they want it pretty wired and we're seeing other of <unk>.
Working with us to say how did they also pre wire of their trucks. So we continue to expand our free trials.
We are we don't have any.
The specific major announcements with regard to specific fleets, but there's a whole series of safety consortia and other midsize fleets that we're working whether we feel really good about where we're going on.
Okay. Thank you very much.
Thanks to take care of the question.
Our next question of comes from just too long was Texas. Please just to go ahead.
Thanks, and good morning.
On ingesting.
So the supply chain issues are very well known but it does seem like net impact of stoneridge has been a lot more pronounced diversity of it a lot of the other suppliers out there. So can you talk about some of the reasons why this might be the case and in terms of how long the slash.
No. It's a tricky question, you've given the second half guidance.
Any thoughts about.
The next year and if these challenges could linger into 2022.
So so just.
Justin Thanks for your question and.
We've talked about on many of these calls.
The transformation of stoneridge product portfolio of the smart products. The good news is that sets the stage for the future of the bad news is exposes us to the vet.
Where the majority of our products of the chip in them.
And so.
Both then and the commercial vehicle and markets and in the past car and markets were exposed that way.
That's piece of number 1.
Internal to us secondly.
The the.
The exposure that we have to some of the light duty.
<unk> and their specific impact and what our end market exposure on and customer of exposure, it's not completely balanced across all of the OAS and in that situation, there's a little bit of.
Additional impact because of the because of where we're balanced with are always on the light on the light duty side, what I would say with regard to.
How long this lasts.
We are.
Getting.
We continue we speak with all of the chip manufacturers, we we buy from all of the chip manufacturers and we're getting feedback from them. All the time, we do see that we do see the tightness going at least through the end of the year and that's why we are conservative with regard to the guidance that we provided.
We know that others have given the different points of view. This is the best value that we have for our shareholders.
What we are doing is working actively with our with our total supply chain and with our partners to look at what we can do from a redesign standpoint, not only 2.
The address the situation in the near term, but make permanent corrective actions in the future.
Okay. Thanks, John and maybe the next 1 is for Bob I wanted to ask about incremental margin as we look forward to 2022.
Gave the color of debt weighted average and markets will be at 10% you expect to outgrow that but as I, just think about 2021 and all the supply chain headwinds elevated DND cost it seems to set the stage for incremental margins that could be above your long term framework.
<unk>, maybe even meaningfully about that framework. So just wanted to get your thoughts around that if you would agree with that statement or if there's something that could offset on some.
Some of the tail wind in the next year.
Yeah, So adjusted it's true.
No not appropriate for me to comment on 2022.
Right now of the middle of kind of what's going on with the current supply chain situations. So what I would what I would prefer to do is.
Will allow us to go through our normal or normal planning process and have the conversations with our customers on our suppliers that we're having right now and the rest assured we're having we're having a lot of those conversations to give a better line of sight to what the what.
Of what the impact is going to be and how it's going if it's going to impact the longterm margin profile of the company and what in what that looks like and when we have something that.
To say when we have something more to say about that will be it will be out will be on.
We'll be up front with that as soon as we possibly can but right now it's not I just I just feel like now is not the time to really talk about that given given where we're at right now in this in this in the middle of the supply chain issue, but we'll we'll come back to you on that.
I understand and maybe just lastly on the tax rate that was a surprise in the quarter and the guidance. Thank you made the comment as we get into the next year, we should normalize what what do you view his dad normalised tax rate for the business.
Yes, the judgment. Thanks for the question of and let me just let me expound upon the the tax rate of little because I think it's important so we talked about a little bit in the prepared remarks, but you can imagine just with all of the headwinds that we see in the quarter with the supply chain of the incremental engineering efforts that were that were that were moving forward on to support our new new program launches in our future growth.
The impact of the incremental expenses, it's not occurred evenly throughout all of the jurisdictions of the world, where we do business.
So that's.
It really the the net result of that you have relatively strong earnings in certain higher tax jurisdictions, and an incremental expenses and some lower tax jurisdictions as well, even including some of its on pre tax losses in certain jurisdictions, where we of valuation of allowance and so you don't you don't.
Or you will get any kind of tax benefit recognize any of that tax benefit from that so.
So the net impact of that as a result of the tax expense for the quarter of despite of pretax loss, which obviously is unusual in a negative tax rate.
We do expect the earnings trend to continue.
Of through the remainder of this year, we're looking forward of 2022 and beyond we're looking at the tax rate to return to the normalized range of of given the floor, which is the $22.5 of $27.5 per cent range.
Okay, Great. That's helpful. I appreciate the time.
Thanks, Joseph anxious.
Oh and the next question comes from Scott's timber, which C. L. King places just timber go ahead.
Good morning, guys and thanks for taking my questions.
The mining Morningstar.
Oh, maybe talking about electronics and a little bit.
If you were to add back I guess for the first half of the year of the supply chain costs and the obsolescence charges still I guess floating around for a given of sure maybe.
Us or minus a little bit.
Can we talk about some of the other issues.
Primarily I guess, it's product launches in in the timeline for that to hit.
For the for Prozac to obey just to see when we can start getting back to some profitability on the second.
Yes, Scott day, Thanks for the question and.
I think it's.
It's 1 of the.
Great of sources of frustration that we have in the organization is how well many things are going in spite of in spite of these headwinds if you look at our looked at the progress on our plants and look at the progress with our launches.
It gets overwhelmed with.
The.
This the supply chain turbulence.
But what.
We've talked about many times and what we've talked about review of any times is the number of of launches that we have going on in electronics right now between the instrument clusters between the mirror of programs as well as the advanced development activities as and also just the rotation of capabilities. So we're seeing all of those things happen right now.
As you and as you.
Add back the.
The supply chain disruptions and at the end of the inventory right out of that you talked about what you see is a business that's absolutely well positioned as things like the Packers from a cluster of ramps up in the mirror of programs ramp up and thanks, Lexmark, 2 and other programs ramp up this business is completely positioned for gray.
Growth and great profitability.
Got it okay.
And.
With regards to I guess cost sharing and.
You talked about how the none of this is really guaranteed but.
Is there any of that in the guidance from the remainder of the year have you put in the in and if you did how much.
What day of Scott. Thank you so much for the question, we haven't put very much in.
With respect to the guidance of the balance of the year.
We have.
Absolutely active in in discussions with our.
With our customers as John mentioned, we offset of $2 million of the $5 million out of the increases that we saw during the quarter. So as I said before we're moving quickly.
We're responding having conversations with our customers on a on the daily basis around around the increases that we're seeing relative to the supply chain. So but the overall with respect to the guidance that we have not that we have not included much in terms of from recovery perspective, the most in the numbers that we've provided.
Ooh.
Got it and then just lastly on the mirror.
Seems like you've made some more traction here in the retrofit and Prewired soon to be.
The accelerating nicely could you just give us an estimate of total mirror I related revenues that you would see for of 2021, how much of that is in your guidance.
So.
Remember.
We've talked about relatively small numbers.
In the couple of thousand systems that are that are in our guidance.
What we're seeing what.
What we're seeing Scott is.
The.
The opportunities are accelerating we've talked about the bus we talked about the bus opportunity. That's that's an expansion of the opportunity that's of celebrating and we're seeing these midsize fleets, which when we set the.
When we originally set the guidance for the couple of thousand mirror of Retrofits, we didn't expect the sort of pull out the mid sized fleets necessarily that we're seeing right. Now. So we're really we're really positive about what pre wires doing what the.
What the safety of results are doing on what the safety, leaving fleets and how the Strickling down I think there is also an important thing to note.
That nearby retrofit often is done on new trucks.
And.
When there is constraints in the marketplace with regard to the availability of new trucks. It doesn't change the interest from the fleets, but it does change the the does change when they can get the hell struck so we know that there are fleets that want to.
Put the new trucks and service and retrofits of trucks of a mirror that are constrained by when they can get a new truck.
So the what we're what we're seeing on what we've talked about earlier on what we will continue to talk about is we see the demand there we see the interest there we see the poll expanding right now this the supply chain constraint not only impacts us from the financial performance standpoint, but it impacts us with regard to our end markets and what trucks we can.
Our customers can get access to so that they can be retrofit does that make sense.
Yes of that help you.
Yeah, Yeah, Yeah also on.
Last quarter, you get the number of forgot with the number of but it was immaterial book.
I guess, you would expect it to be relatively of material from the full year.
Yes, please a lot of about the next year.
Yeah, but but again.
Our fleet services of activity.
From the with retrofit also is a critical portion of developing this mirroreye platform. So what it is that we're providing for the aleve and how do we provide of true safety platform going forward. So I look at the.
The retrofit also as a way in the fleet services activity as a way to create more pole for a week programs going forward. So when we talk about the programs that are launching at the end of this year on in the early next year and we talked about a 15% take right the more market awareness and more market pole as we see it through retrofit also should drive.
Additional Kay Great me on the 15%. So there is synergy between those activities. We worked very hard to make sure that there is that synergy and work with the OAS that way and it will create opportunities on both sides in the 2022.
Yeah, that's all I have thanks, guys.
Thanks, Scott patch of your questions.
And this concludes our question and answer session on would like to turn the conference back over to John gain any closing remarks.
Yeah, So I want to thank everybody for your participation in today's call.
In closing I can assure you that our company is committed to continuing to drive shareholder value through strong operating results profitable new business and focus deployment of our available resources.
A management team will respond efficiently effectively to manage of control of the variables that we can impact and we will continue to drive strong financial performance or confident that our actions will result in and continued success for 2021 on beyond Thank you all for being here.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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