Q4 2021 Stoneridge Inc Earnings Call

March 1, 2022

As well as our expectation of continued contribution margin of 25% to 30%. We expect the incremental revenue and continued leverage on our existing fixed cost structure will drive EBITDA margins to over 12, 5% by 2026.

While nothing has structurally changed in our long term margin expansion strategy the opportunity to expand margin up to and beyond are 14% long term target depends on our ability to implement pricing and material cost recovery strategies.

Finally, we expect that outperformance of our revenue target, particularly related to mirror OEM and retrofit expansion could lead to incremental margin expansion aligned with our strong contribution margins.

Despite the challenges of the last two years and continued short term challenges in 2022, we remain committed to our long term strategy and expect revenue growth that will significantly outpace our underlying markets and resulting EBITDA margin expansion to drive substantial value creation going forward.

Turning to page 10 in.

In summary, despite the variety of challenges we faced in 2021 I'm proud of the stoneridge team.

We were able to continue to execute on our long term growth.

Our growth strategy and set the stage for a successful 2022 and beyond.

We remain focused on protecting our margins through cost and price recovery actions, while supporting our customers as they launch and ramp up vehicles and platforms with our systems.

Looking beyond 2022 supported by continued backlog growth of 13%. This year, we are targeting $1 5 billion in revenue by 2026, suggesting four times market growth over the next five years.

We expect that this level of growth combined with our continuous improvement initiatives and specific strategic priorities will drive EBITDA margin expansion to our long term target of 14% by 2026.

<unk> in particular provides a path to up form. These outperform these targets based on continued expansion of our retrofit programs and strong take rate for our OEM programs at Stoneridge, we will continue to capitalize on market opportunities and execute our strategies to deliver shareholder value through long term profitable growth with that.

Now I'll turn it over to Matt to discuss our financial results in more detail. Thanks.

Thanks, John turning to slide 12, adjusted sales in the fourth quarter were approximately $184 7 million an increase of one 7% relative to the third quarter.

Adjusted operating income was negative $7 million or negative three 8% of sales.

More specifically control devices adjusted sales were approximately $78 6 million.

Which was a decrease of approximately seven 4% compared to the third quarter, resulting in adjusted operating income of $4 1 million or five 2% of sales.

<unk> adjusted sales of $96 5 million increased by 15% compared to the third quarter, resulting in adjusted operating income of negative $4 7 million or negative four 9% of sales.

<unk>, Brazil sales of $14 million decreased 15, 1% compared to the third quarter, resulting in adjusted operating income of $300000 or two 5% of sales.

This morning, we are establishing guidance for our 2020 to financial performance. We are guiding 2022, adjusted sales to a midpoint of $880 million implying an.

Increase of approximately 17% versus our 2021 revenue it.

It is important to note that our 2022 guidance includes our view on current market conditions, including the potential impact of continued global supply chain disruptions and current production forecast both of which have been volatile over the second half of 2021.

We are expecting continued material cost challenges, particularly early in the year.

Our revenue guidance includes price increases to offset incremental incremental material costs and adjustments to our contractual annual price downs to reflect current macroeconomic conditions.

Despite continued pressure on gross margin, we are expecting to leverage our existing cost structure to drive margin expansion on substantial growth.

We are guiding adjusted gross margin to a midpoint of 22% adjusted operating margin to a midpoint of $1, two 5% and adjusted EBITDA to a midpoint of $48 5 million or five 5%.

Given the continued expense expectation for unusual mix of earnings in 2022, rather than guiding to an effective tax rate, we're guiding to a midpoint tax expense of approximately $3 $5 million. This is based on our current expectations of earnings and utilization of tax credits based on the geographic mix of those earnings.

As a result, we are guiding to a midpoint adjusted earnings per share of negative three for 2022 I will provide additional color on the drivers of expected sales and adjusted earnings per share performance later in the call.

Turning to page 13 on our third quarter earnings call, we guided our fourth quarter EPS to a midpoint of negative 16, with an expected revenue midpoint of $188 million.

As a result of continued production volatility, particularly with our North American passenger car customers adjusted revenue in the fourth quarter was $180 million, resulting in a <unk> <unk> headwind relative to our previously provided guidance.

Additionally, foreign currency impacted our quarter quarterly results unfavorably by <unk> <unk>.

During the quarter, our ability to recover historical supply chain related costs, and offset current costs outperformed our expectations driving a two <unk> improvement relative to our previously provided guidance. Similarly, despite continued volatility in North America, we were able to improve our manufacturing related costs by <unk> relative to prior guidance our.

<unk> to neutralize and recover supply chain related cost and drive improvement in our facilities, approximately offset the volume and currency related headwinds in the quarter.

We expected to receive a significant engineering recovery for work previously completed for one of our OEM customers, which was not received within the quarter. This.

This resulted in a <unk> <unk> headwind relative to prior expectations.

We expect to receive the customer funded engineering reverse reimbursement in 2022 and that reimbursement has been included in our guidance that I'll discuss later on the call.

Our fourth quarter performance, particularly related to net supply chain recoveries and manufacturing performance provides a solid foundation for continued improvement in 2022.

Yeah.

Page 14 summarizes our key financial metrics specific to control devices controls.

Control devices full year adjusted sales were approximately $344 4 million, an increase of one 5% compared to 2020.

The increase in sales was due to incremental revenue from new programs, partially offset by supply chain related downtime and volatile OEM production schedules full.

Full year adjusted operating income decreased by approximately $5 $2 million versus 2020, which resulted in $23 9 million for the year or six 9% of sales.

Operating income was significantly impacted by supply chain related costs, which reduced full year operating income by an estimated $6 $9 million.

Excluding the impact of supply chain related costs, we estimate the control devices operating margin would have been eight 9% relative to eight 6% in the prior year on similar revenue.

Similar to portfolio actions taken in prior years in the first quarter of 2021, we divested the systems business to better align our resources with future growth opportunities, particularly related to electrified powertrain actuation.

In 2021, we launched several key programs such as the park by Wire program featured in several electric electrified vehicle platforms.

These programs launched on critical platforms for our customers, including the Ford Mach E platform, which is expected to significantly increase production through 2023 based on strong market demand.

Stoneridge has content on the marquee platform is only the start of our capitalization on the market shift towards electrified vehicles.

We will continue to invest in the development of programs and product platforms that are targeted to electrified applications in drivetrain architectures.

We expect to launch this product in additional platforms in 2022, which will drive future growth for the segment.

In 2022, we expect control devices sales and operating margin to improve relative to 2021, as we take advantage of incremental volume.

Page 15 summarizes our key financial metrics specific to electronics electronics full year sales were approximately $366 5 million.

Which was an increase of approximately 30% compared to the prior year, primarily driven by the continued ramp up of several key program launches, including large programs related to our direct digital driver information systems.

We expect continued strong growth in 2022, as we ramp up our <unk> OEM and retrofit programs and expect strong production by our commercial vehicle customers.

Operating margins were significantly negatively impacted by incremental costs related to supply chain disruptions material cost increases and production volatility.

We estimate that these cost impacted profitability by $11 9 million in 2021 and created a 340 basis point headwind for the segment's margin.

In addition to supply chain related costs electronics margin was negatively impacted by the required engineering spend to support our current and future product launches looking forward, we will continue to invest to develop and innovate around our current product platforms such as mirror a program that is already seeing very promising take rates and expansion in several markets.

Our supply chain headwinds persist we are confident that our electronics division will execute to overcome these disruptions in order to meet the significant incremental demand we expect from our customers in 2022.

As a result, we expect that electronics margin will expand in 2022 and are expecting above breakeven operating income for the segment this year.

Electronics is well positioned to take advantage of significant future growth and margin expansion as a result of a strong product portfolio a substantial backlog of awarded programs. Our focus on a more efficient long term cost structure and continued expansion of our opportunities related to the mirror platform.

Page 16 summarizes our key financial metrics specific to Stoneridge, Brazil.

Stoneridge, Brazil full year sales total approximately $56 8 million, an increase of $9 1 million or 19, 1% relative to the prior year. Despite a revenue headwind of approximately $3 million related to unfavorable FX movements.

Full year adjusted operating income increased by approximately 290 basis points or $1 8 million relative to the prior year, despite a $200000 headwind related to currency rates.

This was primarily driven by lower SG&A costs and fixed cost leverage on higher sales, resulting in an adjusted operating margin of nine 1%.

Despite continued macroeconomic challenges in Brazil, we expect revenue and operating margin to remain stable in 2022 due to the continued ramp up of OEM launches and growth in the track and trace business to offset reduction in demand for aftermarket products in the region.

We remain focused on utilizing local engineering resources to support our global electronics business as we continue to focus on a more cost efficient global engineering footprint.

Turning to page 17, net debt increased by $2 1 million in the fourth quarter, resulting in net debt of $83 7 million or three five times trailing 12 month adjusted EBITDA.

As we have discussed previously we expect significant improvement in our overall financial performance in 2022, as we continue to offset a substantial portion of our supply chain related costs by working closely with our customers and suppliers.

That said, we expect continued headwinds in the first half of 2022, resulting in relatively lower trailing 12 month EBITDA. As a result, we worked with our bank group to amend our existing credit facility and provide the company with the financial flexibility needed to continue investing in the business to drive and support future growth.

<unk>, which extends through the first quarter of 2023 raised our net debt leverage ratio to four times in the fourth quarter of 2021 leaves our leverage ratio for the first three quarters of 2022 and modifies the fourth quarter of 2022 to include a 475 times leverage ratio.

The Amendment concludes after the first quarter of 2023, returning to a three five times leverage ratio requirement.

We believe that this amendment gives the company ample liquidity and flexibility to operate within a broad range of potential macroeconomic conditions.

As we move into 2022, we remain focus on efficient cash management to help return our leverage ratios to more normalized rates.

We expect rapid improvement in our financial ratios as we move into the second half of 2022.

We expect that our net debt to EBITDA ratio will return to a more normalized level by the end of the year as we are targeting a leverage ratio under two times.

Similarly, due in part to volatility in our supply chain and production schedules for our customers our networking capital levels increased significantly in 2021, we are focused on reducing inventory as production normalizes and ensuring efficient working capital performance to drive cash generation in 2022.

Through 2022, we will continue to strengthen our balance sheet, helping to provide a steady foundation that will allow us to capitalize on our long term opportunities.

Turning to page 18, we expect strong growth in 2022, driving midpoint revenue guidance to $880 million or 17% growth versus 2021.

Based on current IHS forecasts, we're expecting market production to drive approximately $60 million of growth year over year.

Additionally, we are expecting more than two times market growth driven by our product portfolio. Our specific growth opportunities include the continued ramp up of our digital instrument cluster programs and our previously launched actuation programs as well as the start of production for our first OEM Mirror program and continued expansion of our retrofit opportunities Sim.

<unk> to our reporting of adjusted results in the fourth quarter the impact of spot purchases pass through to customers is excluded from our guidance.

Finally, we are expecting incremental revenue based on our ability to recognize price increases from our customers to offset incremental material related costs during the year as well as a portion of our contractual annual price downs, we are targeting to offset approximately 80% of forecasted incremental material cost and contractual price downs.

We're expecting first quarter revenue of approximately $195 million to $200 million.

Followed by second quarter revenue of approximately $215 million as production continues to stabilize and ramp up through the first half of the year. Despite.

Despite continued volatility we're expecting extremely strong revenue growth in 2022.

Page 19 summarizes our expectations for full year adjusted earnings per share in 2022 relative to 2021.

We are expecting strong contribution margin on roughly $108 million of net non price revenue growth in 2022, resulting in just over $1 of incremental adjusted EPS.

As I outlined previously we are targeting to offset approximately 80% of incremental material cost and contractual price downs, resulting in a net headwind of approximately <unk> 18 in 2022.

Similar to the fourth quarter, we expect to continue to drive improved performance in our manufacturing facilities and estimate the impact of operational improvement to be approximately 10.

This includes the beneficial impact of continued stability in production schedules and reduce over time as well as continuous improvement activities, primarily related to better leveraging our fixed overhead.

Partially offsetting the incremental EPS is a normalization of our annual incentive programs and wage and benefit increases in 2022.

At targeted performance for our incentive compensation programs and inflationary wage adjustments, we expect this to create a 34 headwinds.

As outlined previously we are expecting reimbursement for historical engineering expenses in 2022 that were previously expected in the fourth quarter of 2021 as well as continued focus on a more cost efficient engineering footprint to result in a <unk> <unk> benefit relative to last year. Additionally, our guidance includes a reduction in equity earnings in 2022.

Primarily due to the divestiture of our stake in the MSL MFS IL joint venture in late 2021, as well as incremental interest expense based on current debt levels.

As outlined previously our guidance includes a total tax expense of between two five and $4 $5 million.

Creating an incremental <unk> <unk> headwind for the year at the midpoint relative to our adjusted tax expense in 2021.

As a result, we are expecting adjusted EPS of between negative <unk> 15, and positive <unk> in 2022, our midpoint adjusted EPS guidance of negative three.

Similar to our expectations of revenue growth over the course of the year, we expect that adjusted EPS will follow a similar cadence despite our.

Our expectation of strong incremental contribution margin and increased revenue in Q1, we expect a five to seven decline in Q1, adjusted EPS relative to Q4 2021.

This is primarily driven by incremental wage incentive compensation and our expectation that incremental material cost will be more heavily weighted to the first quarter before we expect price recovery actions to reduce the net impact of these costs in the second quarter and even more substantially in the second half.

We expect second quarter, adjusted EPS to improve but remain below breakeven with a significant improvement in performance from the second to third quarter and sustained performance throughout the second half as our expectations of price recoveries reduced material costs and incremental volume support strong margin expansion.

We expect that our run rate performance by the end of 2022 will provide a solid foundation for significantly improved financial performance in 2023, and we expect approximately $1 billion of revenue continued contribution margin at the high end of our targeted range and the ability to leverage our existing cost structure to drive margin expansion.

Moving to slide 20, we have continued to execute on our long term strategic plan focused on long term profitable growth, we remain well positioned to significantly outgrow our underlying markets and achieve our 2026 revenue target of $1 $2 5 billion.

Our contribution margin on incremental revenue and our ability to leverage our existing fixed cost structure provide a strong foundation as we target a 14% EBITDA margin by 2026.

As always driving shareholder value is at the forefront of all stoneridge is strategic initiatives with that I will open up the call to questions.

Thank you.

As a reminder, if you have.

A question at this time, please press Star and then the number one key on your Touchtone telephone.

Please standby will become sounds like you're any roster.

Your first question comes from the line of Justin Long from Stephens. Your line is open.

Thanks, and good morning.

Hi, Jonathan.

So maybe just start with the supply chain, obviously, a lot of moving pieces, but when you just kind of step back and look at things from a high level could you comment on the sequential progression of the supply chain as we've kind of moved from the fourth quarter into the first quarter and maybe what's baked into the <unk>.

Guidance for 2022 for that sequential progression on a quarterly basis.

Yes. Thanks for the question Justin There is obviously a lot of moving pieces to the supply chain dynamics and how that impacts the financial performance.

We do expect that we're going to incur incremental material incremental material cost moving from 2020 to 2021, I'm sorry from 'twenty one to 'twenty two.

That said, we do expect to be able to offset a significant portion of those costs like we said about 80% and that's what's been included in the guidance. So sequentially, we are seeing incremental certainly incremental costs and a little bit of incremental net.

Headwind as well as we move into 2022.

Okay and the cadence that you gave on the guidance was really helpful. But theres a lot of noise below the line that's impacting EPS is there any way you could share.

Kind of what you're expecting in terms of the cadence of EBITDA and EBITDA margins through the year because to your point I think we're going to exit this rate at a much higher rate and a much higher rate and I just wanted to get a sense for what youre expecting in the guide.

Yeah. So Justin we expect obviously, a similar cadence for EBITDA, there is a little bit of noise below the line, particularly as you look at Comping year over year, you've got to remember the equity interest in <unk> will come out as you comp and we'll have a little bit of incremental interest expense as well when you look at the year over year net debt profile certainly in the beginning of the year.

EBITDA will follow a similar pattern, where we expect.

Stabilization and improvement from Q1 to Q2 with a pretty significant ramp up and a fairly stabilized number as we head into the second half of the year. So you can expect that EBITDA will follow a fairly similar a fairly similar pattern to the adjusted EPS cadence that I outlined.

Okay, and just last one quickly on mirror anything you can share on the contribution from a revenue perspective.

Getting baked in the 2022 guidance.

So suggested and while we talked about good news with regard to take rates and continued expansion in what we put in our.

Guidance is we put at this point the contractual take rates because it's early days.

What we gave you on the feedback from the OEM program is early days. So what's in our guidance is the contractual take rates. So we expect to see that trend.

Positively over the next couple of months, but but what we couldnt guidance as the contractual side.

As we've also talked about we've got continue to see expansion from a retrofit perspective.

We have.

A couple of thousand systems that are in there from our from our guidance standpoint on the retrofit side.

You see opportunities to expand that as well so when we talk about being at an inflection point, which we put together the guidance we wanted to be.

So the middle of the world with regard to the guidance, but we see opportunities when we talk about inflection point from here.

Okay, great. Thanks for the time.

Thanks, Justin.

And your next question comes from the line of Scott December from CL King Your line is open.

Good morning, and thanks for taking my questions guys.

Hey, Scott.

Yes, just looking at the different segments.

Relating it to 'twenty two guidance the electronics segment looks like that will probably be.

One of the reasons why you are still I guess I guess the midpoint of earnings is around breakeven ish and you've talked in the past about.

I guess upgrading some based technologies.

That seems to have been sped up by some of the Oems and I'm, just trying to get a sense of.

How whats holding that back in when would you expect the electronics segments really turned to material profitability are we talking to.

2023, I know, you're not guiding that far out, but just trying to get a sense of whether in 'twenty two at least the run rate in the back half of the year should be materially.

Positive.

Yes, Scott it's a really good question I think it's important to understand that when you talk about material cost headwinds most of those flow through electronics.

Not balanced between the two divisions, secondly, I'm going to talk about the the investing in resources to launch new programs. Much of that is also close to electronics with all of the engineering, that's being done to launch the <unk> platform to smart to tachograph and historically over the last 18 months to launch the digital driver information systems. So.

So when we talk about the inflection point from here and we talked about the ramp up of those programs. What you see is we've been spending the engineering resources in advance of the ramp up for the revenues and that division has or that segment has seen the far and away the greatest impact from our material cost inflation perspective.

So.

While none of us are thrilled with showing the charts that we've talked about with regard to electronics, what we see is and it's what we've talked about in each of these quarterly reviews, we have to continuing to invest because the division that's driving that's driving the outsized growth and while both sides are going really well, it's alumnus driving outsized growth.

On both sides, we need to investment continued to invest in engineering resources to get us to that $125 billion and beyond yes, and I would add to that Scott.

While we may not.

We may not be thrilled with the current year financial performance and you look at the chart I will say, we are thrilled with the ROIC that that generates in the future.

Talked about a lot. The fact that we really focus on ROIC.

And the way that we think about investing our resources. When you look at that backlog growth and you look at the long term revenue growth profile of the company.

There's a lot of expansion coming from the electronics the electronics activity that we've invested in over the last several years, we're starting to see some of that in your eye investment pay off even earlier with take rates that are improved and really strong performance in the retrofit market.

So we've talked about in the past the investment will always precede the ROIC and we're starting to see the benefit of our OSB as we ramp up this inflection point for electronics I think to your point. It's also important to remember that the run rate coming out of next year as we see some of these material costs.

Start to subside and the ability to offset them and have a reduced net impact that will impact electronics more so than certainly than the other segments, because thats, where the most of the headwind is coming particularly in the beginning of the year.

Yeah.

Got it and just to be clear when you guys talk about 80% recovery or.

Covering.

<unk>.

I guess overall supply chain related costs I know you guys have talked about two different buckets.

I guess more stuff thats related to spot buys and expedited freight and then the other part is inflationary or are you talking about everything altogether.

Yes, Great question Scott. So this is a really important part of our guidance.

The recovery of spot buys.

That are pass through to customers.

Included in our actual sales, but not in our adjusted sales. So the guidance assumes that we will continue to pass through a significant portion of those spot buys as necessary.

As we move through the year, so the headwind that we're talking about and frankly, the offset that we're talking about in the guidance is more related to mature more durable material costs and inflationary increases and offsets rather than the spot buy activity that we expect to continue to pass through substantially to our to our end customer.

Got it and then just last question on Euro IV.

I guess youre expanding your partnerships on the bus side.

Over in Europe .

Maybe just give us a.

Timeline of when that will start materializing in the P&L.

Similar to normal OE type of business or is this more like a a retrofit kind of thing where happens right away.

Yes.

It's OE programs, but it doesn't have the same sort of development cycle as we do with the commercial vehicle Oems. So there's $10 million worth of revenue in 2000, roughly in 2022 for this we've talked about <unk> as a platform for a long time, Scott and what we said is we needed to get through the development, we need to make sure that we launched the first programs.

And then we could expand on it and here's an example of where we're living up to that commitment of doing an expansion. So.

There are synergies between our retrofit activities.

Commercial vehicle OEM programs and the bus programs, we continue to drive those synergies and there'll be additional end markets, where we can see expansion, but the bus programs has.

Like I said about $10 million with revenue in 2022.

Got it that's all I had.

Thanks, guys.

Thanks Scott.

And again, if you would like to ask a question. Please press Star then the number one on your Touchtone telephone.

We have very next question coming from the line of Gary.

From Barrington Research your line is open.

Good morning, all.

Thank you Eric.

Just want to understand.

Some of these guidance buckets here.

Through 2022 sales guidance to 71 million specific growth to stoneridge would really pertained to the program launches that you highlight bullet 0.2 is that correct.

Yes, that's right Gary that what we tried to do is break apart what youll see just on pretty strong production in our end markets, but also the fact that we expect to outperform that by almost the same amount or by actually a little bit more due to exactly like what you said ramp up of programs that we launched last year and new program launches this year, yes.

And then the IHS production forecast of $61 million.

Obviously kind of a leading question here. This IHS production forecast was developed before this war shut off.

In Ukraine.

Have you taken into account in any of your projections here.

The possibility I guess, the strong possibility of some IHS production decline forecast declines because we're already here and that the supply chain, particularly in.

With the European manufacturers is really starting to turn negative here, just because of what's going on in Europe .

Yes, so Gary the answer is no we haven't taken to do that.

Yes, it was.

Are the basis for this guidance is based on January 2022 IHS Okay.

But let me let me.

A couple of things.

It's important to remember the split between commercial vehicle and passenger car within stoneridge.

Secondly.

Remember that we.

We have very little European passenger car exposure.

R R.

When you start talking about the impact in Europe , particularly.

Vehicle sales you are talking about in 2021 European pass car was one 3% of our sales.

Okay.

No.

So commercial vehicle is a bigger portion in Europe from a European standpoint.

European passport very very small.

So we watch it closely we're watching the impact from a supply chain standpoint, but we are at this point, we don't have a huge exposure to the European pass car production.

Okay.

And then.

You talked about.

What youre doing for the I guess, it's the Mustang Mach E is that correct and talked about yes, yes, that's right side could you.

Could you maybe just give us some other specific models.

Youre, maybe youre actuation programs are also going to be driving growth.

On electrified platforms for this year.

So obviously, we can't talk about something that hasn't yet launched Gary.

Okay.

So we are on the marquee which is in production.

Chevy bolt, which is in production.

What you can imagine as platforms.

With customers, there's commonality or we can't talk about the other platform. The other vehicles that we would be on until they are launched.

Okay, alright, but suffice to say you are on other platforms that are going to launch.

In 2022.

Yes, that's right.

The control devices team has done a fantastic job.

Ill.

Developing the right products for the future state, we've talked about it with regard to getting ourselves being motive force agnostic and rotating out of things that are solely exposed to internal combustion engines, which is why we got out of its why we why we had the other portfolio changes that we've made and the engineering team.

In the commercial and strategy team within control devices has done a fantastic job getting us positioned to grow wins.

<unk> and hybrid powertrains, and I'm really proud of what we're doing.

Okay and then just lastly on on slide nine where you go through a long term EBITDA target.

Is that 14% number that you are looking for is that if everything goes right in your long term plan.

You feel you feel very strongly about the $12 five baseline.

So so no Gary it is not it is not if everything goes perfectly what we wanted to do is give you an idea of how much first of all how incremental the amount of revenue growth that we're expecting can be on the EBITA margin expansion given our expectation of continued strong contribution margins. So in my mind.

The floor for what we should expect going forward based on that really strong revenue growth.

Material cost recovery improve manufacturing efficiency and a more cost efficient overall structure is what allows us to get to our target and I think.

When you when you think about what John said.

Getting to an increasing over our target is really based on our ability to first of all get back on the curve. When you think about the relationship between material cost and contractual annual price downs as we move forward as a really important thing to remember that in a normal year. We expect first of all we have contractual annual price downs and we expect to it.

East offset those those price downs through supply chain strategy and productivity in our facilities over obviously in 2022 as we outlined in the guidance and certainly last year not only were we able to get to.

To mitigate those contractually a price down we had significant incremental material related costs. So you've got a pretty substantial net headwind. When you think about long term margin targets, our ability to negotiate those longer term.

Relationships is what helps us get back to or exceed that long term target. So it's not if everything goes perfect. Its a reasonable target based on the way the AC both our current revenue opportunity in the contribution margin associated with that as well as some very strategic specific strategic plans to expand our margin.

Thank you very much.

Thanks, Sharon Thanks, Gary.

Yeah.

And I am showing no further questions at this time I would now like to turn it back to.

John The Gamer for further comments. Please go ahead.

Thank you and thank you everybody for your participation in today's call in closing I just want to reassure you that our company is committed to driving shareholder value through strong operating results profitable new business and focused deployment of our available resources.

And then the 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.

And this concludes today's conference call. Thank.

Thank you all for participating you may now disconnect.

Okay.

[music].

Okay.

[music].

Good day, and thank you for standing by and welcome to the Stoneridge fourth quarter 2021 conference call.

At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at the site. If anyone should require assistance. During the conference. Please press Star then zero on your touch tone telephone and I would now like to turn the conference over to your host John Saturday Sunday.

F E N E. Please.

Please go ahead.

Okay.

Everyone and thank you for joining us to discuss our fourth quarter and full year 2021 result.

The release and accompanying presentation was filed with the SEC yesterday evening.

And on our website at Www Dot Stoneridge dot com in the investors section under Webcasts and presentations joining.

Joining me on today's call are John <unk>, our President and Chief Executive Officer, and therefore that our Chief Financial Officer.

Before we begin I need to inform you that certain statements today, maybe forward looking statements.

We're 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 a 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 has been 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 each non-GAAP financial measures to the most directly comparable GAAP measures.

After John and Matt had finished their formal remarks, we will then open up the call to questions.

I would ask that you keep your questions with me follow up with that I will turn the call over to Jonathan. Thank you John and good morning, everyone.

Let me begin on page three.

In 2021, we navigated the direct and indirect challenges created by the global pandemic, including global supply chain related issues with.

We focused on being responsive to fluctuating production schedules.

<unk>, our cost structure, and implementing price and cost recovery actions to drive stronger margin performance as volumes recover.

As a result of our continued focus on supply chain management, and our ability to both recover historical cost pass through current costs, we were able to offset approximately 78% the gross supply chain related costs incurred in the quarter I want to thank the stoneridge team for pacing in overcoming the challenges in 2021.

In the fourth quarter.

Production environment continued to stabilize driving adjusted sales of $185 million, representing a sequential improvement relative to the third quarter and providing a strong indication of continued top line improvement as we progress into 2022.

Similarly fourth quarter gross margin of 22, 7% and EBITDA margin of one 3% represented sequential growth for the third quarter.

Based on our current view of market conditions and macroeconomic factors, we believe that the third quarter of 2021 will be the trough the strong rates from an EBITDA performance perspective.

Our 2021 adjusted sales of $755 million <unk>.

Resulted in an adjusted gross margin of 22, 4% translating to an adjusted operating loss of $12 2 million or negative one 6% of sales.

Adjusted EPS for the year was a loss of 59.

Most importantly, despite the external challenges in 2021, we stayed focused on our strategy and continue to invest in the resources necessary to develop and launch the technologies and product platforms that will drive future growth for storage.

Our strategic focus and alignment with industry Megatrends will continue to pay off in 2022 and beyond.

This morning, we are providing midterm revenue guidance of approximately $880 million in 2022, which represents approximately two times market growth driven by significant program launches and the continued ramp up of programs launched in 2021.

We expect the continued material challenges in 2022 will put pressure on margins, particularly in first half of the year.

It's important to note that approximately $21 million of our sales growth is related to price recovery to offset the material cost increases we incurred in 2021 or are expecting in 2022.

Similarly, we are in negotiations with our customers to adjust contractual annual price downs to reflect the current macroeconomic conditions.

We are guiding to a midpoint adjusted gross margin of 22% and adjusted operating margin of $1, two 5%, resulting in an EPS mid point loss of <unk>, <unk> and EBITDA margin midpoint of five 5% or 230 basis points better than 2021.

We are expecting $43 million to $54 million of EBITDA in 2022, and that will provide additional detail on the specific components of our sales and adjusted EPS guidance later in the call.

This morning, we are also updating our long term financial targets based on strong backlog, our expectations of significant topline outperformance relative to the market and substantial margin expansion throughout our five year plan.

Our backlog grew by 13% in 2022, primarily due to new program awards and the expansion of existing programs.

This supports.

A five year compound annual growth rate more than 9%, resulting in over $125 billion of revenue in 2026.

We continue to expect contribution margins of 25% to 30% on incremental revenue and have specific initiatives focused on margin recovery relative to material prices continuous improvement in our manufacturing facilities and leverage on our existing cost structure as we grow.

As a result, we are targeting an EBITDA margin of 14% in 2026.

Page four summarizes our key financial metrics quarterly for 2021 and for the full year compared to 2020.

It goes without saying the continued impact of the global pandemic provided a challenging backdrop for the industry and for stoneridge.

Might this we effectively manage the impact to our financial performance and showed strong progression from the trough in the third quarter to an improved performance in the fourth quarter.

While adjusted sales only increased by $3 million gross profit improved by $5 3 million with gross margin expanding by 260 basis points.

As the year progressed, we offset incrementally more supply chain related costs. However, we still incurred almost $17 million of those costs in 2021 versus 2020.

We estimate supply chain related costs negatively impacted our gross margin by 230 basis points in 2021.

Turning to slide five.

Gross supply chain related costs continued to increase in the fourth quarter. However, we were able to effectively offset a large portion of these incremental costs, resulting in net costs of just over $5 million.

Supply chain disruptions and material cost pressure increased in the fourth quarter we.

We expect continued material cost challenges and are in negotiations with our customers to offset and recover a portion of both the forecasted continued rise material costs as well as historical costs.

During the quarter, we offset more than $18 million of supply chain related costs or approximately 78% of our total exposure primarily related to spot bypass through and other customer recoveries.

We're able to better manage our net supply chain related costs in the fourth quarter, resulting in a favorable impact of approximately <unk> <unk> relative to our prior guidance.

Turning to page six.

We continue to take significant steps with our <unk> platform, particularly in the OEM commercial vehicle end markets, including continued expansion into adjacent markets with significant penetration in the bus market.

In late 2021, we launched the first OEM mirror program with that on the New X gene platform.

Hi, Chip and award winning <unk> platform features both on <unk> and corner, our systems as well as our fully Configurable digital instrument cluster.

The X gene has been recognized as an industry leader for its innovative technologies and we are proud to support them as they make nearby the industry's best camera mirror system available on an OEM platform for the first time.

The response from the market for this system is quite strong.

Based on current customer forecasts, we are expecting to take rate from euro to be at least 35% on the name.

Vehicles.

AAF transitions to full production on the new X gene platform over the course of 2022. This take rate is currently limited by supply chain constraints. Despite these constraints. This was more than double the originally quoted take rate and provides a meaningful upside to our expectations for this and other European mirror OEM programs.

Similarly, while our first launch in North America is not expected until the middle of 2022.

Initial market reaction from prelaunch activities and our continued retrofit expansion suggests that we should see strong take rates for the North American OEM system as well.

That said consistent with our historical cadence, we will continue to utilize customer forecast in take rates in our backlog calculations, while noting that incremental take rates represent upside to the base case scenario.

Additionally, this morning, we are announcing partnerships to make <unk> available on several OEM bus platforms first.

First we're announcing a partnership with tobacco that will make <unk> available as an option on their new urban way bus platform. Similarly, we are announcing a partnership with Marco polo to introduce <unk> as an option on an MGA us in partnership with <unk> to make Mirage standard on their new platform. This is Rs a fully electric city by studying in production in 2000.

'twenty two.

In North America, we continued to expand our retrofit programs driven by growth with existing customers as well as partnerships with new customers.

We believe that the ramp up of mirror systems in both the OEM and retrofit market.

Question point, our continued expansion with industry, leading fleets and Oems as well as the strong initial market reaction to the first OEM production system are all strong indicators of future performance for the product.

Our investment in the mirror platform is beginning to pay off and contribute meaningfully to the financial performance of the company.

Turning to page seven.

Our backlog of awarded business has grown significantly over the last year, our topline growth profile remains strong with opportunity to grow as <unk> continues to expand.

Our five year backlog at the end of 2021 grew by 13% over the same time last year. This.

This strong growth was driven primarily by continued new program ramp up and expansion of our powertrain actuation programs mirror and digital driver information system programs as well as the New program awards related to our smart II tachograph.

As a reminder, our backlog includes only awarded programs over a five year period at forecasted third party volumes and Couldnt take rates as we've outlined several times incremental mineral high penetration rates could have a significant positive impact on our backlog.

Five year backlog of almost $3 4 billion.

Represents five eight times of 2021 OEM sales.

Turning to page eight.

We are updating our long term revenue target to reflect current market conditions and updated expectations for the next several years based on our strong backlog.

From a midpoint of $880 million expected in 2022, we are anticipating another year of strong growth in 2023.

Based on current production forecast, we're expecting approximately $1 billion of revenue in 2023 and over $1 $25 billion of revenue in 2026, which implies a compound annual growth rate of over 9% through 2026. This represents approximately four times market growth over that same period.

Our long term revenue targets include OEM near eye programs at customer quota take rates and a modest amount of annual retrofit systems through 2026 as I discussed previously we believe that we are at an inflection point and the potential for Mary <unk>.

<unk> will take rates could drive revenue up to $1 45 billion in 2026 based on full penetration of the system for the currently awarded OEM programs. While we don't expect that <unk> will be standard equipment on every platform by 2026, we do expect that take rates will continue to improve as more customers see the benefit of the technology.

Our long term strategy has resulted in a growth profile that far exceeds the market and positions us for consistent strong growth over our five year plan.

Turning to page nine.

We are also updating our long term EBITDA margin target to reflect our improved long term revenue target as well as current market conditions.

As a result of our expectations of strong topline growth and continued margin expansion strategies. We have in place we are targeting a 14% EBITDA margin or approximately $175 million of EBITDA based on $1 5 billion.

Of revenue by 2026.

Before we talk about the drivers of our expected EBITDA margin expansion, it's important to understand the impact that the current macro economic conditions have had on our long term EBITDA margin targets.

As I outlined previously this year, we experienced almost $17 million of incremental supply chain related costs, we have contractual price downs in most of our OEM contracts, which in most years, we aim to at least offset every year with deflationary material buys and productivity in our facilities.

Overall, we estimate that the impact of unmitigated price downs and incremental material cost over the last two years have created an estimated $40 million headwind to our prior EBITDA margin targets or 320 basis points on revenue of $1 two 5 billion by 2026.

The midpoint of our 2022 guidance implies a five 5% EBITDA margin for 2022, our midpoint revenue guidance of $880 million.

Based on our 2026 target of $1 25 billion as well as our expectation of continued contribution margin of 25% to 30%, we expect that incremental revenue and continued leverage on our existing fixed cost structure will drive EBITDA margins to over 12, 5% by 2026.

Turning to page 10 and.

In summary, despite the variety of challenges we faced in 2021 I'm proud of the stoneridge team.

We were able to continue to execute on our long term.

Our growth strategy and set the stage for a successful 2022 and beyond.

We remain focused on protecting our margin through cost and price recovery actions, while supporting our customers as they launch and ramp up vehicles and platforms with our systems.

Looking beyond 2022 supported by continued backlog growth of 13%. This year, we are targeting $1 5 billion in revenue by 2026, suggesting four times market growth over the next five years.

We expect that this level of growth combined with our continuous improvement initiatives and specific strategic priorities will drive EBITDA margin expansion to our long term target of 14% by 2026 year on in particular provides a path to outperform these outperform these targets based on continued expansion of our retrofit programs and strong.

Take rate for our OEM programs at Stoneridge, we will continue to capitalize on market opportunities and execute our strategies to deliver shareholder value through long term profitable growth.

Turn it over to Matt to discuss our financial results in more detail. Thanks.

Thanks, John turning to slide 12, adjusted sales in the fourth quarter were approximately $184 7 million an increase of one 7% relative to the third quarter.

Adjusted operating income was negative $7 million or negative three 8% of sales.

More specifically control devices adjusted sales were approximately $78 6 million.

Which was a decrease of approximately seven 4% compared to the third quarter, resulting in adjusted operating income of $4 1 million or five 2% of sales.

<unk> adjusted sales of $96 5 million increased by 15% compared to the third quarter, resulting in adjusted operating income of negative $4 7 million or negative four 9% of sales.

<unk>, Brazil sales of $14 million decreased 15, 1% compared to the third quarter, resulting in adjusted operating income of $300000 or two 5% of sales.

This morning, we are establishing guidance for our 2020 to financial performance. We are guiding 2022, adjusted sales to a midpoint of $880 million implying an.

Increase of approximately 17% versus our 2021 revenue it.

We are expecting continued material cost challenges, particularly early in the year.

Our revenue guidance includes price increases to offset incremental incremental material costs and adjustments to our contractual annual price downs to reflect current macroeconomic conditions.

Despite continued pressure on gross margin, we are expecting to leverage our existing cost structure to drive margin expansion on substantial growth.

We are guiding adjusted gross margin to a midpoint of 22% adjusted operating margin to a midpoint of $1, two 5% and adjusted EBITDA to a midpoint of $48 5 million or five 5%.

As a result, we are guiding to a midpoint adjusted earnings per share of negative <unk> for 2022, I will provide additional color on the drivers of expected sales and adjusted earnings per share performance later in the call.

Turning to page 13 on our third quarter earnings call, we guided our fourth quarter EPS to a midpoint of negative 16, with an expected revenue midpoint of $188 million.

Additionally, foreign currency impacted our quarter quarterly results unfavorably by <unk> <unk>.

<unk> to neutralize and recover supply chain related cost and drive improvement in our facilities, approximately offset the volume and currency related headwinds in the quarter.

We expected to receive a significant engineering recovery for work previously completed for one of our OEM customers, which was not received within the quarter. This.

This resulted in a nine point headwind relative to prior expectations.

We expect to receive the customer funded engineering reverse reimbursement in 2022 and that reimbursement has been included in our guidance that I will discuss later on the call.

Our fourth quarter performance, particularly related to net supply chain recoveries and manufacturing performance provides a solid foundation for continued improvement in 2022.

Yeah.

Page 14 summarizes our key financial metrics specific to control devices.

Control devices full year adjusted sales were approximately $344 4 million, an increase of one 5% compared to 2020.

The increase in sales was due to incremental revenue from new programs, partially offset by supply chain related downtime and volatile OEM production schedules full.

Full year adjusted operating income decreased by approximately $5 $2 million versus 2020, which resulted in $23 9 million for the year or six 9% of sales.

Operating income was significantly impacted by supply chain related costs, which reduced full year operating income by an estimated $6 $9 million.

Excluding the impact of supply chain related costs, we estimate that control devices operating margin would have been eight 9% relative to eight 6% in the prior year on similar revenue.

In 2021, we launched several key programs such as the park by Wire program featured in several electric electrified vehicle platforms.

These programs launched on critical platforms for our customers, including the Ford Mach E platform, which is expected to significantly increase production through 2023 based on strong market demand.

Stoneridge has content on the marquee platform is only the start of our capitalization on the market shift towards electrified vehicles.

We will continue to invest in the development of programs and product platforms that are targeted to electrified applications and drivetrain architectures.

We expect to launch this product in additional platforms in 2022, which will drive future growth for the segment.

In 2022, we expect control devices sales and operating margin to improve relative to 2021, as we take advantage of incremental volume.

Page 15 summarizes our key financial metrics specific to electronics electronics full year sales were approximately $366 5 million.

We expect continued strong growth in 2022, as we ramp up our mirror I OEM and retrofit programs and expect strong production by our commercial vehicle customers.

Operating margins were significantly negatively impacted by incremental costs related to supply chain disruptions material cost increases and production volatility.

We estimate that these cost impacted profitability by $11 9 million in 2021 and created a 340 basis point headwind for the segment's margin.

In addition to supply chain related cost electronics margin was negatively impacted by the required engineering spend to support our current and future product launches looking forward, we will continue to invest to develop and innovate around our current product platforms such as mirror a program that is already seeing very promising take rates and expansion in several markets.

Our supply chain headwinds persist we are confident that our electronic division will execute to overcome these disruptions in order to meet the significant incremental demand we expect from our customers in 2022.

As a result, we expect the electronics margin will expand in 2022 and are expecting above breakeven operating income for the segment this year.

Electronics is well positioned to take advantage of significant future growth and margin expansion as a result of a strong product portfolio a substantial backlog of awarded programs I'll focus on a more efficient long term cost structure and continued expansion of our opportunities related to the mirror platform.

Page 16 summarizes our key financial metrics specific to Stoneridge, Brazil.

Full year adjusted operating income increased by approximately 290 basis points or $1 8 million relative to the prior year, despite a $200000 headwind related to currency rates.

This was primarily driven by lower SG&A costs and fixed cost leverage on higher sales, resulting in an adjusted operating margin of nine 1%.

We remain focused on utilizing local engineering resources to support our global electronics business as we continue to focus on a more cost efficient global engineering footprint.

Turning to page 17, net debt increased by $2 1 million in the fourth quarter, resulting in net debt of $83 7 million or three five times trailing 12 month adjusted EBITDA.

Which extends through the first quarter of 2023 raised our net debt leverage ratio to four times in the fourth quarter of 2021 leaves our leverage ratio for the first three quarters of 2022 and modifies the fourth quarter of 2022 to include a 475 times leverage ratio.

The Amendment concludes after the first quarter of 2023, returning to a three five times leverage ratio requirement.

We believe that this amendment gives the company ample liquidity and flexibility to operate within a broad range of potential macroeconomic conditions.

As we move into 2022, we remain focused on efficient cash management to help return our leverage ratios to more normalized rates.

We expect rapid improvement in our financial ratios as we move into the second half of 2022.

We expect that our net debt to EBITDA ratio will return to a more normalized level by the end of the year as we are targeting a leverage ratio under two times.

Similarly, due in part to volatility in our supply chain and production schedules for our customers. Our net working capital levels increased significantly in 2021, we are focused on reducing inventory as production normalizes and ensuring efficient working capital performance to drive cash generation in 2022.

Through 2022, we will continue to strengthen our balance sheet, helping to provide a steady foundation that will allow us to capitalize on our long term opportunities.

Turning to page 18, we expect strong growth in 2022, driving midpoint revenue guidance to $880 million or 17% growth versus 2021.

Based on current IHS forecasts, we're expecting market production to drive approximately $60 million of growth year over year.

<unk> to our reporting of adjusted results in the fourth quarter the impact of spot purchases pass through to customers is excluded from our guidance.

We are targeting to offset approximately 80% of forecasted incremental material cost and contractual price downs.

We're expecting first quarter revenue of approximately $195 million to $200 million, followed by second quarter revenue of approximately $215 million as production continues to stabilize and ramp up through the first half of the year.

Despite continued volatility we're expecting extremely strong revenue growth in 2022.

Page 19 summarizes our expectations for full year adjusted earnings per share in 2022 relative to 2021.

We are expecting strong contribution margin on roughly $108 million of net non price revenue growth in 2022, resulting in just over one dollar of incremental adjusted EPS.

As I outlined previously we are targeting to offset approximately 80% of incremental material cost and contractual price downs, resulting in a net headwind of approximately <unk> 18 in 2022.

Similar to the fourth quarter, we expect to continue to drive improved performance in our manufacturing facilities and estimate the impact of operational improvement to be approximately 10.

This includes the beneficial impact of continued stability in production schedules and reduced overtime as well as continuous improvement activities, primarily related to better leveraging our fixed overhead.

Partially offsetting the incremental EPS is a normalization of our annual incentive programs and wage and benefit increases in 2022.

At targeted performance for our incentive compensation programs and inflationary wage adjustments. We expect this to create a 30 <unk> headwinds.

As outlined previously we are expecting reimbursement for historical engineering expenses in 2022. They were previously expected in the fourth quarter of 2021 as well as continued focus on a more cost efficient engineering footprint to result in a <unk> <unk> benefit relative to last year. Additionally, our guidance includes a reduction in equity earnings in 2022.

Primarily due to the divestiture of our stake in the MSL MFS IL joint venture in late 2021, as well as incremental interest expense based on current debt levels.

Finally as outlined previously our guidance includes a total tax expense of between two five and $4 $5 million, creating an incremental <unk> <unk> headwind for the year at the midpoint relative to our adjusted tax expense in 2021.

As a result, we are expecting adjusted EPS of between negative <unk> 15, and positive <unk> in 2022, our midpoint adjusted EPS guidance of negative three.

Similar to our expectations of revenue growth over the course of the year, we expect that adjusted EPS will follow a similar cadence despite our.

Expectation of strong incremental contribution margin and increased revenue in Q1, we expect a five to seven decline in Q1, adjusted EPS relative to Q4 2021.

Our contribution margin on incremental revenue and our ability to leverage our existing fixed cost structure provide a strong foundation as we target a 14% EBITDA margin by 2026.

As always driving shareholder value is at the forefront of all stoneridge is strategic initiatives with that I will open up the call to questions.

Thank you.

As a reminder.

A question at this time, please press Star and then the number one key on your Touchtone telephone.

Please standby will become sounds like you're any roster.

Your first question comes from the line of Justin Long from Stephens. Your line is open.

Thanks, and good morning.

Hi, Jonathan.

For 2022 for that sequential progression on a quarterly basis.

Yes. Thanks for the question Justin There is obviously a lot of moving pieces to the supply chain dynamics and how that impacts the financial performance.

We do expect that we're going to incur incremental material incremental material cost moving from 2020 to 2021, I'm sorry from 'twenty one to 'twenty two.

Headwinds as well as we move into 2022.

Okay.

Cadence that you gave on the guidance was really helpful. But theres a lot of noise below the line that's impacting EPS is there any way you could share.

Kind of what Youre expecting in terms of the cadence of EBITDA and EBITDA margins through the year because to your point I think we're going to exit this rate at a much higher risk at a much higher rate and I just wanted to get a sense for what youre expecting in the guide.

Yes suggested we expect obviously a similar cadence for EBITDA there is a little bit of noise below the line, particularly as you look at Comping year over year, you've got to remember the equity interest in <unk> will come out of your comp and we'll have a little bit of incremental interest expense as well when you look at the year over year net debt profile certainly in the beginning of the year.

EBITDA will follow a similar pattern, where we expect.

Stabilization and improvement from Q1 to Q2 with a pretty significant ramp up and are fairly stabilized number as we head into the second half of the year.

So you can expect that EBITDA will follow a fairly similar a fairly similar pattern to the adjusted EPS cadence that I outlined.

Okay, and just last one quickly on mirror anything you can share on the contribution from a revenue perspective, that's getting baked in the 2022 guidance.

So suggested and while we've talked about good news with regard to take rates.

Continued expansion, what we put in our guidance as we put at this point the contractual take rates because it's early days.

What we gave you on the feedback from the OEM program is early days. So what's in our guidance is the contractual take rates. So we expect to see that trend.

Positively over the next couple of months, but but what we've put in the guidance is the contractual side.

As we've also talked about we've got continue to see expansion from electric with perspective.

We have.

Okay.

A couple of thousand systems that are in there from our from our guidance standpoint on the retrofit side.

And we see opportunities to expand that as well so when we talk about being at an inflection point as we put together the guidance we wanted to be.

So the middle of the world with regard to the guidance, but we see opportunities which are cost plus.

Okay, great. Thanks for the time.

Thanks, Justin.

And your next question comes from the line of Scott, Tim Barrett from CL King Your line is open.

Good morning, and thanks for taking my questions guys.

Scott.

Yes, just looking at the different segments.

Relating it to 'twenty two guidance the electronics segment looks like that will probably be.

One of the reasons why you're still I guess I guess the midpoint of earnings is around breakeven ish.

You've talked in the past about.

I guess upgrading some based technologies.

That seems to have been sped up by some of the Oems and I'm, just trying to get a sense of.

How whats holding that back in when would you expect the electronics segments really turned to material profitability are we talking.

2023, I know, you're not guiding that far out, but just trying to get a sense of whether in 'twenty two at least a run rate in the back half of the year should be materially.

Positive.

Yes, Scott it's a really good question I think it's important to understand that when you talk about material cost headwinds most of those flow through electronics its not balance between the two divisions secondly, I'm going to talk about the the investing in resources to launch new programs. Much of that is also close to electronics with all of the engineering, that's being done to launch the Bureau.

<unk> platform, the smart to tachograph and historically over the last 18 months to launch the digital driver information systems.

So when we talk about the inflection point from here and we've talked about the ramp up of those programs. What you see is we've been spending the engineering resources in advance of the ramp up of the revenues and that division has where that segment has seen the far and away the greatest impact from our material cost inflation perspective.

So.

While none of us are thrilled with showing the charts that we've talked about with regard to electronics, what we see is and it's what we've talked about in each of these quarterly reviews. We have to continue to invest because it's the division that's driving that's driving the outsized growth and while both sides are going really well, it's alumnus driving upsides.

And on both sides, we need to invest and continue to invest in engineering resources to get us to that 125 billion and beyond yes, and I would add to that Scott.

While we may not.

We may not be thrilled with the current year financial performance and you look at the chart I will say, we are thrilled with the ROIC that that generates in the future.

Talked about a lot. The fact that we really focus on ROIC.

And the way that we think about investing in resources. When you look at that backlog growth and you look at the long term revenue growth profile of the company.

There's a lot of expansion coming from the electronics the electronics activity that we've invested in over the last several years, we're starting to see some of that near eye investment pay off even earlier with take rates that are improved and really strong performance in the retrofit market.

So we've talked about in the past the investment will always precede the ROIC and we're starting to see the benefit of our always see as we ramp up this inflection point for electronics I think to your point. It's also important to remember that the run rate coming out of next year as we see some of these material costs.

Yes.

Got it and just to be clear when you guys talk about 80% recovery.

Covering.

<unk>.

I guess overall supply chain related costs I know you guys have talked about two different buckets I.

I guess more stuff thats related to spot buys and expedited freight and then the other part is inflationary or are you talking about everything altogether.

Yes, Great question Scott. So this is a really important part of our guidance.

The recovery of spot buys.

That are pass through to customers.

Included in our actual sales, but not in our adjusted sales. So the guidance assumes that we will continue to pass through a significant portion of those spot buys as necessary as we move through the year. So the headwind that we're talking about and frankly offset that we're talking about in the guidance is more related to.

More durable material costs, and inflationary increases and offsets rather than the spot buy activity that we expect to continue to pass through substantially to our to our end customer.

Got it and then just last question on Euro IV.

I guess youre expanding your partnerships on the bus side.

Over in Europe .

Maybe just give us a.

Timeline of when that will start materializing in the P&L.

Similar to normal OE type of business or is this more like of a retrofit kind of thing where happens right away.

Yes.

It's OE programs, but it doesn't have the same sort of development cycle as we do with the commercial vehicle Oems. So there's $10 million worth of revenue in <unk> roughly in 2022 for this we've talked about mineralized platform for a long time, Scott and what we said is we needed to get through the development, we need to make sure that we launched the first programs.

And then we could expand on that here's an example of where we're living up to the commitment of doing an expansion.

No.

There are synergies between our retrofit activities.

Commercial vehicle OEM programs and the bus programs, we continue to drive those synergies and there'll be additional end markets, where we can see expansion, but the bus programs. It has.

Like I said about $10 million with revenue in 2022.

Got it that's all I have thanks guys.

Thanks Scott.

And again, if you would like to ask a question. Please press Star then the number one and your Touchtone telephone.

We have very next question coming from the line of Gary <unk>.

From Barrington Research your line is open.

Good morning, all.

Thank you Eric.

Just want to understand.

Some of these guidance buckets here.

There are 2022 sales guidance for 71 million specific growth to stoneridge would really pertained to the program launches that you highlight bullet 0.2 is that correct.

Yes, that's right Gary that what we try to do is break apart what youll see just on pretty strong production in our end markets, but also the fact that we expect to outperform that by almost the same amount or by actually a little bit more due to exactly like what you said ramp up of programs that we launched last year and new program launches this year.

And then the IHS production forecast of $61 million.

Obviously kind of a leading question here. This IHS production forecast was developed before this war shut off.

In Ukraine.

Have you taken into account in any of your projections here.

The possibility I guess, the strong possibility of some IHS production decline forecast declines because we're already here and that the supply chain, particularly in.

With the European manufacturers is really starting to turn negative here, just because of what's going on in Europe .

Yes, so Gary the answer is no we haven't taken into the 11%.

Yes, it was.

Are the basis for this guidance is based on January 2022 IHS Okay.

But let me let me.

Qualify a couple of things.

One it's important to remember the split between commercial vehicle and passenger car within stoneridge.

Secondly.

Remember that we.

We have very little European passenger car exposure.

R R.

When you start talking about the impact in Europe , particularly vehicle.

Vehicle sales you are talking about in 2021 European pass car was one 3% of our sales.

Okay.

<unk>.

So if commercial vehicle is a bigger portion in Europe from a European standpoint is quite European pass very very small.

So we watch it closely we're watching the impact from a supply chain standpoint, but we are at this point, we don't have a huge exposure to the European postcard production.

Okay.

And then.

You talked about.

What youre doing for the I guess, it's the Mustang Mach E is that correct and talked about yes, yes, that's right side could you just help.

Could you maybe just give us some other specific models, where you are maybe youre actuation programs are also going to be driving growth on electrified platforms for this year.

So obviously, we can't talk about stuff that hasnt, yet been launched Gary.

Okay.

So we're on the marquee which is in production.

Chevy bolt, which is in production.

What you can imagine as platforms.

With customers there is commonality, where we can't talk about the other platform. The other vehicles that we will be on until they are launched.

Okay, alright, but suffice to say you are on other platforms that are going to launch.

In 2022.

Yes, that's right.

The control devices team has done a fantastic job.

Ill.

Developing the right products for the future state, we've talked about it with regard to getting ourselves being motive force agnostic and locating out of things that are solely exposed to internal combustion engines is why we got out of it.

It's why we've made it's why we have the other portfolio changes that we've made and the engineering team and the commercial and strategy team within control devices has done a fantastic job getting us positioned to grow with us.

<unk> and hybrid powertrains, and I'm really proud of what we're doing.

Okay and then just lastly on on slide nine where you go through a long term EBITDA target.

Is that 14% number.

Youre looking for is that if everything goes right in.

In your long term plan.

You feel you feel very strongly about the $12 five baseline.

So so no Gary it is not it is not if everything goes perfectly what we wanted to do is give you an idea of how much first of all how incremental the amount of revenue growth that we're expecting can be on the EBITA margin expansion given our expectation of a strong continued strong contribution margin. So in my mind.

As a floor for what we should expect going forward based on that really strong revenue growth.

Material cost recovery improve manufacturing efficiency and a more cost efficient overall structure is what allows us to get to our target and I think.

When you when you think about what John said.

Getting to an increasing over our target is really based on our ability to first of all get back on the curve. When you think about the relationship between material cost and contractual annual price downs as we move forward. It's a really important thing to remember that in a normal year. We expect first of all we have contractual annual price downs and we expect to it.

<unk> offset those those price downs through supply chain strategy and productivity in our facilities.

Obviously in 2022 as we outlined in the guidance and certainly last year not only were we able to get.

To mitigate those contractual price downs, we had significant incremental material related costs. So you've got a pretty substantial net headwind. When you think about long term margin targets, our ability to negotiate those longer term.

Relationships is what helps us get back to or exceed that long term target. So it is not if everything goes perfect. Its a reasonable target based on the way.

Both our current revenue opportunity in the contribution margin associated with that as well as some very strategic specific strategic plans to expand our margin.

Okay. Thank you very much.

Thanks, Sharon Thanks, Gary.

And I am showing no further questions at this time I would now like to turn it back to Mr. John .

John The Gamer for further comments. Please go ahead.

Okay. Thank you and thank everybody for your participation in today's call in closing I just want to reassure you that our company is committed to driving shareholder value through strong operating results profitable new business and focused deployment of our available resources.

And the 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.

And this concludes today's conference call. Thank.

Thank you all for participating you may now disconnect.

Q4 2021 Stoneridge Inc Earnings Call

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