Ladies and gentlemen, thank you for standing by, and welcome to the Stoneridge Fourth Quarter 2020 Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Matt Horvath, Executive Director of Investor Relations and Corporate Strategy. Thank you. Please go ahead.

Great. Thank you, Stacy. Good morning, everyone, and thank you for joining us to discuss our fourth quarter and full-year 2020 results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted on our website at www.stoneridge.com in the Investors section under webcasts and presentations. Joining me on today's call are Jon DeGaynor, our President and Chief Executive Officer and Bob Krakowiak, our Chief Financial Officer. Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties, and actual results may differ materially. Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-K, which has been filed with the Securities and Exchange Commission under the heading forward-looking statements. During today's call, we will also be referring to certain non-GAAP financial measures. Please see the appendix for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. After Jon and Bob have finished their formal remarks, we will then open up the call to questions. I would ask you that you please keep your question to a single follow-up. With that, I will turn the call over to Jon.

Thanks, Matt, and good morning, everyone. I'd like to start by reflecting on the global health crisis we encountered over the last year. We have and will continue to put the health and safety of our employees and their families at the forefront of every decision we make. I recognize that the situation continues to be challenging for many, and I want to thank our employees for their continued dedication to Stoneridge during this period. I'm really proud of our accomplishments this past year and our ability to adapt and respond to this crisis, both from a business perspective, but also as a team and a member of the global business community. Before we discuss our earnings materials, as you may have seen, yesterday we announced that Frank Sklarsky has joined Stoneridge's Board of Directors. Frank's impressive background includes being one of - being CEO of several large multinational companies, including ConAgra, Eastman Kodak, Tyco and most recently, PPG. Frank was also a member of Harman's International Board of Directors. Additionally, Frank has a significant amount of transportation experience as part of Chrysler for over 20 years. I'd like to take a minute to welcome Frank to the Board, and I look forward to working with him as we continue to transform Stoneridge. Let me begin on Page 3. In 2020, we effectively navigated through the challenges brought on by the global pandemic. We adapted our business to current market conditions and managed our cost structure efficiently throughout the year. We focused our efforts on continuous improvement throughout our manufacturing facilities, resulting in strong margin performance as global volumes recovered. Our 2020 adjusted sales of $648 million resulted in an adjusted gross margin of 24.4%, translating to an adjusted operating margin of $2.1 million or 0.3% of sales. Adjusted EPS…

Thank you, John. Turning to Slide 15. Sales in the fourth quarter were approximately $190 million, an increase of 7.9% relative to the third quarter. Adjusted operating income was $7 million or 3.7% of sales. More specifically, Control Devices sales was approximately $100 million, which was a decrease of 0.5% compared to the third quarter, resulting in adjusted operating income of $12.6 million or 12.6% of sales. Electronics sales of $84 million increased by 19.5% compared to the third quarter, resulting in adjusted operating income of $4.3 million or 5.2% of sales. Stoneridge Brazil sales of $13.3 million, an increase of 3.4% compared to the third quarter, resulted in adjusted operating income of $100,000 or 1.1% of sales. This morning, we are providing guidance for our 2021 financial performance. First, it is important to note that our 2021 guidance includes our current expectations of the potential impact of the global supply chain disruptions that John discussed earlier. I would also note that this is an evolving situation, and our guidance is based on current market conditions and expectations. We are guiding 2021 revenue to a midpoint of $780 million, implying an increase of approximately $132 million or 20% versus our 2020 revenue, including the discontinued soot sensor product lines. Our guidance assumes that the soot sensor product line will contribute approximately $13 million in revenue in 2021 and a few pennies of adjusted EPS. As discussed previously, we expect continued gross margin improvement in 2021 through a continued focus on material cost reductions and operational improvements, partially offset by the impact of continued supply chain disruptions. In addition, we are expecting operating margin to increase compared to 2020 due to fixed cost leverage on incremental revenue, partially offset by incremental investments in engineering resources and the normalization of certain costs,…

[Operator Instructions] Our first question comes from Scott Stember from CL King.

Good morning guys and thank you for taking my questions.

Good morning Scott.

Given the commentary about I guess sales in the quarter, I guess effectively breakeven results in the first quarter, can you maybe dig into that a little bit deeper? It seems like the supply chain is going to have obviously a meaningful impact. Can you maybe just give us a little bit more color on that, talk about incrementals and things like that?

Sure. I'd be happy to, Scott. Thank you so much for the question. So it's really being driven by - we talked about that we're expecting about $2.5 million of incremental costs right now based upon the current IHS and LMC forecasts and the forecasted disruptions. A good portion of that, about two-third of that is going to be - our view on that is that we'll incur about two-third of that in the first quarter. And then in addition to that, we're seeing - we are seeing some pressure on revenue relative to the fourth quarter. And I talked about in my comments that we see sales of about $180 million for the quarter right now based upon our current outlook. So if you look at our contribution margins on that decremental revenue, plus the incremental - plus the incremental supply chain costs and some of the currency headwinds that we're seeing, that's basically how you get to - that's how you walk your way to the breakeven for Q1.

Okay. Got it. And with regards to MirrorEye, it seems like a lot of good support on the ground level here. But can you just maybe frame out, within your guidance for this year, what kind of run rate we should be looking for in contribution by the end of the year? And maybe within your 2025 guidance, just maybe that $1.1 billion, rough number what that includes?

Yes, Scott, thanks for your question. So as we said, our OEM programs launch later this year. So in our 2021 guidance, our OEM revenue expectation is actually quite low, around $5 million, and our retrofit revenue is somewhere between $5 million and $10 million. So when we talk about the additional penetration and additional fleets deepening and expanding their take rates, we expect that to be - to continue to hear more of that over the year. But our guidance in 2021 has a very limited OEM level for MirrorEye.

And Scott, that's primarily due to the timing of the launch. Obviously, it's late in the year.

Okay. And just last question and I'll jump back in the queue, about the footprint going to lower cost areas. I know you guys have been working on that, but it seems as if it's - that those efforts are accelerating. Are we talking building facilities in other places? Are we talking outsourcing a little bit more? Just can you break that out for us a little bit?

Yes, Scott, we're talking about partnering rather than adding bricks and mortar. You are correct that it is accelerating. It's part of when we talk about continuing to invest in advanced technology and continuing to invest in our team. We made a significant number of organizational changes within 2020 that allowed us to, really positioned us to accelerate this transformation. And the actions are not only accelerating, but they're ongoing and they're happening right now in 2021.

[Operator Instructions] Your next question comes from Justin Long.

I wanted to start with a question on D&D. This year there is going to be a pretty significant kind of pickup in spending there. It seems fairly unique. You gave the guidance beyond 2021 that D&D would grow less than 5%, and revenue is going to be growing at 10% plus, so some nice leverage there. Can you just talk a little bit more about why there is such a significant step-up in D&D this year? And what gives you confidence in D&D growing at a rate that's less than 5% beyond 2021?

So Justin, thanks for the question. There's a series of aspects to it. The first one is the magnitude of the number of launches that we're working on both in the Control Devices and on the Electronics side of the business, which means you have to have those resources, and there's a peak load of resources that are managed there. The second is, as we look at transitioning our capabilities, there is an overlap in capabilities. You can't make step function changes in the organization. So there's a period of overlap where, as we're changing our footprint mix, there's an overlap in the engineering cost structure. And the third piece is the importance of speed and continue to make our investments in what's next and how do we expand the MirrorEye platform. As an example, our connectivity platform and other of these advanced platforms, we see right now is the time to make those investments to continue to move forward and take advantage of the position that we have in the marketplace. So we've worked as an organization to be as optimal as possible, but we believe this is the prudent spend of capital or prudent spend of resources in this year.

Okay. That's helpful perspective. And then I wanted to follow-up with a couple of quick questions on the longer-term guidance. So you gave the 2023 revenue guide. Is it fair to say that the market outgrowth between now and then is already secured in the backlog? Just curious if you could comment on the level of visibility you have?

Yes. Justin, hi, it's Bob. I'm happy to comment on that. As you're aware, Justin, we generally win programs 2 to 3 years in advance of production. So when you look at that revenue number, I think it's really important to talk about the way that we do it. We basically take the IHS and the LMC projections. So they are third-party projections, they're not internal projections for Stoneridge. And we take it - and we get that information by platform by region and we build it up at a very granular level. So that number that we have, that midterm guidance number that we talked about today, it is - the vast majority of that, 80% of our backlog - I mean, 80% of our total revenue is OEM based, and that backlog is all booked business. So we're more conservative than a lot of other companies when we talk about our backlog because we only talk about booked business in our backlog. A number of our competitors and a number of people in the industry, if they have over 80% confidence that they're going to win a program or if they're on an existing program, they include that in their backlog. We do not. So we've got line of sight to that - to the numbers that we provided, to the $1.1 billion and the $925 million. And the $925 million, the lion's share of that is already in the bag for us.

Okay. That's great. And then on the 2025 revenue target, I wanted to clarify that the MirrorEye contribution only includes the $76 million of peak revenue from the OE contracts you've won. Is that correct?

That is correct, Justin. Yes.

Okay. So anything incremental in terms of –

And Justin, there is some retrofit in there as well.

Can you comment on the significance of that retrofit revenue?

It's not - I would say it's not - it's a modest amount.

I'm showing no further questions at this time. I would now like to turn the conference back to Jon DeGaynor for closing comments.

Yes, thank you, and I want to thank everybody for your participation in today's call. In closing, I can assure you that our company is committed to continuing to drive shareholder value through our strong operating results, through our wins of profitable new business, and our focused deployment of our available resources. This management team will respond efficiently and effectively to manage and control the variables that we can impact and continue to drive strong financial performance. We're confident that our actions will result in continued success in 2021 and beyond and we look forward to talking to you in the next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.