Q4 2022 Stoneridge Inc Earnings Call

Speaker 1: Good day and thank you for standing by. Welcome to the Stone Ridge Fourth Quarter 2022 Conference call. At this time, all participants are in the listen only mode. After this speaker's presentation, there will be a question and answer session.

Speaker 1: Please be a vivacist. This call is being recorded. And I would not like to hand the conference over to our speaker today, Kelly Harvey, Director of Investor Relations. Please go ahead.

Speaker 2: Good morning, everyone, and thank you for joining us to discuss our fourth quarter and full year 2022 results. The release and accompanying presentation was filed with the SEC yesterday evening and it's posted to our website at stomerich.com and the investor section under webcast and presentation.

Speaker 2: Joining me on today's call are Jim Zizlman, our President and Chief Executive Officer, and Matt Horvath, our Chief Financial Officer.

Speaker 2: Before we begin, I need to inform you that certain statements today may be forward looking statements. Forward looking statements include statements that are not historical in nature and include information concerning their 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.

Speaker 2: 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 .

Speaker 2: After Jim and Matt have finished the formal remark, we will open up the call to question.

Speaker 2: Turning to page three, I would like to introduce Jim Zizlman, who was recently appointed as President and Chief Executive Officer of Stone Ridge, and was also appointed to the Stone Ridge Board of Directors, Effective January 30.

Speaker 2: After a year of consulting with the company, Jim joined Stone Ranch almost three years ago as president of the control devices division and has played an integral role in developing and executing on the strategic priorities, product development, and technical vision for both control devices and Stone Ranch more broadly.

Speaker 2: Jim brings a welcome knowledge and experience and we are fortunate to have a proven business leader and experienced executive step into the CEO role.

Speaker 3: Thank you Kelly. I am fortunate enough to have already spent a significant amount of time that the company has President of the Control Device's division and as a member of the executive staff where I was able to have a broad impact on the overall strategic direction of the company.

Speaker 3: I focused on aligning the segment with industry mega trends while sustaining strong margins during challenging macroeconomic conditions by placing a key focus on rigor and discipline across all elements of the business.

Speaker 3: I look forward to working closely with our board, our senior leadership team, and our dedicated global teams as we continue to execute on a strong long-term strategy focused on sustainable, profitable growth.

Speaker 3: Turning to page 4. With my transition to CBO, Roger Kassad was appointed as president of the control devices business. Roger was most recently the vice president of sales and product line management for control devices. During his three year tenure, he demonstrated the leadership and strategic thinking.

Speaker 3: that has helped advance the division's priorities and performance.

Speaker 3: Lajay was responsible for overseeing a number of the vestitures of non-claw business that help shape the control devices portfolio to better align with industry mega trends that will drive growth going forward.

Speaker 3: Using the role, Rodgey will be responsible for driving business performance, commercial relationships, product development, and our continued innovation strategy within the segment.

Speaker 3: Logi will be responsible for driving business performance, commercial relationships, product development, and our continued innovation strategy within the segment. Turning to page 5.

Speaker 3: In the fourth quarter, we continue to see sequential revenue improvement with 5.2% growth compared to the third quarter and even of margin expansion of 100 basis points.

Speaker 3: excluding an adjustment related to a prior quarter correction.

Speaker 3: This 10 cent correction was driven by the FX impact on not operating game recorded in the second quarter related to a derivative security and not material to our operations or baseline operating performance.

Speaker 3: sent correction was driven by the FX impact on not operating game recorded in the second quarter related to a derivative security and not material to our operations or baseline operating performance. Matt will provide further detail later in the call.

Speaker 3: excluding this correction, adjusted earnings per share was 11 cents, which was an 8 cent increase over the prior quarter.

Speaker 3: Overall, 2022 sales increased by 12% relative to 2021, while evident increased by over 25%.

Speaker 3: We expect this trend to continue as we are guiding midpoint revenue growth of approximately 16 percent in 2023 with even a growth of over 75 percent and even a margin expansion of approximately 210 basis points based on our midpoint guidance.

Speaker 3: Most importantly, we continue to focus on the product platforms that will drive future growth. Our first OEM MIRI program launched over a year ago in Europe and has significantly outperformed original expectations with the take rate of approximately 40% going into 2023.

Speaker 3: Our next MIRI program launches in North America in the second quarter of this year with a customer expected take rate of approximately 10%.

Speaker 3: This morning, I am pleased to announce that our second European OEM partner has increased their forecast to take rate from 25% originally to approximately 45% based on expected market demand. This program is expected to launch in 2024.

Speaker 3: Similarly, we continue to expand our retrofit applications and develop technologies in adjacent markets that will continue to drive our future growth.

Speaker 3: Earlier this week, we announced a partnership with KLLM Transport Services and Frozen Food Express detailing their intention to equip approximately 1,000 new and existing vehicles with Mirrori this year.

Speaker 3: Similarly, we announced a partnership with Grody Industries to introduce the industry's first wired rearview trailer camera.

Speaker 3: I will discuss these applications and provide more detail on our progress with the nearby platform later in the call.

Speaker 3: As a result of continued success in our core products.

Speaker 3: This morning, we are updating our long-term financial targets to include strong backlog growth. Our expectations of significant top-line health performance relative to our end markets and substantial market expansion through our five-year plan.

Speaker 3: Our five-year awarded business backlog grew by 6% in 2022 to $3.6 billion, supporting a five-year compound annual growth rate of more than 7.5%. Resulting an targeted revenue of $1.3 to $1.5 billion.

Speaker 3: and targeted even a margin of 11.5 to 13.5% by 2027.

Speaker 3: Page 6 summarizes our key financial metrics by quarter for 2022 and compared to both the four-year 2021 and our midpoint guidance for 2023.

Speaker 3: The global macroeconomic environment continued to provide a challenging backdrop for the industry in 2022. Throughout the year, our revenue grew quarterly as material constraints began to ease and customer production volumes became less volatile.

Speaker 3: 2022 adjusted sales outperformed are underlying in markets by four times.

Speaker 3: This was driven by key program launches and expansions, including our park by wire programs, digital instrumentation and cluster programs, and our first OEM Miri program in Europe .

Speaker 3: During the year, we were able to mitigate a significant amount of the material hen winds we experienced through incremental price.

Speaker 3: driving strong ebid-amargin progression throughout the year. This resulted in base-operated adjusting, adjusted ebid-amargin expansion of 440 basis points in the fourth quarter relative to the first quarter.

Speaker 3: We expect continued strong growth in 2023 and EBITB margin expansion despite sustained elevated material costs and rapidly increasing labor costs. We continue to negotiate with our customers to offset incremental material costs with price adjustments and other supply chain improvement strategies.

Speaker 3: Similarly, we remain focused on operating cost control to leverage our existing cost structure and expand operating margins as revenue continues to grow. And that will provide additional detail on our 23 guidance also later in the call.

Speaker 4: Turning to page 7.

Speaker 3: We have made a significant investment to the Mirri platform over the last several years, as it is a key element to our long-range plan. We are seeing the benefits of these investments as Mirri drove approximately $34 million in sales in 2022, and is expected to approximately double to $60 million in sales.

Speaker 3: Similarly, our first OEM program in North America is launching early in the second quarter of this year. Although North American customer has not updated take rate assumptions for this program yet, based on the momentum we are seeing in North American retrofit, as well as the first OEM program, we believe there is upside to the take rate assumption.

Speaker 3: build momentum around our future program launches as our customer for the next OEM program is launching in Europe in 2024 has updated their take rate assumptions from approximately 25% to approximately 45%. Based on mere anticipating capital.

Speaker 3: This aligns well with our first OEM launch in Europe and reflects the expectation of continued out performance relative to originally quoted take rates for our OEM mirror-eye programs.

Speaker 3: As mentioned, we announced a partnership with KLLM Transport Services and Frozen Food Express, detailing their intention to equip approximately 1,000 vehicles with Near Ride this year.

Speaker 3: Together, those fleets represent approximately 3,500 vehicles on the road.

Speaker 3: Their decision to equip Mirrori on new and existing trucks is a demonstration of the tremendous value proposition that Mirrori brings to the market.

Speaker 3: Based on this announcement, as well as the continued expansion of existing trials, with the following largest current?ologist.

Speaker 3: year expecting significant growth in the retrofit market in 2023.

Speaker 3: Similarly, the man continues to be strong for the system on bus applications. We are expecting continued growth in this market in 2023 as well.

Speaker 3: Overall, we are expecting retrofit and bus-related mirror-eye revenue to grow from approximately $9 million in 2022 to over $20 million this year.

Speaker 3: In addition to our current marketing applications, I want to talk further on our partnership with Grote Industries to introduce our vision systems to commercial vehicle trailer applications as we introduce not only the very first wired rear view camera in the industry.

Speaker 3: but also the ability to add additional cameras throughout and within the trailer.

Speaker 3: This application utilizes industry standard trailer to tractor connection technology, which maximizes the speed of implementation.

Speaker 3: In addition, the innovation brought forward by Stone Ridge.

Speaker 3: The added trailer cameras, including the rear view camera, will be fully functional utilizing only the existing wiring in the trailer. While this product is still early in the commercialization strategy, we are seeing a very significant interest from fleets, and expect that this product will continue to expand our Mirri platform.

Speaker 3: and provide incremental opportunities going forward. We have not currently included any benefits from this product in our 2023 guidance, although commercialization of this product may be possible this year.

Speaker 3: Our investment in mirror eye platform is paying off with substantial year over year growth, improved future take rate expectations, and continued momentum across our end markets and applications.

Speaker 3: We will continue to invest in the technologies and adjacent product opportunities to optimize our position in this market and drive technology innovation, improve safety, and driver retention for our customers.

Speaker 3: Starting to page 8. Our long-term strategy focused on transforming our portfolio to align with industry mega-trims continues to drive strong long-term growth prospects.

Speaker 3: Our five-year backlog at the end of 2022, moved by 6% versus the prior year.

Speaker 3: Near-I contributed to growth in our backlog as OEM takeaways continue to trend up and program launches contribute positively to the five-year window.

Speaker 3: Digital driver information systems continue to ramp up and expand in 2023.

Speaker 3: Similarly, our connectivity programs continue to grow driven by our Smart2 Packagraph Program, which we'll launch later this year.

Speaker 3: This program not only contributes meaningfully to our backlog, but also represents a significant aftermarket opportunity as regulatory requirements will drive retrofit applications for this product over the next several years.

Speaker 3: This retrofit opportunity, similar to the MIRI retrofit opportunity, is not represented in this backlog, but they are not awarded OEM programs. Inclimatal MIRI penetration rates, particularly in North America and in programs where customer forecasted tick rates and lag are European programs.

Speaker 3: could have a significant positive impact on our backlog. Finally, control devices contributed to our backlog with program expansions for our part-by-wire actuation programs and continued growth and our electrification-focused sensor applications.

Speaker 3: While 100% of our electronics portfolio is currently dry-praying agnostic, the continued progression in control devices will drive our targets to at least 90% of total product portfolio being dry-praying agnostic by 2027.

Speaker 3: We have been successful in aligning our portfolio with industry mega trends and that strategy is paying off as our backlog continues to grow year-over-year as we expand existing programs, leverage the Near-Right platform and win new business.

Speaker 4: Turning to page 9.

Speaker 3: We are updating our long-term revenue and evative targets aligned with our updated five-year backlog in current market conditions.

Speaker 3: Our long-term strategy has resulted in a growth profile that is expected to outperform your market by two to three times over the next five years and positions us for consistent, strong growth, resulting in substantial EBITDA margin expansion.

Speaker 3: From a midpoint of $975 million expected in 2023, we are anticipating another several years of strong growth, resulting in a long-term revenue target of $1.3 to $1.5 billion by 2027. Based on our 2027 revenue target.

Speaker 3: We are targeting an EBITDA margin between 11 and a half and 13 and a half percent.

Speaker 3: This EBITDA margin expansion will be driven by our expectation of continued contribution margin of 25 to 30 percent. A favorable mix primarily aligned with growth in our aftermarket products and continued leverage on our existing fixed cost structure. Over the last four years,

Speaker 3: I helped craft the overall strategy of the company and provided over-arching support to each segment. Now at the CEO , I will focus on executing on that long-term strategy to drive some sustainable performance and achieve our long-term targets.

Speaker 3: Turning to slide 10, we remain focused on certain key priorities as a company and more specifically within each segment to achieve our goals within this year and going forward.

Speaker 3: As we look forward to this year, we have a lot to be excited about.

Speaker 3: Over arcingly, we are focused on flawless execution of our major program launches, continuous improvement in our manufacturing facilities, and proven cost control.

In dual devices, we will continue to focus on growing our core product portfolio aligned with powertrain electrification.

We will continue to invest in our actuation business as we anticipate greater opportunities as power trades become increasingly electrified. During a driven by the expected growth in our actuation business and the rotation of our temperature sensing applications, we expect that control devices will continue to deliver hard.

a strong margin profile on long-term growth that will outpace our underlying end markets.

And electronics are focused remains on executing on program launches, particularly our Near-I programs and our Smart2 TACOGRAPH programs launching this year. With the significant investment we have already made in Near-I, we will continue to expand our vision and safety platform. We are focused.

on driving advanced development through a refined and more cost-effective global engineering structure along us to both expand margins and continue the pace of development that is fueled a backlog and forward growth profile.

Finally, Stone Ridge Brazil will focus on continuing to grow our OEM capabilities in region to better support our global customers. This will drive steady future growth and provide a platform to continue to rotate our local portfolio to more closely align with our global business.

Similarly, we will continue to leverage the talent and capabilities of our growing engineering team in Brazil to better support our global initiatives and more cost-efficiently support our current programs and drive future growth. Each of our segments plays a critical role in helping us achieve our long-term targets.

I am committed to continuing to execute on the long-term plan, Stormrich has in place, as well as driving our company-wide priorities to achieve our goals.

With the right focus, we will execute at a high level resulting in strong margin expansion on growth that will continue to help pace our underlying end markets.

Frank, Patel S. and Summary, we remain focused on implementing our long-term strategy to drive sustainable, profitable growth and shareholder value creation. And with that, I will turn it over to Matt to discuss our financial results and guidance from more detail.

Thanks Jim. Turning to slide 13, sales in the fourth quarter were approximately $225.2 million, an increase of 5.2% relative to the third quarter. Operating income was $6 million or 2.7% for adjusted sales.

More specifically, control devices sales were approximately $86 million, which was a decrease of approximately 3.9% compared to the third quarter, resulting in operating income of $5.5 million or 6.4% of sales. The electronic suggested sales of $134.8 million increased by 15%.

compared to the third quarter, resulting in operating income of $4.9 million or 3.7% of sales. Stone Ridge Brazil's sales of $13.1 million decreased 5.5% compared to the third quarter, resulting in operating income of $800,000 or 6.4% of sales.

This morning, we are establishing guidance for our 2023 financial performance. We are guiding 2023 revenue to a midpoint of $975 million, implying an increase of approximately 16 percent versus our 2022 revenue, which is more than 13 times our underlying weighted average end market growth. Despite continued pressure on gross margin, we are expecting to leverage our existing cost structure to drive all-.

points and almost $29 million relative to 2022.

As a result, we are adding to a midpoint of break even adjusted earnings per share for 2023. I will provide additional call-on to drivers with expected sales and adjusted earnings per share performance later in the call. Turning to page 14, before we discuss the factors impacting operating performance in the quarter,

I'd like to provide some detail on a prior quarter correction that impact of the fourth quarter. In the second quarter of 2022, the company unwound two net investment hedges driven by favorable FX movements and recognize the net gain of approximately $3.7 million of other non-operating income or adjusted earnings per share of 10 cents.

In the fourth quarter, the company determined we had incorrectly recognized the net gain in the income statement and reclassified the gain to other comprehensive income, resulting in the reduced earnings of $3.7 million or 10 cents in the fourth quarter.

On our third quarter earnings call, we guided our fourth quarter EPS to a midpoint of 24 cents with an expected revenue midpoint of $239 million.

Reduced production volumes from customers, material constraints, and our inability to reduce our short-term backlog as quickly as previously expected resulted in a seven-cent headwind relative to our previously provided guidance. This was primarily due to lower customer production in our North American passenger car and market, COVID-related shutdowns in China impacting customer demand, and material constraints impacting production for our off-highway products.

These factors drove revenue under performance of approximately $14 million versus our prior expectation.

That said, commercial vehicle demand has remained strong with sales volumes outperforming prior expectations. During the fourth quarter, we absorbed higher material, labor, and other manufacturing costs versus previous expectations. Incremental manufacturing costs were primarily driven by unexpected premium freight costs, manufacturing inefficiencies, and incremental labor costs. That said, commercial vehicle demand has remained strong with sales volumes outperforming prior expectations.

That said, we partially offset the incremental costs to reduce the offering expenses, including the reduction of our annual incentive compensation program.

Although fourth quarter performance was lower than previous expectations, we have the ability to retime a portion of that performance through the reduction of a strong backlog in early 2023 and continued cost recovery actions. We will continue to focus on improved manufacturing performance to drive margin expansion.

Page 17 summarizes our key financial metrics specific to control devices.

Control devices, fourth quarter sales declined by $3.5 million, versus the third quarter due to reduced customer production volumes in North America and China, partially offset by incremental revenue from the ramp-up in production of actuation programs and incremental price.

Fourth quarter operating income declined by 200 basis points compared to the third quarter of 2022, primarily due to higher material costs as a result of unfavorable sales mix during the quarter.

4-year sales of $345.3 million were approximately in line with 2021.

full year operating income of $23.5 million or 6.9% of sales would also be in line with the prior year.

excluding the rest of products. As discussed on previous calls, we continued to transform our product portfolio to align with future growth opportunities. We expect continued revenue growth in 2023 for our portfolio devices as North American passenger car production continues to recover. Our actuation programs on several electrified vehicle platforms are continuing to seek demand and the outpaces of the underlying market resulting in planned production expansions.

They will drive above-market top-line growth in 2023. In 2023, we expect control devices, sales, and operating margin to improve relative to last year, as we take advantage of incremental revenue and focus on continued supply chain improvements.

Page 16 summarizes our key financial metrics specific to electronics. Electronics' fourth quarter sales increased by $17.5 million or 15% compared to the third quarter. The third quarter sales increased by $17.5 million or 15% compared to the third quarter.

Full-year sales were $475.4 million, which was an increase of approximately 24% compared to the prior year. Primarily driven by the continued ramp-up of several key program launches, including the first MirRi program and the ramp-up of large programs related to our digital driver information systems.

Fourth quarter performance would have been even stronger, but material limitations contributed to reduced sales and are off-high weight vision and safety products.

We are expecting these material issues to subside as we move through the first quarter of 2023 and expect to be able to make up some portion of the lost production early this year.

And we expect continues strong sales in 2023 due to the continued ramp up of these programs and the launch of our second MIRI program at the beginning of the second quarter in North America.

Fourth quarter, adjusted operating income declined by 90 basis points due to the continued impact on elevated material labor costs partially offset by fixed cost leverage from higher sales. Operating margins improved in the second half of 2022 due to successful negotiations with customers to recover incremental costs through price recovery and other supply chain actions.

Full year adjusted out to about 30 basis points versus 2021, largely due to strong contribution margin from substantial incremental revenue.

Looking forward, we will continue to focus on flawless execution of new program launches and ramp-ups.

Although we expect margins to continue to be challenging the first half of the year, we plan to recover a significant portion of these incremental costs through supply chain improvements and customer price recovery actions. As a result, we expect continued margin expansion in 2023. Electronics is well positioned to take advantage of significant future growth and margin expansion as a result of...

Brazil.

Stoneage preserves four year sales, total approximately $52.3 million, a decrease of $4.5 million, or 5.5% relative to the prior year, primarily due to lower sales volumes partially offset by the favorable impact of foreign currency.

A full year adjusted operating income increased by approximately 50 basis points relative to the prior year, primarily driven by lower S-GNA spend, resulting in an adjusted operating margin of 5.1%.

Today, we are excited to announce a new business award for infotainment systems to one of the market meters of OEM commercial vehicles in Brazil. This award is expected to launch in 2024 with the peak annual revenue of approximately $4 million, which represents approximately 7.6% of total 2022 sales for the segment.

This is not only financially significant for the segment, but it furthers our expansion of local OEM programs to better support our global customers. We are successfully shifting our portfolio in Brazil to more closely aligned with our global growth initiatives.

Despite continued macroeconomic challenges in Brazil, we expect revenue and operating larger to remain stable in 2023.

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 18, fourth quarter net debt was $114.5 million, a decrease of approximately $22 million from the third quarter, driven primarily by strong cash performance at the end of the year. At the beginning of 2023, we anticipated the continued material cost and production headwinds forecasted for the first half of the year would result in a relatively lower ebita and work with our bank group to amend our existing credit facility.

The amendment modified the first quarter of the year to include a 4.75 times leverage ratio and second quarter of 2023 to include a 4.25 times leverage ratio with an interest coverage ratio of three times in both quarters. The amendment returns to a three and a half times leverage ratio and interest coverage ratio going forward. The amendment returns to a three and a half times leverage ratio and interest coverage ratio going forward.

We are confident the company has ample liquidity and flexibility to operate in the current macroeconomic conditions. As we move into 2023, we remain focused on efficient cash management to help return our leverage ratios to more normalized rates as we continue to improve financial performance and expand our earnings with substantial growth. We expect our net debt to EBITDA ratio to return to a more normalized level by the end of the year.

We are targeting a leverage ratio under two and a half times.

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 19, we expect strong growth in 2023, driving midpoint revenue guidance to $975 million or 16% year-over-year growth. Based on current IHS forecasts, we are expecting market productions in drive-approxivity. We are expecting a steady foundation that will allow us to capitalize on our long-term opportunities.

for sustainable long-term growth.

In the first quarter of the year, we are still seeing the residual impacts of reduced demand in China driven by the ramp up in COVID-19 at the end of 2022. Similarly, material availability challenges in our off-highway products led to substantially reduced sales in January relative to our normalized run rate. Thank you.

while we expect to recover a portion of these reductions in the quarter and more in the second quarter. We are expecting quarterly revenue to be approximately flat to the fourth quarter of 2022 in the first quarter of 2023. Looking beyond the first quarter, we are expecting approximately 5-10% growth from the first to second quarter.

as material availability improves, our first OEM program, near our first OEM MIRI program launches in North America, and our newly installed SMT line in Europe drives short-term backlog reduction. This will imply revenue of $225 million in the first quarter and $235 to $245 million in the second quarter. Page 20 summarizes our expectations for full-year adjusted earnings for sharing 2023 relative to 20.

We expect operational improvement reduced over time due to stability in production schedules, continuous improvement activities, and leverage on fixed costs.

Partially offsetting the incremental EPS driven by strong volumes and continued manufacturing and operating improvement is a significant burden related to incremental labor costs from 2022 to 2023. Influatory pressure has driven annual labor increases above our historical average.

Similarly, we expect a normalization of our annual incentive cost programs back to targeted levels in 2023 after they were reduced in 2022.

As a result, we are forecasting a 42-cent headwind relative to 2022 related to labor costs.

We do not expect the same relative level of annual incremental costs going forward as inflation subsides and our top line growth outpaces structural cost growth to drive fixed cost leverage. Finally, we are expecting incremental interest expense in 2023, as rising interest rates continue to impact the interest rate on our credit facility and an increased average annual debt balance relative to last year. We expect incremental interest of approximately $5.5 million relative.

large expansion and substantial earnings growth year over year.

Finally, similar to our expectations of revenue growth over the course of the year, we expected adjusted EPS will follow a similar cadence. The challenges we faced in December related to production volumes, particularly in our highway business in China, persisted through January . We have seen significant production ramp up in February and are forecasting even better sales in March.

which should drive an improved sales trajectory into the second quarter. A slow start to production, incremental annual labor cost, and material cost that remain elevated will result in depressed margins for the first quarter. That said, we continue to negotiate appropriate price increases with our customers to offset these costs.

However, we expect the impact of price recoveries to lag using incremental costs. We expect that this will result in a below-break even operating margin for the first quarter and EPS of approximately negative 30 cents. This assumes that as we continue negotiations with customers regarding price increases, we will recognize only a minimal impact of incremental prices in the first quarter.

with the expectation that we will recognize retroactive price increases as these negotiations are completed. We expect that production normalization and growth, along with negotiated retroactive price increases, will drive above break even operating performance in the second quarter with the PPS of approximately negative 10 cents.

We are expecting to exit the second quarter with gross operating and EBITDA margins that exceed our annual guidance as revenue continues to ramp up over the second half of the year. Additionally, as is typical with new program launches, we expect margins to improve as are recently launched and to be launched programs continue to mature this year and going forward.

This should result in much stronger stock and half earnings performance and a trajectory on both the top and bottom line that will drive continued earning expansion in 2024. We are focused on driving earnings growth in 2023 through efficient manufacturing processes aggressive but appropriate price negotiations and prudent management of our fixed cost structure.

Moving the 521, we expect significant revenue growth, EBITDA margin expansion, and adjusted EPS growth in 2023, as we continue to focus on opportunities to recover and improve growth margin, execute on a cost structure aligned with current and market conditions, and flex our variable cost structure efficiently should macroeconomic conditions change.

Longer term, Stone Range remains well positioned to significantly help pace our underlying markets due to the strength of our awarded business backlog and our product portfolio aligned with industry megatrons. Our contributions on incremental revenue, our ability to leverage our existing fixed cost structure, and our continued focus on material cost improvement, price.

and supply chain strategy provide a strong foundation for the long-term targets of $1.3 to $1.5 billion of revenue and an 11.5 to 13.5% EBITDA margin by 2027. As always, driving shareholder value is at the forefront of all of Stone Registration's strategic initiatives. With that, I will open up the call for questions.

Thank you. As a reminder to ask the question, please press star 11 on your phone and wait for your name to be announced. If you draw your question, please press star 11 again. One moment please, as we compile the Q&A roster.

Our first question will come from Justin Long of Stevens. Your line is open. Rest in Ark

Our first question will come from just in long of Stevens. Your line is open. Thanks and good morning.

Hey, Joseph. Hey, so I just wanted to take a step back. The company's results have obviously been pretty volatile recently. And while revenue performance seems to be a bright spot as you outperform the market, there's been a struggle taking this to the bottom line. Jim, as you step into the CEO role.

What are the steps you plan to take to number one, improve the predictability of earnings, and number two, improve the profitability of this company?

Thanks, Justin, for the question. I think the steps I'm taking actually will address both of those concerns.

And where I'm focused, more so going forward, is on execution. Driving a rigor and discipline in the company across all elements of the business, making sure that we have a program management focus. By doing so, we will seriously minimize the potential for any surprises that has historically had the opportunity to creep in.

to our numbers. I think by holding us accountable to these elevated elements in the rigor and discipline across all elements of the business, I think that we all will more successfully drive.

Excellent for an execution and again, drive out issues that have historically crept in. Okay. And I guess secondly, when I look at the 2023 guidance, here implied contribution margins are in the high teens just using the midpoint of the outlook.

I know you called out the wage inflation and incentive comp, but I feel like those are headwinds that you probably saw coming on the horizon for a while. So I guess my question is why not get more aggressive with price and it sounds like you are pushing price, but is there more of an opportunity just in response to the...

higher supply chain costs and higher labor costs that you're seeing in addition to the fact that the company's margin profile is below target.

Yeah, Justin. Thanks for the question. The the the the Contributor Contribution Marigrants next year are definitely influenced by a significant increase burden on inflationary labor costs. So while we could see some of that coming, it is substantially greater than what we've experienced in prior years across the business.

of existing products to make sure that we are recovering those costs, but also maximizing our opportunity to improve margin as we go forward. Like we said previously, we have expected incremental costs. We do expect that our recovery will lag those costs. But as you saw last year, we were extremely successful in offsetting those costs.

through the playbook that we ran with customers, supply chain, and product engineering. So there's certainly that opportunity to continue to be aggressive and we are in all of those cases that we expect will drive a run rate for the second half of the year that is significantly improved to the first, similar to what we saw last year, and provides a really good trajectory of re-heading the continued growth beyond next year.

point of the guidance.

How much of that improvement first half to second half is just a function of price versus other items? I mean, I know the implied revenue guidance is a little bit better in the second half, but maybe you could just give us a sense for a prior level of visibility essentially into the second half.

Yes, well, Justin, it's a great question. We have a lot of visibility on the top line because like we've talked about in the past, a good portion of that is OEM programs that are obviously awarded and have visibility into production volumes. We've obviously seen macroeconomic conditions be volatile over the last 18 months, so I wouldn't say that we have perfect visibility there. So we shall add this picture quality, if we might be right, also just the two lines directly got a little better.

but we have good visibility to that top line growth, including the launch of the North American Miri program and the Smart 2 program, which are both incremental this year as we go through, go into the second half. Top line, there is still some variability, obviously, in aftermarket or non-OE products, but top line.

We've got pretty good visibility to the cadence of our expectations there. That does drive incremental contribution, obviously, in line with those historical averages as we go through the quarters of the year because the incremental labor cost will already be considered in the beginning of the year. We do expect, and there is a assumption of incremental price.

that obviously impacts, we believe retroactively, once those price negotiations are complete. Again, similar to last year, but we'll impact the second half of the year as well on incremental volume. So it does have a compounding effect as you increase price. Got it, thanks. I guess last one for me is.

on the board. There have been some changes recently. You've talked about this refreshment strategy, but can you share what the catalyst was to drive these changes and why this is the right timing and the midst of a CEO transition as well?

Yes, so Justin, I'll pick the first start and then maybe Jim can chime in. I don't want to speak for the board. I'm not on the board, but you can see that there's been a progression of board transformation over the last several years. That starts with the appointment of Frank Skolarski, who is Audit Committee Chairman and has continued now with the announcement of our most recent board member.

Carson, so I think you've seen the board that has been very clear with their expectation of continuing transformation to align expertise with the business and they've delivered on that over the last several years. Jim, I don't know if you'd be on the board if you have any. I think it is the normal natural progression. The board is very cognizant that it's ten years. They're also very cognizant of the skills necessary in a business that is changing dramatically.

We're going from a automotive parts company to a systems company, more technology focused company, and sometimes skills required to ensure that you've got good support of the management team from the directors and the board. Sometimes that needs some refreshment. And the board is very cognizant of that and is willing to allow for those adjustments and solutions to be made.

Okay, understood. Thanks for the time.

Thanks, Justin. Good talking to you. Appreciate the questions. Thank you.

Thanks, Justin and good talking to you. Appreciate the questions. Thank you. Can one moment please for our next question?

Our next question will come from Gary, Pacificino, of Barrington Research. Your line is open. Good morning, Matt Jim Kelly. A couple of questions. Hey Gary, first of all on the

The rate of revenue that you're projecting for the mirror eye business does that given that that level of volume that you're doing does that become Adjusted EBITDA margin accretive Bottom line results in 2023 or does it flatline it or is it lower than then?

what you're looking at. Yeah, I would say with a ramp up in that program that percentage wise is so substantial year over year, you will see a creative, a creative EBITDA performance from that level of growth. And we expect that level of growth to continue, obviously, as we are increasing the forecast to take rates on the second European launch, substantially almost double.

and obviously have a relatively lower take rate on the first North American program currently forecasted that we rightfully saw or optimistic around given what we're seeing in other OEM products or our first OEM program and the MIRI Retrofit Momentum in North America. So...

It will have an accretive impact this year and I expect that that will continue and accelerate because of the substantial growth opportunity and not only this program but this platform, this vision safety platform going forward.

Okay. And I want to get back to some of those new endeavors with Miri in a second. But what I want to call the director attention to is the sales guidance for this year. And I guess the prior question was the, you know, what is your confidence level in that sales guidance?

So if I look at you're looking at a 10 million lift from IHS production forecast, which that could very much move around, that's just based on what production could be.

But the 108 to 138 of specific growth and price recoveries, how much of that is actually in the books and how much of that has to come from maybe increased better than increased production rates, better than increased price recovery.

of guidance and then as the year goes by, things are less than what we initially expected. Yeah, appreciate the question, Gary. So I would say a couple of things. One, the so-and-re-specific drivers there do not require some incremental market performance versus what production levels are showing or us.

or any sort of price outperformance. It's what we expect from a price perspective and what the market is suggesting for a production perspective. Those things are much more related to content that is specific to us on those vehicles. So for example, our digital driver information systems are annualizing at very high rates as the new model trucks ramp up.

That provides a significant annualized tailwind versus last year. You know, we talked about mirror-right. So, so, so, so, get your comment on predictability. It obviously relies on production volumes, but it is specifically driven year over year by something that is specific to us, not just peanut buttered to production volumes.

Similarly, on the MIRI programs, we talked about all of the incremental revenue there. Certain by a new program. It's certain by the annualization of higher take rates for a full year, on full year production volume for our existing program. And the expectation that we will continue the momentum we're seeing in the retrofit market. So of those things, the retrofit market obviously has more variability.

but is also a relatively smaller portion of that overall revenue pie. So if you think about the relative rank of volatility, that's how I would think there for Miri. And then similarly, we're launching a new connectivity product with Smart2. We're seeing the ramp up of some of those recently launched connectivity programs. And we're seeing continued expansion on the actuation side. We talked a little bit about some of the platforms that were on.

For example, with ParkbyWire, right, in those electrified vehicle platforms. For example, the Machee, we talked about that historically, being one of our largest content vehicles, that platform for Ford is performing tremendously. So it's storage-specific growth gear around four-capsible OEM content that's growing.

some variability from the aftermarket, although less so than the OEM side, and being on the right platforms with the right customers to facilitate that growth versus the underlying weighted average end market.

it although less so than the OEM side and being on the right platforms with the right customers to facilitate that growth versus the underlying weighted average end market.

So I want to get back to the mirror eye slide. It's slide seven for.

on my presentation. So this partnership with Grody Industries, industry to introduce the first wide rear view trailer camera. I mean, that strikes me as interesting and possibly a big breakthrough for this product overall because there's got to be more trailers out in the market.

First off, we do think this is a major breakthrough and a real opportunity for us to expand the MIRI platform. And there are just a very, very large number of trailers out there in the market. Right now, best estimation for trailers existing in the US is 6 million. And also, we should look at the yearly production in just the US.

For new trailers, it's about 300,000 years.

So this is a very substantive market. And you think about the technology and what it can bring here with looking directly behind the trailer, looking inside the trailer. There's a lot of things that the driver could benefit from seeing relative to risk mitigation, relative to product he's carrying, but also relative to...

safety. So, you know, this is a major step forward and, you know, the technology itself, there is so much innovation in this. I mean, oftentimes people say, well, you're just adding a camera back there. But think about what we're talking here. You know, adding several cameras without the need to add any additional wiring to the trailer.

The innovation really is around how we've encoded the signal of the camera to be pushed through the power lines and the existing wiring harness in the trailer up to a connector that's exactly the same as the connector today to drive the signal into the cab itself.

It's an extreme innovation. We were at the TMC exhibition in Orlando Florida this week, and we saw extreme.

interest by tracking companies and trailer companies relative to this technology. So we are very optimistic about the expansion of MIRAI based on this new addition to the family. Gary, I would ask you that. When you think about the speed of implementation there, because it uses existing technology that's already on the tractor or the trailer.

There's a benefit of speed of implementation. But also, this is more broadly carried. This is a testament to the significant investment we have made over the last several years in this platform. You're seeing things start to pay off, not only in the OEM programs and the retrofit along with the, you know, aligned with the mirror-eye product.

but this vision and safety commercial vehicle platform in total. So developing these capabilities in their technologies and applying them in the right way as we work with the fleet to better understand value proposition and where these things are applied most beneficially to the fleet, to our ultimate end customer is driving the adoption and development of these advanced technologies that we agree with you. We think our change in the industry. So as I look at this, I mean you can actually port the technology.

and the actual product itself. I don't know how much you have to reconfigure it to be on a trailer versus a truck. But in terms of actually having this product out in the market, how long would you anticipate that event to occur from now? I don't know.

Okay, so I think you're asking Gary, one would be anticipate the introduction of such a technology into the market. Yeah, so I think in volume you start to see it next year, early part of next year. As I said, as we were speaking, there's some opportunity perhaps for some trial fleets for something of that nature.

Yes, we get to the tail end of this year, but you know, pure commercial sales in the next year. That's most likely. Okay. So really this partnership with Grody industry is kind of more or less like a

I mean, a grody is what? Is that a trailer company or is that what is that? There are harness, I don't want to misrepresent them, but they're essentially a harness and lighting company. So they don't really produce the trailers. They provide the electric structure in the trailer.

Okay, okay, thank you very much. Thank you Gary, appreciate it. Thank you.

Again, to ask a question, please press the 1-1 on your phone and wait for your name to be announced, stand by as a Compile of the Q&A roster.

I'm seeing no further questions in the queue. I would now like to turn the conference back to Jim Dizzleman for closing remarks.

Well, thank you everyone for joining us for the call. I know your time is very important and we truly appreciate your willingness to engage you today.

We couldn't be more excited, I think as you can tell, about our industry changing product platforms and the growth it brings to our company.

Our focus is now on rigorous and disciplined execution, which will bring the performance we outlined today. So thanks again everyone.

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.

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You.

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My.

Good day and thank you for standing by. Welcome to the Stone Ridge Fourth Quarter 2022 conference call. At this time, all participants are in the listen only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that this call is being recorded, and I would not like to hand the conference over to our speaker today, Kelly Harvey, Director of Investor Relations.

Please go ahead. Good morning, everyone. And thank you for joining us to discuss our fourth quarter and full year 2022 results. The release and accompanying presentation was filed with the SEC yesterday evening and it's posted to our website at stomerish.com and the investor section under webcast and presentation.

Joining me on today's call are Jim Zizlman, our President and Chief Executive Officer, and Matt Boravats, our Chief Financial Officer. Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning their 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 tank case, which will be filed today with the Securities and Exchange Commission under the heading forward looking statement. The Securities and Exchange Commission will be filed today with the Securities and Exchange Commission under the heading forward looking

During today's call, we will also be referring to certain non- GAAP financial measures. Please do the appendix for a reconciliation of these non- GAAP financial measures to the most directly comparable GAAP measures .

After Jim and Matt have finished the formal remarks, we will open up the call to question. Turning to page three, I would like to introduce Jim Zizlman, who was recently appointed as President and Chief Executive Officer of Stoneridge, and was also appointed to the Stoneridge Board of Directors, Effective January 30th. After a year of consulting with the company.

Jim joined Stone Ridge almost three years ago as president of the control devices division and has played an integral role in developing and executing on the strategic priorities, product development, and technical vision for both control devices and Stone Ridge more broadly. Jim brings a welcome knowledge and experience and we are fortunate to have a proven business leader and experienced executive.

of the company. I focused on aligning the segment with industry mega trends while sustaining strong margins during challenging macroeconomic conditions by placing a key focus on rigor and discipline across all elements of the business. I look forward to working closely mostly with our board, our senior leadership team.

and our dedicated global teams as we continue to execute on a strong long-term strategy focused on sustainable, profitable growth. Turning to page 4. With my transition to CBL, Roger Kitsed was appointed as president of the control devices business. Roger was most recently the vice president of sales and product line management for control devices. During his three-year tenure, he demonstrated the leadership and strategic thinking.

continued innovation strategy within the segment.

strategy within the segment. Turning to page 5.

In the fourth quarter, we continue to see sequential revenue improvement with 5.2% growth compared to the third quarter and EBITDA margin expansion of 100 basis points, excluding an adjustment related to a prior quarter correction.

This 10 cent correction was driven by the FX impact on not operating gain recorded in the second quarter related to a derivative security and not material to our operations or baseline operating performance.

Matt will provide further detail later in the call. Excluding this correction, adjusted earnings per share was 11 cents, which was an 8 cents increase over the prior quarter.

Overall, 2022 sales increased by 12 percent relative to 2021, while EBIT increased by over 25 percent. We expect this trend to continue as we are guiding midpoint revenue growth of approximately 16 percent in 2023 with EBIT growth of over 75 percent and even a margin expansion of approximately 210 basis points based on our midpoint guidance.

Most importantly, we continue to focus on the product platforms that will drive future growth. Our first OEM MIRI program launched over a year ago in Europe and has significantly outperformed original expectations with a take rate of approximately 40 percent going into 2023. Our next MIRI program launches in North America in the second quarter of this year with a customer expected take rate of approximately 10 percent. This morning I am pleased to announce that our second European OEM partner has increased their forecast to take rate.

from 25% originally to approximately 45% based on expected market demand. This program is expected to launch in 2024. Similarly, we continue to expand our retrofit applications and develop technologies in adjacent markets that will continue to drive our future growth. Earlier this week, we announced a partnership with KLLM Transport Services and Frozen Food Express, detailing their intentions will equip approximately 1,000 new and existing vehicles with Mirrorize this year. Similarly, we announced a partnership with Grody Industries.

to introduce the industry's first wired rear view trailer camera. I will discuss these applications and provide more detail on our progress with the nearby platform later in the call. As a result of continued success in our core products, this morning we are updating our long-term financial targets to include strong backlog growth. Our expectations of significant top-line health performance relative to our end markets and substantial market expansion through our five-year plan. Our five-year awarded business backlog grew by 6% in 2022 to $3.6 billion supporting a five-year compound annual growth rate of more than 7.5%. Resulting an attributed revenue of $1.3 to $1.5 billion and targeted even a margin of 11.5 to 13.5% by 20.27. Page 6 summarizes our T financial metrics by quarter for 2022 and compared to both the four-year 2021 and our

2023 and EBITDA margin expansion, despite sustained elevated material costs and rapidly increasing labor costs. We continue to negotiate with our customers to offset incremental material costs with price adjustments and other supply chain improvement strategies.

Similarly, we remain focused on operating cost control, to leverage our existing cost structure, and expand operating margins as revenue continues to grow. And that will provide additional detail on our 23 guidance also later in the call.

Turning to page 7, we have made a significant investment to the Mirri platform over the last several years as it is a key element to our long range plan. We are seeing the benefits of these investments as Mirri drove approximately $34 million in sales in 2022 and is expected to approximately double the $60 million in sales in 2023. Market demand continues to be strong for the first OEM Mirri program. We are expecting a year over year revenue growth of this program.

That said, our guidance reflects customer-forecasted take rates resulting in approximately $6 million sales related to the North American program this year, again, at a take rate of approximately 10%. Looking forward, we continue to build momentum around our future program launches, as our customer for the next OEM program is launching in Europe in 2024 has updated their take rate assumptions.

As mentioned, we announced a partnership with KLLM Transport Services and Frozen Food Express, detailing their intention to equip approximately 1,000 vehicles with Nearline this year.

Together, those fleets represent approximately 3,500 vehicles on the road. Their decision to equip Mirrora on new and existing trucks is a demonstration of the tremendous value proposition that Mirrora brings to the market. Based on this announcement, as well as the continued expansion of existing trials with our largest current fleet partners, we are expecting significant growth in the retrofit market in 2023.

Similarly, the man continues to be strong for the system on bus applications. We are expecting continued growth in this market in 2023 as well. Overall we are expecting retrofit and bus-related mirror-eye revenue to grow from approximately $9 million in 2022 to over $20 million this year. In addition to our current markets and applications, I want to talk further on our partnership with Grody Industries to introduce our vision systems to commercial vehicle trailer applications as we introduce not only the very first wired rear-view camera in the industry, but also the ability to add additional cameras throughout and within the trailer.

This application utilizes industry standard trailer to tracker connection technology, which maximizes the speed of implementation. In addition, the innovation brought forward by Stone Ridge, the added trailer cameras, including the rear view camera, will be fully functional utilizing only the existing wiring in the trailer. While this product is still early in the commercialization strategy, we are seeing a very significant interest from fleets and expect that this product will continue to expand our MIRRI platform and provide incremental opportunities going forward. We have not currently included any benefits from this product in our 2023 guidance.

Although commercialization of this product may be possible this year. Our investment in mirror-i-platform is paying off with substantial year-over-year growth, improved future ticket expectations, and continued momentum across our end-markets and applications. We will continue to invest in the technologies and adjacent product opportunities to optimize our position in this market and drive technology innovation, improve safety, and driver retention for our customers. Turning to page 8. Our long-term strategy focused on transforming our portfolio to align with industry mega trends continues to drive strong long-term growth prospects. Our five-year backlog at the end of 2022, due by 6% versus the prior year. Mirror-i-contributed to growth in our backlog as OEM takeaways continue to trend up.

significant positive impact on our backlog.

Finally, control devices contributed to our backlog with program expansions for our part by wire actuation programs and continued growth in our electrification focus center applications. While 100% of our electronic portfolio is currently dry trained agnostic, the continued progression and control devices will drive our target to at least 90%.

of total product portfolio being gripe-prank agnostic by 2027. We have been successful in aligning our portfolio with industry mega trends, and that strategy is paying off as our backlog continues to grow year over year as we expand existing programs, leverage the Near-Right platform, and win new business. Turning to page 9. We are updating our long-term revenue and ebit of targets aligned with our updated five-year backlog in current market conditions.

Our long-term strategy has resulted in a growth profile that is expected to outperform the market by two to three times over the next five years and positions us for consistent strong growth, resulting in substantial EBITDA margin expansion. From a midpoint of $975 million expected in 2023, we are anticipating another several years of strong growth, resulting in a long-term revenue target of 1.3 to 1.5 billion dollars by 2027.

Based on our 2027 revenue target, we are targeting an EBITDA margin between 11.5 and 13.5%. This EBITDA margin expansion will be driven by our expectation of continued contribution margin of 25 to 30%. A favorable mix, primarily aligned with growth in our aftermarket products and continued leverage on our existing fixed cost structure. Over the last four years, I helped craft the overall strategy of the company and provided over-arching support to each segment. Now, at the CDO, I will focus on executing on that long-term strategy to drive sustainable performance and achieve our long-term targets. Turning to slide 10, we remain focused on certain key priorities as a company and more specifically within the each segment to achieve our goals within this year and going forward.

As we look forward to this year, we have a lot to be excited about. Over arcingly, we are focused on flawless execution of our major program launches, continuous improvement in our manufacturing facilities and prudent cost control. In Gold devices, we will continue to focus on growing our core product portfolio aligned with powertrain electrification. We will continue to invest in our actuation business as we anticipate greater opportunities as powertrains become increasingly electrified. During driven by the expected growth in our actuation business and the rotation of our temperature sensing applications, we expect that control devices will continue to deliver a strong margin profile on long-term growth that will outpace our underlying end markets. In electronics, our focus remains on executing on program launches, particularly our near-eye programs and our smart-to-tackered program launches this year. With the significant investment we have already made in near-eye, we will continue to expand our vision and safety platform.

We are focused on driving advanced development through a refined and more cost-effective global engineering structure, along with both expand margins and continue the pace of development that has fueled our backlog and forward growth profile. Finally, Stone Ridge Brazil will focus on continuing to grow our OEM capabilities in region to better support our global customers. This will drive steady future growth and provide a platform to continue to rotate our local portfolio to more closely align with our global business. Similarly, we will continue to leverage the talent and capabilities of our growing engineering team in Brazil to better support our global initiatives and more cost-efficiently support our current programs and drive future growth. Each of our segments plays a critical role in helping us achieve our goals. I am committed to continuing to execute on the long-term plan Stone Ridge has in place as well as driving our company wide priorities to achieve our goals.

With the right focus, we will execute at a high level resulting in strong margin expansion on growth that will continue to help pace our underlying end markets. Frank, Paisalette, and Summary, we remain focused on implementing our long-term strategy to drive sustainable, profitable growth and shareholder value creation. And with that, I will turn it over to Matt to discuss our financial results and guidance for more detail. Thanks Jim. Turning to slide 13, sales in the fourth quarter were approximately $225.2 million, an increase of 5.2% relative to the third quarter. Operating income was $6 million or 2.7% of adjusted sales.

More specifically, control devices sales were approximately $86 million, which were the decrease of approximately 3.9% compared to the third quarter, resulting in operating income of $5.5 million or 6.4% of sales. Electronics adjusted sales of $134.8 million increased by 15% compared to the third quarter, resulting in operating income of $4.9 million or 3.7% of sales. Stonerage Brazil's sales of $13.1 million decreased 5.5% compared to the third quarter, resulting in operating income of $800,000 or 6.4% of sales. This morning, we are establishing guidance for our 2023 financial performance. We are guiding 2023 revenue to a midpoint of $975 million, implying an increase of approximately 16%.

versus our 2022 revenue, which is more than 13 times our underlying weighted average end market growth. Despite continued pressure on gross margin, we are expecting to leverage our existing cost structure to drive overall margin expansion on substantial growth. We are guiding adjusted gross margin to a midpoint of 20.9% of just operating income to a midpoint of 1.9% and adjusted EBITDA to a midpoint of 54.6 million dollars for 5.6% of sales. Our midpoint guidance implies EBITDA margin expansion of 210 basis points and almost 29 million dollars relative to 2022. As a result, we are guiding to a midpoint of break even adjusted earnings per share for 2023.

I will provide additional color on the drivers with expected sales and adjusted earnings per share performance later in the call. Turning to page 14, before we discuss the factors impacting operating performance in the quarter, I'd like to provide some detail on a prior quarter correction, the impact of the fourth quarter. In the second quarter of 2022, the company unwound two net-invested hedges driven by favorable FX movements and recognize the net gain of approximately $3.7 million of other non-operating income or adjusted earnings per share of 10 cents. In the fourth quarter, the company determined we had incorrectly recognized the net gain in the income statement and reclassified the gain to other comprehensive income, resulting in reduced earnings of $3.7 million or 10 cents in the fourth quarter.

On our third quarter earnings call, we guided our fourth quarter EPS to a midpoint of 24 cents with an expected revenue midpoint of $239 million. Reduced production volumes from customers, material constraints, and our inability to reduce our short-term backlog as quickly as previously expected resulted in a seven-cent headwind relative to our previously provided guidance. This was primarily due to lower customer production in our North American passenger car and market, COVID-related shut down in China impacting customer demand, and material constraints impacting production for our off-highway products. These factors drove revenue under performance of approximately $14 million versus our prior expectation.

That said, commercial vehicle demand has remained strong with sales volumes outperforming prior expectations. During the fourth quarter, we absorbed higher material, labor, and other manufacturing costs versus previous expectations. Incremental manufacturing costs were primarily driven by unexpected premium freight costs, manufacturing and efficiencies, and incremental labor costs. That said, we partially offset these incremental costs through a reduced offering expenses, including the reduction of our annual incentive compensation program. Although fourth quarter performance was lower than previous expectations, we have the ability to retime a portion of that performance through the reduction of a strong backlog in early 2023 and continued cost recovery actions. We will continue to focus on improved manufacturing performance to drive margin expansion. Page 17 summarizes our key financial metrics specific to control devices.

Control devices, fourth quarter sales declined by $3.5 million versus the third quarter due to reduced customer production volumes in North America and China, partially offset by incremental revenue from the ramp-up in production of actuation programs and incremental price. Fourth quarter operating income declined by 200 basis points compared to the third quarter of 2022, primarily due to higher material costs as a result of unfavorable sales mix during the quarter. Full year sales of $345.3 million were approximately in line with 2021. Full year operating income of $23.5 million or 6.9% of sales was also in line with the prior year.

excluding the rest of the products. As discussed on previous calls, we continued to transform our product portfolio to align with future growth opportunities. We expect continued revenue growth in 2023 for our control devices as North American passenger car production continues to recover. Our actuation programs on several electrified vehicle platforms are continuing to seek demand that outpaces the underlying market resulting in planned production expansions that will drive above market top-line growth in 2023. In 2023, we expect control devices sales and operating margin to improve relative to last year as we take advantage of incremental revenue and focus on continued supply chain improvements. Page 16 summarizes our key financial metrics specific to electronics. Electronics' fourth quarter sales increased by $17.5 million or 15% compared to the third quarter.

Full-year sales were $475.4 million, which were an increase of approximately 24% compared to the prior year. Primarily driven by the continued ramp-up of several key program launches, including the first MirRi program and the ramp-up of large programs related to our digital driver information systems. Fourth-quarter performance would have been even stronger, but material limitations contributed to reduced sales and are off-highway vision and safety products. We are expecting these material issues to subside as we move through the first quarter of 2023 and expect to be able to make up some portion of the loss production early this year. We expect continuous strong sales in 2023 due to the continued ramp-up of these programs and the launch of our second MirRi program at the beginning of the second quarter in North America. Fourth-quarter adjusted operating income declined by 90 basis points due to the continued impact of elevated material labor costs, partially offset by fixed cost leverage from higher sales. Operating margins improved in the second half of 2022 due to successful negotiations with customers to recover incremental costs, due price recovery and other supply chain actions. Full-year adjusted out to $30 basis points versus 2021 largely due to strong contribution margin from substantial incremental revenue.

Looking forward, we will continue to focus on flawless execution of new program launches and ramp-ups. Although we expect margins to continue to be challenging the first half of the year, we plan to recover a significant portion of these incremental costs through supply chain improvements and customer price recovery actions. As a result, we expect continued margin expansion in 2023. 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, a focus on an efficient long-term cost structure, and continued expansion of our opportunities related to the Muirai platform. Page 17 summarizes our key financial metrics specific to Silveridge Brazil. Stoneidge Brazil's four-year sales total approximately $52.3 million, a decrease of $4.5 million or 5.5% relative to the prior year, primarily due to lower sales volume. Partially offset by the favorable impact of foreign currency. Full-year adjusted operating income increased by approximately 50 basis points relative to the prior year.

primarily driven by lower SG&A spend resulting in an adjusted operating margin of 5.1%. We are excited to announce a new business award for infotainment systems to one of the market meters of OEM commercial vehicles in Brazil. This award is expected to launch in 2024 with a peak annual revenue of approximately $4 million, which represents approximately 7.6% of total 2022 sales for the segment. This is not only financially significant for the segment, but it furthers our expansion of local OEM programs to better support our global customers. We are successfully shifting our portfolio in Brazil to more closely aligned with our global growth initiatives. Despite continued macroeconomic challenges in Brazil, we expect revenue and operating margins to remain stable in 2023.

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 18, fourth quarter net debt was $114.5 million, a decrease of approximately $22 million from the third quarter, driven primarily by strong cash performance at the end of the year. At the beginning of 2023, we anticipated the continued material cost and production headwinds forecasted for the first half of the year, would result in a relatively lower EBITDA and work with our bank group to amend our existing credit facility.

The amendment modified the first quarter of the year to include a 4.75 times leverage ratio and second quarter of 2023 to include a 4.25 times leverage ratio with an interest coverage ratio of three times in both quarters. The amendment returns to a three and a half times leverage ratio and interest coverage ratio going forward. We are confident the company has ample liquidity and flexibility to operate in the current macroeconomic conditions. As we move into 2023, we remain focused on efficient cash management to help return our leverage ratios to more normalized rates as we continue to improve financial performance and expand our earnings with substantial growth. We expect our net debt to ebit our ratio to return to a more normalized level by the end of the year. We are targeting a leverage ratio under two and a half times. 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 19, we expect strong growth in 2023, driving midpoint revenue guidance to $975 million or 16% year-over-year growth. Based on current IHS forecasts, we are expecting market production to drive approximately 10 million dollars of growth or 1.2% in our weighted average end market year-over-year. Given by our specific growth opportunities, we are expecting to outperform our underlying weighted average end markets by approximately 13 times in 2023. We continue to significantly outpace our underlying end markets, creating a run-wave for sustainable long-term growth. In the first quarter of the year, we are still seeing the residual impacts of reduced demand in China, driven by the ramp-up in COVID-19 at the end of 2022.

Similarly, material availability challenges in our off-highway products led to substantially reduced sales in January relative to our normalized run rate. As such, what we expect to recover a portion of these reductions in the quarter and more in the second quarter, we are expecting quarterly revenue to be approximately flat to the fourth quarter of 2022 in the first quarter of 2023. Looking beyond the first quarter, we are expecting approximately 5 to 10 percent growth from the first to second quarter, as material availability improves, our first OEM program, our first OEM MIRI program launches in North America, and our newly installed S&T line in Europe drives short-term backlog reduction. This will imply revenue of $225 million in the first quarter and $235 to $245 million in the second quarter. Page 20 summarizes our expectations for full-year adjusted earnings per share in 2023 relative to 2022. We are expecting contribution margins aligned with our historical averages of 25 to 30 percent on roughly $117 million of non-priced revenue growth in 2023, resulting in 87 cents of incremental EPS this year.

As supply chain volatility uses and the production environment normalizes, we expect to continue to drive improved performance in our manufacturing facilities. We expect operational improvement through reduced overtime due to stability in production schedules, continuous improvement activities, and leverage on fixed costs. Partially offsetting the incremental EPS for in by strong volumes and continued manufacturing and operating improvement is a significant burden related to incremental labor costs from 2022 to 2023. Inflationary pressure has driven annual labor increases above our historical average. Similarly, we expect a normalization of our annual incentive cost programs back to targeted levels in 2023 after they were reduced in 2022. As a result, we are forecasting a 42-cent headwind relative to 2022 related to labor costs.

We do not expect the same relative level of annual incremental costs going forward as inflation subsides and our top line growth outpaces structural cost growth to drive fixed cost leverage. Finally, we are expecting incremental interest expense in 2023, as rising interest rates continue to impact the interest rate on our credit facility and an increased average annual debt balance relative to last year. We expect incremental interest of approximately $5.5 million relative to 2022 or approximately 15 cents. As I discussed previously, we remain committed to reducing our debt balance to reduce our interest burden and drive expanded earnings.

As a result, we are expecting approximately break even a just EPS in 2023. Despite a challenging macroeconomic backdrop, we continue to drive significantly above market growth, margin expansion, and substantial earnings growth year over year. Finally, similar to our expectations of revenue growth over the course of the year, we expect that adjusted EPS will follow a similar cadence. The challenges we faced in December related to production volumes, particularly in our highly-business in China persisted through January . We have seen significant production ramp up in February , and are forecasting even better sales in March, which should drive an improved sales trajectory into the second quarter. A slow start to production, incremental annual labor cost, and material cost that remain elevated will result in depressed margins for the first quarter. That said, we continue to negotiate appropriate price increases with our customers to offset these costs. However, we expect the impact of price recoveries to lag using incremental costs. We expect that this will result in a below-break even operating margin for the first quarter, an EPS of approximately negative 30 cents. This assumes that as we continue negotiations with customers regarding price increases, we will recognize only a minimal impact of incremental prices in the first quarter.

with the expectation that we will recognize retroactive price increases as these negotiations are completed. We expect that production normalization and growth, along with negotiated retroactive price increases, will drive above-break even operating performance in the second quarter with the PPS of approximately negative 10 cents. We are expecting to exit the second quarter with gross operating and EBITDA margins that exceed our annual guidance as revenue continues to ramp up over the second half of the year. Additionally, as it's typical with new program launches, we expect margins to improve as our recently launched and to be launched programs continue to mature this year and going forward. This should result in much stronger step-and-half earnings performance and a trajectory on both the top and bottom line that will drive continued earning expansion in 2024. We are focused on driving earnings growth in 2023 through efficient manufacturing processes, aggressive but appropriate price negotiations, and independent management of our fixed cost structure.

Moving to 521, we expect significant revenue growth, EBITDA margin expansion, and adjusted EPS growth in 2023, as we continue to focus on opportunities to recover and improve gross margin, execute on a cost structure aligned with current market conditions, and flex our variable cost structure efficiently should macroeconomic conditions change. Long-term, Stone Range remains well positioned to significantly outpace our underlying markets due to the strength of our awarded business backlog and our product portfolio aligned with industry Megatrends. Our contributions on incremental revenue, our ability to leverage our existing fixed cost structure, and our continued focus on material cost improvement, price, and supply chain strategy provide a strong foundation for the long-term targets of $1.3 to $1.5 billion of revenue, and an 11.5 to 13.5% EBITDA margin by 2027. The goal is driving shareholder value at the forefront of all of Stone Range's strategic initiatives. With that, I will look up the call questions. Thank you.

As a reminder, to ask the question, please press star 11 on your phone and wait for your name to be announced. If you draw your question, please press star 11 again. One moment please, as we compile the Q&A roster. Our first question will come from Justin Long of Stevens. Your line is open. Thanks and good morning. Hey Justin. Hey, so I just wanted to take a step back. The company's results have obviously been pretty volatile recently. While revenue performance seems to be a bright spot as you outperformed the market, there's been a struggle taking this to the bottom line. Jim, as you step into the CEO role, what are the steps you plan to take to number one improve the predictability? The ability of earnings and number two improve the profitability of this company. Thanks Justin for the question. I think the steps I'm taking actually will address both of those concerns.

And where I'm focused, more so going forward, is on execution. Driving a rigor and discipline in the company across all elements of the business, making sure that we have a program management focus. By doing so, we will seriously minimize the potential for any surprises that has historically had the opportunity to creep in to our numbers. I think by holding us accountable to these elevated elements in rigor and discipline across all elements of the business, I think that we will more successfully drive excellence in execution and again drive out issues that have historically crept in. Okay. And I guess secondly, when I look at the data, I think that we will be able to see what we can do. In 2023 guidance, here, implied contribution margins are in the high teens just using the midpoint of the outlook. I know you called out the wage inflation and incentive comp, but I feel like those are headwinds that you know you...

probably saw coming on the horizon for a while. So I guess my question is why not get more aggressive with price and it sounds like you are pushing price but you know is there more of an opportunity just in response to the higher supply chain costs and the higher labor costs that you're seeing in addition to the fact that the company's margin profile is below target. Yeah, Justin, thanks for the question. The the the the Evertot contribution margins next year are definitely influenced by a significant increase burden on inflationary labor costs. So while we could see some of that coming, it is substantially greater than what we've experienced in prior years across the business. Now that said, like you suggested, as those conditions change, like I said in the prepared remarks, we are taking aggressive but appropriate actions with our customers and even beyond that with our supply chain, with our with engineering design of existing products to make sure that we are recovering those costs, but also maximizing our opportunity to improve margin as we go forward. Like we said, we've said previously, you know, we we have expected incremental costs. We do expect that our recovery will lag those costs. But as you saw last year, we were extremely successful and often setting those costs.

through the playbook that we ran with customers, supply chain, and product engineering. So there's certainly that opportunity to continue to be aggressive and we are in all of those cases that we expect will drive a run rate for the second half of the year that is significantly improved to the first, similar to what we saw last year, and provides a really good trajectory of re-heading the continued growth beyond next year. Okay, and as I think about what you said about the first half versus the second half, so from an EPS perspective, first half guidance is negative 40 cents, which implies, you know, second half of positive 40 cents to get to the midpoint of the guidance. How much of that improvement first half to second half is just a function of price versus other items? I mean, I know we're going to be able to do that. The implied revenue guidance is a little bit better in the second half, but maybe you could just give us a sense for for your level of visibility, essentially, into the second half.

Yes, well, Justin, it's a great question. We have a lot of visibility on the top line because like we've talked about in the past, a good portion of that is OEM programs that are obviously awarded and have visibility into production volumes. We've obviously seen macroeconomic conditions be volatile over the last 18 months, so I wouldn't say that we have perfect visibility there, but we have good visibility to that top line growth. Including the launch of the North American Near-Eye Program and the Smart 2 program, which are both incremental this year as we go into the second half. So top line, there is still some variability, obviously, in aftermarket or non-OE products, but top line, we've got pretty good visibility to the cadence of our expectations there. That does drive incremental contribution, obviously, in line with those historical averages as we go through the quarters of the year.

because the incremental labor cost will already be considered in the beginning of the year. There is a, we do expect, and there is a assumption of incremental price that obviously impacts, we believe retroactively, once those price negotiations are complete, again, similar to last year, but will impact the second half of the year as well on incremental volume. So it does have a compounding effect as you increase price. Got it, thanks. And I guess last one for me is on the board. There have been some changes recently. You've talked about this refreshment strategy, but can you share what the catalyst was to drive these changes and why this is the right timing in the midst of a CEO transition as well? Yes, so Justin, I'll pick the first start and then maybe Jim can chime in. I don't want to speak for the board. I'm not on the board, but you can see that there's been a progression of board transformation over the last several years. That starts with the appointment of Frank Skolarski, who was audit committee chairman and, and, and has continued now with the announcement of our most recent board member, Carson. So.

I think you've seen the board that has been very clear with their expectation of continued transformation to align expertise with the business and they've delivered on that over the last several years. Jim, I don't know if you'd be on the board if you have any. I think it is a normal natural progression. The board is very cognizant that it's ten years. They're also very cognizant that the skills necessary in a business that is changing dramatically. We're going from a automotive parts company to a systems company, more technology focused company and sometimes skills required to ensure that you've got good support of the management team from the directors and the board. Sometimes that needs some refreshment. And the board is very cognizant of that and is willing to allow for those adjustments and solutions to be made. Okay, understood. Thanks for the time.

Thanks, Justin and good talking to you. Can one moment please for our next question. Our next question will come from Gary Pesifino of Barrington Research. Your line is open. Good morning, Matt Jim Kelly. A couple of questions. Hey Gary. First of all, on the rate of revenue that you're projecting for the mirror eye business. Does that given that that level of volume that you're doing? Does that become adjusted EBITDA margin or creative to bottom line results in 2023? Or does it flat line it or is it lower than what you're looking at? Yeah, Gary. I would say with a ramp up in that program that percentage-wise is social substantial year over year, you will see a creative EBITDA performance from that level of growth. And we expect that level of growth to continue obviously as we are.

increasing the forecast and take rates on the second European launch, substantially almost double. And obviously have a relatively lower take rate on the first North American program currently forecasted that we rightfully saw or optimistic around given what we're seeing in other OEM products or other, our first OEM program and the MIRAI Retrofit Momentum in North America. So it will have an accretive impact this year and I expect that that will continue and accelerate because of the substantial growth opportunity and not only this program but this platform, this vision-fafety platform going forward. Okay. I want to get back to some of those new endeavors with MIRAI in a second. But what I want to call the director attention to is the sales guidance for this year. And I guess the prior question was the, you know, what is your confidence level in that sales guidance? So if I look at, you're looking at a 10 million lift from IHS products.

which that could very much move around. That's just based on what production could be. But the 108 to 138 of specific growth and price recoveries. How much of that is actually in the books and how much of that has to come from. Maybe increased better than increased production rates, better than increased price recoveries. I'm just trying to get an idea of the visibility, the confidence you have in these numbers because as the other analysts mentioned, the numbers have been all over the place. It's a situation where you start the year off with a certain cadence of guidance. And then as the year goes by, things are less than what we initially expected. Yeah, I appreciate the question, Gary. So I would say a couple of things. One, the storage. So specific drivers there are not, do not require some incremental market performance versus what production levels are showing or any sort of price outperformance. It's what we expect from a price perspective and what the market is suggesting for a production perspective. Those things are much more related to content that is specific to us.

on those vehicles. So for example, our digital driver information systems are annualizing it very high rate as the new model trucks ramp up. That provides a significant annualized tailwind versus last year. We talked about mirror-ride. So get your comment on predictability. It obviously relies on production volumes, but it is specifically driven year over year by something that is specific to us, not just peanut buttered to production volumes. Similarly, on the mirror-ride programs, we talked about all of the incremental revenue there, driven by a new program. It's driven by the annualization of higher take rates for a full year, on full year production volume for our existing program, and the expectation that we will continue the momentum we're seeing in the retrofit market. So of those things, the retrofit market obviously has more variability, but is also a relatively smaller portion of that overall revenue pie. So if you think about the relative rank of volatility, that's how I would think they're for mirror-ride. And then similarly, we're launching a new connectivity product with Smart 2. We're seeing the ramp up of some of those recently launched connectivity programs. And we're seeing continued expansion on the actuation side. We talked a little bit about some of the platforms that we're on, for example, with ParkbyWire, and those electrified vehicle platforms. For example, the Machee, we talked about that historically, you're being one of our largest content vehicles, that platform for Ford is performing tremendously.

So it's a storage specific growth gear around for CASTible OEM content that's growing some variability from the aftermarket, although less so than the OEM side and being on the right platforms with the right customers to facilitate that growth versus the underlying weighted average end market. Okay, that's that's very helpful. So I want to get back to the mirror eye slide. I've had slide seven for on my presentation. So this partnership with Grody Industries, industry to introduce the first wide rear view trailer camera. I mean, that strikes me as interesting and possibly a big breakthrough for this product overall because there's got to be more trailers out in the market. And there are. You know, the trucks that that drive. Is that a correct assumption?

on my part? Yeah, Gary, that is in fact, everything you said actually is correct and in line with what we're thinking. First off, we do think this is a major breakthrough and a real opportunity for us to expand the MIRI platform. And there are just a very, very large number of trailers out there in the market. Right now, best estimation for trailers existing in the US is 6 million. And also, if you look at the yearly production in just the US for new trailers, it's about 300,000 years. So this is a very substantive market. And you think about the technology and what it can bring here with, you know, looking directly behind the trailer, looking inside the trailer. There's a lot of things that are the driver could benefit from seeing relative to risk mitigation, relative to product he's carrying, but also relative to safety. So this is a major step forward. And the technology itself, there is so much innovation in this. I mean, oftentimes people say, well, you're just adding a camera back there. But think about what we're talking here. You know, adding several cameras without the need to add any of the additional wiring to the trailer.

The innovation really is around how we've encoded the signal of the camera to be pushed through the power lines and the existing wiring harness in the trailer up to a connector that's exactly the same with the connector today to drive the signal into the cab itself. It's an extreme innovation. We were at the TMC exhibition in Orlando Florida this week and we saw extreme interest by trucking companies and trailer companies relative to this technology. So we are very optimistic about the expansion of mirror-eye based on this new addition to the family. Yeah, Gary, I would add to that when you think about the speed of implementation there because it uses existing technology that's already on the tractor or the trailer. There's a benefit of speed of implementation. But also this is more broadly Gary. This is a testament to the significant investment we have made over the last several years in this platform. You're seeing things start to pay off not only in the OEM programs and the retrofit along with the mirror-line with the mirror-eye product but this vision and safety commercial vehicle platform in total.

So developing these capabilities in these technologies and applying them in the right way as we work with the fleet to better understand value proposition and where these things are applied most beneficial to the fleet, to our ultimate end customer is driving the adoption and development of these advanced technologies that we agree with you. We think are changing the industry. So as I look at this, I mean you can actually port the technology and the actual product itself. I don't know how much you have to reconfigure it to be on a trailer versus a truck. But in terms of actually having this product out in the market, how long would you anticipate that event to occur from now? Okay, so I think you're asking Gary when would we anticipate the introduction of such a technology into the market? Yeah, yeah, so I think in volume you start to see it next year, early part of next year. As I said, as we were speaking, there's some opportunity perhaps for some trial fleets or something of that nature as we get to the tail end of this year. But you know, pure commercial sales in the next year. That's most likely. Okay, so really this partnership with Grody industry is kind of more or less like that. Grody is why, is that a trailer company or is that what is that?

Now, there are harness, I don't want to misrepresent them, but they're essentially a harness and lighting company, so they don't really produce the trailers. They provide the electric structure in the trailer. Okay, okay. Thank you very much. Thank you, Gary. Appreciate it. Thank you. Again, to ask a question, please press start 1-1 on your phone and wait for your name to be announced, stand by as a compiled Q&A roster. I'm seeing no further questions in the queue. I would now like to turn the conference back to Jim Dizzleman for closing remarks. Well, thank you everyone for joining us for the call. I know your time is very important. I mean, I really appreciate your willingness to engage us today. We couldn't be more excited, I think as you can tell, about our industry changing product platforms and the growth that brings to our company. Our focus is now on rigorous and disciplined execution, which will bring the performance we outlined today. So thanks again, everyone. This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day. Thank you.