Q2 2022 Stoneridge Inc Earnings Call

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Good day and thank you first I welcome to the Stoneridge second quarter 2022 conference call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be.

There will be a Q&A session to ask a question during the session you will need to press star one on your telephone.

That's it.

The adviser.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Kellie Harvey Director of Investor Relations. Please go ahead.

Good morning, everyone and thank you for joining us to discuss our second quarter results.

Elite and accompanying presentation was filed with the ICC yesterday evening and is posted on our website at <unk> 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 may be forward looking statements.

Or looking statements include statements that are not historical in nature and include information concerning our future results of the plan.

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 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 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.

That I will turn the call over to John .

Thanks, Kelly and good morning, everyone.

Before we begin with the specific results of the quarter I want to recognize and thank the stoneridge team for their continued dedication to the company and to our customers during this challenging period.

Turning to page three.

In the second quarter, we continued to navigate through macroeconomic challenges, including ongoing supply chain disruptions production volatility and rising material costs. During the quarter. We also experienced significant foreign currency headwinds primarily related to European currency exposures.

We focused on responding to fluctuating production schedules securing material managing our cost structure and continuing to engage with our customers and suppliers and cost recovery actions.

Our second quarter adjusted sales of $205 $7 million resulted in an adjusted gross margin of 18, 7% translating to an adjusted operating margin of negative three 2%.

Adjusted EPS for the quarter was negative 29 cents.

Second quarter adjusted EPS performance was impacted by net foreign currency headwinds of approximately six versus previous expectations.

We continue to offset a large portion of the incremental material and supply chain related costs through pricing actions and pass through of costs.

We have offset approximately 90% of incremental costs year to date relative to last year. Additionally.

Additionally, we continue the past the majority of spot purchases through to our OEM customers offsetting more than $15 million and spot buys in the quarter.

We will continue to evaluate macroeconomic conditions and expect ongoing discussions with our customers regarding price increases and other cost recovery actions.

We remain focused on the growth initiatives that will drive long term profitable growth.

During the quarter, we continued to make progress with our mirror eye platform focusing on our first OEM program launch in Europe , and the continued expansion of our retrofit programs.

Take rates in Europe continued to exceed prior expectations and customer production forecasts suggest take rates will continue to rise as material becomes more readily available and customer truck production continues to shift to new models.

This morning, we are updating our full year guidance to reflect current market conditions as well as second quarter performance, we are allowing our midpoint adjusted sales guidance by $15 million to reflect slower than expected improvement in customer production volumes. Despite continued strong end market demand.

Therefore, we are updating margin expectations to reflect reduced fixed cost leverage on these lower sales expectations.

Italy, we expect ongoing non operating headwinds related to incremental tax and interest expense as a result. This morning, we are reducing our full year adjusted EPS guidance to a midpoint of negative <unk>.

Matt will provide additional detail on our full year guidance later in the call.

Page four summarizes our key financial metrics relative to the prior quarter.

During the quarter. We saw continued strong performance in our commercial vehicle and off highway end markets offset in part by continued customer production volatile volatility.

In addition to continued ramp up of new programs, including the first OEM mirror program as well as incremental pricing actions contributed to higher sales during the quarter.

Second quarter sales were unfavorably impacted by foreign currency by approximately $1 $6 million.

Excluding the impact of foreign currency relative to Q1, we experienced an adjusted revenue growth of approximately 5% quarter to quarter.

Excluding the impact of foreign currency second quarter, adjusted gross margin declined by 140 basis points relative to the first quarter of 2022 within.

Within the quarter, we incurred incremental expenses related to specific nonrecurring inventory adjustments that impacted our gross margin by approximately 70 basis points.

We do not expect that our run rate gross margin profile will be impacted by these items.

We expect that revenue growth in the second half of the year combined with improvement in our operating performance and continued careful cost control will drive expanded gross and operating margins, creating a strong run rate into 2023.

Slide five provides an update on supply chain related costs and actions taken to offset incremental costs in 2022.

Material costs continue to rise however, we have agreements in place with customers to offset a large portion of these costs that said, we continue to face headwinds on material costs and expected additional pricing actions and supply chain strategies will be necessary going forward.

Excluding the material spot buys pass through to our customers, we were able to offset approximately 90% of the incremental supply chain cost experienced year to date, primarily driven by price increases and cost recovery actions.

We recognize there is continued risk in the overall supply chain as markets externalities, continuing to drive increased material cost and limit material availability.

Overall, we expect the impact of material cost net of recoveries to remain neutral versus our previous expectations. We continue to work with our suppliers and customers to put actions in place to recover not only incremental costs, but strengthen our gross margin and supply chain issues continue to ease.

Turning to page six during.

During the quarter, we announced that Kevin <unk>, our senior Vice President of integrated supply chain has returned to a consulting role for the company effective July one as.

As a result, we announced the appointment of <unk> as Chief procurement officer to lead our global procurement organization and Archie number the current vice president of operations to lead our global operations.

<unk> brings more than 25 years of global supply chain management expert.

Experience in the automotive and aerospace industries, leading procurement organizations around the world while living in Asia Pacific Europe , and Mexico, Sal will be focused on executing our company strategy through all aspects of the company's global procurement organization, including supplier quality and global supply chain strategy.

Archie number the current vice President of operations will continue to lead our global operations team has joined my staff since joining stoneridge 2017, Archie has played an integral role in shaping our operations organization.

Our team will continue to execute on our strategic objectives with a focus on continuing to drive operational excellence globally for the company.

Turning to page seven.

Market demand continues to be strong for the first OEM.

Mirror program that launched in Europe in late 2021 with take rates, averaging approximately 35% that said production has been limited due to supply chain constraints on certain components. As a result is constraining take rates in 2022.

Based on discussions with our OEM partner, we expect the take rate will continue to expand the supply chain issues subside and are forecasting your take rate to be greater than 50% heading into next year.

This has the potential to drive significant revenue upside and strong contribution margins going forward as the existing program continues to expand it is also important to note that our customers still transitioning from an old model to a new model production and as such not only do we expect a tailwind from overall take rate percentage, but also in <unk>.

Vehicle volume is that take rate is applied to only the new model production.

Based thereon, we are estimating at least $40 million in mirror sales on our first OEM program in 2023 year to date, we have recognized approximately $7 million and your OE sales in.

In addition, based on the take rates for the current program. We are optimistic that take rates for future program launches will exceed prior estimates.

This has the potential to drive significant revenue upside and earnings potential.

We believe this 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 horizon adoption through all of our channels.

The last two years have been challenging for our industry and we are battle every day to continue to drive performance in the business and make progress against our long term strategic plan.

Moving to slide eight I think it is important to take a moment to step back and reflect on our progress. Despite the macroeconomic challenges, we have and expect to continue to face.

Over the last several years, we have effectively transformed the company's product portfolio to align with industry megatrends, including electrification safety in vehicle intelligence.

Through continued investment and an advanced and advanced technologies and product platforms aligned with those underlying growth drivers. We have built a robust five year backlog of awarded business of $3 4 billion.

This alignment supports significant topline growth moving forward with the expectation of $1 $5 billion in revenue by 2026.

This represents significant market outgrowth, and a compound annual growth rate that exceeds 9%.

We have developed this growth trajectory, while also aligning our portfolio with the powertrains that will drive our industry forward as more than 85% of our product portfolio is expected to be drivetrain agnostic by 2025.

We expect that this level of growth coupled with our continued focus on operational performance and cost structure optimization will drive significant margin expansion.

We expect contribution margins of 25% to 30% going forward aligned with our historical performance driving EBITDA margins of at least 12, 5% and up to 14% by 2026.

Our successful cost recovery actions through price increases and pass through an incremental material costs as well as efficient in our operations and supply chain strategy has contributed to margin stabilization. Despite the significant macroeconomic headwinds we have faced since early 2020.

We will bring about this trends formation through strict allocation of resources, creating global capabilities cost savings and technology platforms to accelerate the growth and financial performance of the company.

Our focus on the <unk> platform has positioned us well to drive continued growth of existing programs facilitate incremental awards and expand retrofit opportunities.

We have invested a significant amount of engineering resources in the <unk> platform and we are now at an inflection point, where our investments are starting to pay off.

While much of the discussion of our expected growth has been centered on Mary It is important to remember that our control devices segment has transformed significantly over the last several years and has a product portfolio aligned with powertrain electrification that physicians in the segment for sustainable growth.

And it's easy to fixate on the macroeconomic challenges we have faced over the last several years because they have been substantial and had a significant impact on our financial performance that said, we continue to execute on our long term strategic plan that positions stoneridge to significantly outperform our end markets drive significant <unk>.

Expansion and ultimately deliver shareholder value through long term profitable growth.

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

Thanks, John turning to slide 10, adjusted sales in the second quarter were approximately $206 million, an increase of four 6% relative to the prior quarter.

Adjusted operating loss was $6 5 million or negative three 2% of adjusted sales, which decreased by 170 basis points versus the prior quarter the.

The decline in margin performance was primarily due to the negative impact of foreign currency of approximately $1 6 million as well as nonrecurring inventory adjustments related to specific expenses within the quarter of approximately $1 5 million.

These incremental expenses were offset by the continued impact of pricing actions and reduced operating expenses as we continue to rightsize our cost structure to align with current market conditions.

It is important to note that these price recoveries dilute margin as they are accounted for as both incremental material cost and corresponding incremental sales. This impact is amplified as growth material costs continue to rise.

As John discussed earlier in the call. We are adjusting our full year 2022 guidance to reflect second quarter performance, which was primarily impacted by foreign currency headwinds as well as current market conditions.

We are reducing our midpoint adjusted revenue guidance by $15 million or one 7% to reflect slower than expected improvement in customer production forecast driven primarily by material shortages. Despite continued strong end market demand.

We are reducing gross margin by 75 basis points and operating margin by 50 basis points to reflect reduced fixed cost leverage on reduced sales expectations offset by reduced cost structure.

Additionally, we expect incremental tax expense FX headwinds and interest expense. This resulted in a reduction to adjusted EBITDA margin guidance of 75 basis points and a reduction to adjusted EPS guidance of <unk> 17.

Resulting in a midpoint of negative <unk> 20.

I will discuss the specific drivers of our adjusted guidance in more detail later in this call.

Page 11 summarizes some of the significant second quarter drivers of adjusted earnings per share relative to the expectations, we outlined on our first quarter call there.

There were several key items that impacted operating performance during the quarter as we discussed previously we continued to experience production volatility in the second quarter due to component availability and other supply chain limitations impacting customer production schedules. This resulted in continued manufacturing inefficiencies and incremental costs within the quarter.

As John discussed in detailed previously.

The impact of incremental material cost in the quarter were relatively in line with our prior expectations. As we continued to offset a significant portion of rising costs with price recoveries, both within the quarter as well as costs related to prior periods.

We continue to engage our customers and suppliers and negotiations to recover costs and improve our gross margin run rate as supply chain return to normal.

During the quarter, we experienced nonrecurring inventory adjustments that amounted to approximately $1 5 million. These.

These adjustments included reducing inventory balances to reflect current forecast, we do not expect that these specific issues will impact our gross margin run rate.

Excluding these one time expenses as well as the unfavorable impact of foreign currency in the quarter. Our gross margin would have been approximately 24%.

Offsetting these negative impacts will reduced SG&A and engineering spend versus prior expectations. As we continued to carefully monitor spending and align our cost structure with current market conditions.

In total cost reductions of approximately offset operating performance headwinds during the quarter, resulting in approximately negative <unk> of net impact.

More significantly second quarter performance was impacted negatively by foreign currency, primarily in our European entities, we offset a large portion of the FX related headwinds by unwinding and monetizing our net investment hedge positions in the quarter, recognizing approximately $3 $7 million of benefit we will continue to look for opportunities to take advantage of market conditions, where possible going forward.

And carefully monitor global currency markets relative to our exposures to reduce the impact of currency volatility on our financial performance in.

In summary, our adjusted earnings per share were approximately <unk> <unk> lower than the expectations. We outlined on the first quarter call. This was driven by <unk> <unk> of operating performance and <unk> <unk> of FX headwinds.

Page 12 summarizes our key financial metrics specific to control devices.

Whole devices second quarter sales were approximately $85 million, which was in line with the first quarter. This was primarily due to continued acceleration program ramp ups offset by continued volatility and OEM customer production schedules and COVID-19 related shutdowns in China.

We expect revenue growth in the subsequent quarters for control devices as Lockdowns continue to even China and North American passenger car production improves for our key customers.

Operating income was $4 1 million for the quarter or four 8% of adjusted sales.

Operating margin decreased by approximately 320 basis points versus the first quarter of 2022, driven primarily by the timing of a favorable SG&A benefit recognized in the first quarter as well as higher material costs.

We expect control devices sales and operating margins to improve sequentially throughout the remainder of the year as we take advantage of forecasted incremental volume and execute on our initiatives to offset incremental material cost and drive operational performance and our manufacturing facilities.

Page 13 summarizes our key financial metrics specific to electronics electronics second quarter adjusted sales, excluding the unfavorable impact of foreign currency of $1 $8 million were approximately $117 million, an increase of 8% versus the prior quarter.

Revenue growth was primarily driven by higher sales in our commercial vehicle and off highway end markets and continued ramp up and expansion of our digital driver information systems, and our first OEM Mirror program.

Operating loss, excluding the unfavorable impact of foreign currency of $2 1 million improved by approximately 210 basis points relative to the first quarter, primarily due to favorable net engineering spend and the timing of customer reimbursements as well as favorable SG&A spend.

This was offset by higher costs due to inflation and the previously discussed onetime inventory adjustments of approximately $1 $5 million, which negatively impacted the quarter.

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 OEM Eri program John discussed previously.

Operating income is expected to continue 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 the electronics margins will expand sequentially, creating a strong run rate heading into 2023.

Page 14 summarizes our key financial metrics specific to Stoneridge, Brazil.

Brazil second quarter sales, excluding the favorable impact of foreign currency of $700000 increased by $600000 or approximately four 8% relative to the first quarter of 2022, due primarily to the impact of typical sales seasonality.

Adjusted operating income, excluding the favorable impact of foreign currency of $400000 declined by approximately half a million dollars relative to the first quarter, primarily due to slightly higher SG&A and A&P spend.

Despite continued macroeconomic challenges in Brazil, we expect revenue and operating margin to remain relatively flat in 2022 as compared to 2021.

We remain focused on the ramp up of local OEM business and efficient management of variable costs to offset economic headwinds.

Page 15 summarizes our expectations for full year adjusted EPS, we are reducing the midpoint of our adjusted EPS guidance to negative 20, which represents a 17% reduction relative to prior expectations as discussed previously the second quarter underperformed, our prior expectations, driven primarily by <unk> <unk> of FX headwinds.

We are reducing our adjusted revenue midpoint guidance by $15 million or approximately one 7% to a range of $855 to $875 million. Despite.

Continued strong production forecast by our customers, we expect a material availability and global logistics dynamics will continue to create volatile production schedules for the remainder of the year and reduced customer production capabilities.

We expect a strong volume tailwind as material challenges subside into 2023.

We expect the reduction revenue to impact adjusted EPS in the second half by approximately <unk> 11.

Based on our decremental contribution margins of 25% to 30%.

Despite expectations of continued material cost increases we expect that the pricing actions, we have taken and will continue to take will keep material cost headwinds in line with our prior expectations.

As interest rates continue to rise we are forecasting moderately incremental interest expense for the remainder of the year, resulting in a <unk> <unk> headwind.

We expect incremental tax expense of approximately $500000 due to our forecasted geographical mix of earnings and expected U S tax on foreign operations, resulting in a <unk> <unk> headwind for the remainder of the year. In total we are expecting second half headwinds related to reduced revenue expectations and incremental non operating expenses, we expect to offset a portion of those <unk>.

Winds based on run rate operating expenses and continued reductions in our cost structure to align with current market conditions.

We expect the majority of the reduction will impact the third quarter as production volumes have been slower to ramp up than previously expected we expect third.

Third quarter performance to be approximately breakeven earnings per share with a significant improvement in the fourth quarter and a strong run rate from both the top and bottom line perspective, as we head into 2023.

Moving to slide 16, we continue to focus on controlling costs that are within our control and offsetting macroeconomic headwinds to the best of our ability.

We expect to efficiently execute and respond to the continued supply chain headwinds and take advantage of incremental revenue as production schedules continue to stabilize throughout the remainder of the year.

As John discussed earlier in the call Stoneridge is committed to driving shareholder value and that focus remains at the forefront of all of our strategic initiatives with that I will open up the call to questions.

Alright. Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to pass.

One one.

Telephone and wait for your name to be announced please standby, while we compile the Q&A roster.

Yeah.

Yes.

One moment.

Our first question comes from Justin long of Stephens.

Steven Your line is now open.

Thanks, and good morning.

Good morning, Jeff Good morning.

So we are bullish on both sides really proud of what the team is doing on both the OEM and retrofit side and look forward to what that means in the end of the year in 2023.

Okay. Thanks, Matt.

I guess on the revenue guidance is there anything you can share on what's baked in from Euro This year, yes sure.

So year to date like we talked about we've recognized about $7 million in OE sales that has been constrained even up till now obviously by material. So we expect that to improve sequentially as we go forward.

There is an incremental portion of this retrofit as well I think we've talked about the beginning of the year kind of $15 million to $20 million of total <unk> sales OEM retrofit and I would think that we stay within that range, even with the material constraints through the remainder of the year here.

Got it very helpful. Thanks, John Thanks, Matt.

Thank you thanks Justin.

Alright, Thank you Justin I would now like to turn it back to John <unk> for closing remarks.

So I want to thank everybody for your participation in today's call.

To close by saying that we can assure you that the company is committed to continuing to drive shareholder value through strong operating results and profitable new business and focused deployment of our available resources. This management team will respond has responded and will continue to respond efficiently and effectively to manage and control the variables that we can impact to drive those strong financial result.

We're confident in our actions will deliver great results and the balance of the year and beyond thanks very much.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

The conference will begin shortly to raise Johan during Q&A, you can dial star one one.

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