Q1 2022 Stoneridge Inc Earnings Call
Good morning, and welcome to the Stoneridge first quarter 2022 conference call. My name is narrow and I'll be the operator for today's call.
At this time all participants are in a listen only mode. Later, we'll conduct a question and answer session. During the question and answer session. If you have a question. Please present zero one on your Touchtone phone as a reminder, this conference is being recorded I will now turn the call over to MS. Kelly Harvey director of Investor Relations.
It's Harvey you may begin.
Good morning, everyone and thank you for joining us to discuss our first quarter results.
The release and accompanying presentation was filed with the SEC yesterday evening and is posted on our website at stoneridge Dot com in the investors section under webcast and presentation.
Joining me on today's call are John <unk>, our President and Chief Executive Officer, and Matt Horvath, Our Chief Financial Officer.
Before we begin I need to inform you that certain statements today, maybe forward looking statements forward. Looking statements include statements that are not historical in nature and include information concerning our future results or plans.
Although we believe that such statements are based upon reasonable assumptions you should understand that these statements are subject to risks and uncertainties and actual results may differ materially.
Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-Q, which was filed with the securities and Exchange Commission under the heading forward looking statements.
During today's call, we will be referenced 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 Matt have finished their formal remarks, we will open up the call to questions.
I would ask that you keep your question to a single follow up with that I will turn the call over to John Thanks, Kelly and good morning, everyone. Let me begin on page three.
In the first quarter, we continued to navigate through the challenges, resulting from the global pandemic, including continued supply chain disruptions production volatility and rising material costs.
We focused on responding to fluctuating production schedules.
Ltd component availability.
Managing our cost structure and continuing to engage with our customers and suppliers on cost recovery actions.
These actions resulted in improved financial performance during the quarter, our first quarter adjusted sales of $196 6 million resulted in an adjusted gross margin of 21, 1% translating to an adjusted operating margin of negative one 5%.
Adjusted EPS for the quarter was negative 2007.
During the first quarter, we made significant progress with the majority of our customers on pricing actions to offset a large portion of the incremental material and supply chain costs, we are focusing our forecasting for 2022.
These negotiations resulted in increased pricing that offset approximately 90% of the incremental material costs, we incurred during the quarter relative to the fourth quarter of last year.
The price increases agreed upon in the first quarter, we will continue to provide relief related to incremental material cost going forward.
Additionally, we continued to pass spot purchases through to our OEM customers offsetting more than $24 million and spot buys we will continue to evaluate macroeconomic conditions and expect ongoing discussions with our customers regarding price increases as necessary.
This morning, we are confirming our full year revenue and adjusted EPS guidance, we're raising our midpoint adjusted gross operating and EBITDA margin expectations by 25 basis points to account for the continued impact of pricing actions taken in the first quarter.
Our adjusted EPS guidance reflects the expectation of continued strong margin performance offset by expected incremental tax expense due to our forecasted geographic mix of earnings.
Matt will provide additional detail on our full year guidance later in the call.
Finally, while we continue to work to efficiently execute and respond to market externalities. We are also focused on the growth initiatives that will drive long term profitable growth in 2022 and beyond.
During the quarter, we continued to make progress with our mirror eye platform focusing on our first OEM program launch in Europe and continued expansion of our retrofit programs with some of the largest fleets in North America.
I will provide additional details on our fleet activities and OEM take rates later in the call.
Page four summarizes our key financial metrics relative to the prior quarter.
During the quarter, we saw improved stability and customer production volumes in our passenger vehicle end markets and continued strong performance in our commercial vehicle and off highway end markets.
In addition, the continued ramp up of new programs in particular, our powertrain actuation and digital driver information systems contributed to higher sales during the quarter.
First quarter sales were favorably impacted by price increases of approximately $6 million.
As a result of these factors we experienced adjusted revenue growth of seven 5% relative to the fourth quarter of 2021.
Consistent with our expectations first quarter gross margin declined by 170 basis points relative to the fourth quarter of 2021, primarily.
Primarily due to continued and incremental supply chain related costs net of customer recoveries.
Even the price and cost recovery actions taken in the first quarter and the expectation of continued volume improvement as the year progresses, we expect our first quarter gross margin will be the trough with synchrony sequential improvement going forward.
During the quarter, we entered into agreements with several of our key OEM customers, resulting in price increases and other cost recoveries that significantly benefited first quarter performance and we will continue to offset incremental material cost.
We've made significant strides in stabilizing margins.
Adjusted operating margin improved 260 basis points relative to the fourth quarter of 2021, primarily due to the favorable impact of engineering recoveries related to the timing of customer funding and lower SG&A costs.
The pricing and supply chain actions taken in the first quarter contributed to improved performance for the quarter and will provide us with a strong foundation to drive significantly improved financial performance in 2022, despite our expectation of ongoing macroeconomic challenges.
Slide five provides an update on our supply chain related costs and actions taken to offset these costs during the quarter.
Similar to the second half of 2021, we continue to pass through material spot buy purchases to our customers.
During the quarter, we offset $24 $4 million of the $25 million of gross spotlight costs.
We expect to continue to offset a significant majority of spot buy related costs going forward.
As expected gross supply chain related costs continued to increase in the first quarter, excluding spot buys we were able to offset approximately 90% of the incremental supply chain costs.
Primarily due to price increases agreed upon with our customers.
We expect these agreements to result in continued relief related to incremental material cost going forward and provide margin stability for the remainder of the year.
We recognize there is continued risk and the overall supply chain market and the overall supply chain is market externalities continued to drive increased material costs.
They're all we expect to improve margins and reduce margin risk in 2022 due to the actions. We took in the first quarter and will continue to take to offset incremental supply chain related costs as necessary.
Turning to page six.
We continue to see strong momentum with MRI platform in both OEM and retrofit and markets.
As discussed during our fourth quarter call. We launched the first OEM Mirror program in late 2021 the.
The take rates on this first OEM program remains strong as we have delivered over 2500 systems to date.
We are optimistic that the take rate will continue to expand our supply chain issues subside.
Similarly, we continue to expand our retrofit activity with existing and new customers. We are announcing several mirror retrofit expansions with some of the largest fleets in North America first we are announcing an expansion of retrofit programs at Schneider and Maverick to customers that we've talked about previously.
Neither is expanding the retrofit programs across new divisions operating units and locations.
In addition, we have seen continued growth with Maverick, where we have installed over 550 systems to date, representing a large portion of the newer trucks in their fleet.
Maverick has been vocal in the trucking community about the safety benefits. They are seeing with the system, which has driven a rapid expansion of installations on their vehicles, if they target installing mirror systems across their entire fleet.
We expect to install over 1000 systems on Maverick trucks by the end of 2022.
Finally, we are announcing a new partnership with Neustar, who is it.
<unk> also expanded their fleet evaluations and have the expectation of continued expansion across your fleet.
Let's just say the expansion with new and existing fleet partners, demonstrating <unk> ability to improve safety driver satisfaction and fuel efficiency. We are excited about the continued market adoption and expect to have additional and incremental fleet announcements with both our existing named partners and new partners in the coming quarters.
We believe that continued retrofit expansion and strong initial OEM take rates are strong indicators of future performance for the system. We will continue to invest the necessary resources and effort to expand on our current successes and accelerate <unk> adoption through all of our channels.
Turning to page seven and.
In summary, our performance for the first quarter demonstrates our ability to execute despite the many challenges we still face related to global supply chains during.
During the quarter, we entered into agreements with the majority of our customers to offset a large portion of the incremental material and supply chain related costs. We are forecasting for 2022 through agreed upon price increases and other cost recovery actions.
In addition, we remain committed to delivering on our strategic priorities and continuously improving the business to drive strong financial performance.
While we continue to work to efficiently execute and respond to market externalities. We're also focused on the growth initiatives that will drive long term profitable growth in 2022 and beyond.
With that I'll turn it over to Matt to discuss our financial results in more detail.
Thanks, John turning to slide nine adjusted sales in the first quarter were approximately $197 million, an increase of seven 5% relative to the prior quarter.
Adjusted operating loss was $3 million or negative one 5% of adjusted sales, which improved 260 basis points versus the prior quarter the.
The improvement in margin performance was primarily due to pricing actions taken in the first quarter offset the incremental material cost reduced SG&A costs and favorable net engineering costs due to the timing of customer recoveries I will provide additional detail on segment performance and a brief discussion on expectations for each segment for the remainder of 2022 on the subsequent slides.
As John discussed earlier in the call we are maintaining our full year 2022 revenue and adjusted EPS guidance raise.
Raising our midpoint adjusted growth operating and EBITDA margin expectations by 25 basis points to account for the favorable impact of pricing actions taken in the first quarter. However, we expect offsetting incremental tax expenses to result in adjusted EPS guidance in line with our previously outlined expectations of negative 15.
Positive.
Page 10 summarizes our key financial metrics specific to control devices.
Troll devices first quarter sales were approximately $85 million, an increase of six 4% compared to the fourth quarter of 2021. This was primarily due to relatively improved stability in our OEM production schedules compared to the prior quarter as well as incremental revenue from recently launched powertrain actuation programs.
Adjusted operating income was $6 8 million for the quarter or 8% of adjusted sales.
Adjusted operating margin increased by approximately 300 basis points versus the fourth quarter of 2021, driven by lower SG&A costs.
As discussed during our fourth quarter call in 2022, we expect control devices sales and operating margin to continue to improve sequentially throughout the year as we take advantage of incremental volume and execute on our initiatives to offset incremental material cost.
We continue to expect inflationary material cost to put pressure on the segment's performance. However, as a result of customer agreed price increases during the quarter. We expect to continue to offset a large portion of the incremental material and supply chain related costs in 2022.
Lastly, we have and will continue to invest in the development of programs and product platforms that are targeted to electrified drivetrain architectures to drive future growth for the segment.
Page 11 summarizes our key financial metrics specific to electronics.
Electronics first quarter sales were approximately $108 million, an increase of 12, 2% versus the fourth quarter of 2021, which was primarily driven by higher sales in our off highway vehicle end markets and continued ramp up and expansion of our digital driver information systems.
Adjusted operating loss improved by approximately $2 million relative to the fourth quarter of 2021, an increase of approximately 240 basis points, primarily due to pricing actions taken in the first quarter as well as favorable net engineering spend due to the timing of customer recoveries.
We continue to expect strong revenue growth in 2022 with strong demand across our end markets as well as the launch and ramp up of several large programs, including our first two OEM mirror programs and the continued growth in nearby retrofit as Jon discussed previously.
Operating income is expected to improve as we stabilized gross margin with cost recovery actions and carefully control our operating expenses to ensure strong fixed cost leverage with revenue growth.
We continue to expect that electronics margins will expand sequentially in 2022 and expect above breakeven operating income for this segment this year.
Page 12 summarizes our key financial metrics specific to Stoneridge, Brazil.
<unk>, Brazil's first quarter sales decreased by $2 million or approximately 13, 9% relative to the fourth quarter of 2021 as a result of typical sales seasonality in the first quarter of the year, partially offset by favorable foreign exchange rates adjust.
Adjusted operating income improved by approximately 190 basis points relative to the fourth quarter, primarily due to lower direct material costs as a result of favorable mix and lower cost of imported materials. As a result of the strengthening of the Brazilian reais against the U S dollar during the quarter.
Despite continued macroeconomic challenges in Brazil, we expect revenue and operating margin to remain approximately flat in 2022 relative to the prior year.
We remain focused on our ramp up of local OEM business and efficient management of variable costs to offset continued economic headwinds.
Page 13 summarizes our expectations for full year adjusted EPS.
As discussed earlier on the call we are maintaining our full year adjusted EPS guidance of negative 15 to positive 10.
We are maintaining our revenue guidance range of $860 to $900 million.
We expect that material availability and global logistics dynamics will continue to create the possibility for volatile production schedules. Similarly, it should be noted that third party production forecast continued to reflect production risk in both the passenger car and commercial vehicle end markets and have reduced their expectations for production relative to prior forecasts.
That said our customers are forecasting demand to remain strong across our end markets and have indicated a strong production volumes and a forward looking forecast that they provide to us for production planning purposes. Additionally.
Additionally, we expect to continue to outperform the market based on the continued ramp up of our recently launched programs and continued strength in our aftermarket and non OE businesses, including their eye retrofit.
As discussed in detail earlier in the call. We expect gross margin improvement relative to our prior expectations driven largely by material cost recovery from price and supply chain actions taken in the quarter.
As a result, we offset a significant portion of incremental material cost within the quarter and expect to continue to offset a significant portion of forecasted material cost increases for the remainder of the year.
We expect our operating expenses to remain stable relative to our prior expectations, which will drive net improvement to both operating and EBITDA margins. As a result, we are raising our midpoint guidance for adjusted gross operating and EBITDA margins by 25 basis points.
Finally, we expect incremental tax expense of approximately $2 million due to tax on the incremental operating income previously discussed as well as our updated forecast for a geographical mix of earnings in U S tax on foreign operations.
Based on current market conditions, and customer forecasts, we're expecting second quarter revenue of $200 million to $210 million and.
<unk> adjusted EPS improvement of 5% to seven relative to the first quarter.
While we have experienced logistic challenges related to the response to COVID-19 outbreak in China as well as continued material availability changes challenges earlier in the second quarter. We are seeing production continued to ramp up driving our expectations for sequential growth in both revenue and adjusted EPS.
Moving to slide 14 in closing I want to reiterate that we are pleased with our performance during the first quarter. Despite the continued macroeconomic challenges.
We expect to continue to efficiently execute in response to continued supply chain headwinds and take advantage of the forecasted strong demand as production schedules continue to stabilize throughout 2022.
<unk> 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 for questions.
Thank you we will now begin the question and answer session. If you have a question. Please press zero one on your Touchtone phone if you wish to be removed from the queue. Please press zero to once again, if you have a question. Please press star one on your Touchtone phone.
Leading on standby for any questions.
And our first question comes from Justin Long. Please go ahead. Your line is open.
Thanks, and good morning.
Right.
So I wanted to start with a question on the 2022 guidance I know the revenue range didn't change, but is there a way you could speak to the near eye assumption within that revenue guidance and just given some of the commercial momentum that it seems like you've seen.
Has that expectation for <unk> revenue in 2022 changed at all versus the beginning of the year.
Yes, just and obviously, we're really excited about the momentum the continued momentum we're.
We're seeing forecast to take rates are I'm, sorry take rates in the OEM space remained strong and obviously, we're excited about some of the incremental announcements. We've made this quarter and expect to continue to make on the retrofit side.
We have incorporated some of that upside into the guidance.
We've kept the range a little bit broader than we historically have at this point in the year to account for.
Both.
Potential for volatility in the second half of the year given supply chain continues.
Continued supply chain disruptions or the possibility of that but also to offset that some of the upside that we're seeing on your right in both of our channels. So we have incorporated some of that upside in the guidance.
And expect to continue to talk about that that momentum as the year progresses here.
Okay, and just given the supply chain constraints I mean, we're all well aware of that.
Those challenges but.
Is that driving any of this commercial momentum in mirror eye or people pulling forward orders in an effort to just kind of.
And the backlog that could build pretty substantially over the next six to 12 months.
Yes, what I would suggest is I think it's actually the opposite way.
<unk>.
Both from a take rate on the OE side as well as from our.
Retrofit installation rates are constraints from a supply chain perspective.
And with regarding semiconductor side is actually constraining us.
Take rates I believe would be higher if we didn't have the unchanged now what I can say to you is the supply chain challenges and what it means particularly in north American fleets with regard to driver retention and driver attraction.
Is accelerating retrofit activities.
Maverix move in some of the other moves that you see in the people who are looking at what Maverick is doing not only do they do it from a safety standpoint.
But they are making these decisions because it allows them to attract drivers with the best technology out there that allows them to take younger drivers and get them all chain to make sure that they're safe so.
The stress that's in the supply chain as we see it throughout the entire supply chain creates more market need, but the semiconductor challenge constrains us a bit.
Okay.
Helpful. Thanks, John .
Okay, just a follow up on that the guidance cadence that you talked about Matt. So if I just look at what you reported in the first quarter.
Think about your guidance for the second quarter and I'll, just take the midpoint of the full year guidance. It implies back half of this year.
We're going to see revenue per quarter jump up to $240 million or so versus just a touch over 200 potentially here in the second quarter. As you think about that kind of back half ramp and obviously thats flowing through to EPS.
Well could you just speak to your visibility on that ramp.
You have to adjust and there's a couple of components to that one is obviously forecasted production by our customers. We're seeing really strong forecasted production in the third in the third and fourth quarter in particular.
The good news is we're seeing strong demand the challenges that procuring material to support that demand has been has been the issue for the first half of the year and we're expecting some continued stability a sequential improvement to drive the level of revenue that you just outlined and similarly, some of the things that we've got we've got our own self help right. We've got the <unk>.
Ramp up of some really exciting driver information systems.
That are getting really good pull through.
With the customers that we're working with on those systems, obviously, the mirror I retrofit momentum is the snowball rolling down to a little bit here and we're getting some really good momentum on the retrofit side.
And Amir I take rates.
We remain really strong when you add that to the fact like we talked about last quarter that we are on some of the passenger car platforms, particularly the electrified vehicle platforms that are really seeing strong demand and winning in the marketplace. We're getting some pull through that is not just peanut butter spread overall of the production in North America and Europe .
We do expect macroeconomics to improve and fee production tailwind, but we've also got our own self help story there to facilitate some of that growth in the third and fourth quarters. Both on programs that we've already announced and have good visibility to and also on some of the things that are gaining momentum like the retrofit programs and the continued demand on some of those electrified via.
Passenger car platforms.
Okay, and just a follow up on that kind of second half ramp versus first half ramp from a revenue perspective is the majority of that coming from electronics or any way you could give us a little bit more color on how much of that pick up as electronics versus control devices.
Yes.
If you look at where the.
If you think about what we just talked about where the where the areas of opportunity are we have got continued ramp up of programs that we've launched in the electronics segment, particularly in the digital driver information systems, and we've got ramp up on the existing Bureau, as well as the next OEM mirror launch and the retrofit retrofit adoption improvement over the second half. So I think if you think about it that way.
Growth obviously in both the relative growth is probably more weighted to electronics in the second half than than control devices.
Okay got it I'll leave it at that I appreciate the time.
Thanks, Jonathan Thanks, Justin.
Yeah.
Thank you and I'm not showing any further questions at this time I'd like to turn the call back over to Mr. John <unk>.
Thank you and thanks, everybody for your participation in today's call.
I want to conclude by saying first time, I'm really proud of the stoneridge team and their dedication and hard work during this incredibly challenging time.
I can assure you for our investors that our company is committed to driving shareholder value through our operating results through profitable new business and really focused deployment of our available resources. This management team will respond efficiently and effectively to manage and control the variables that we can impact and continue to drive strong financial performance.
We're confident that our actions will result in continued success for 2022 and beyond thank you.
Thank you and thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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