Stoneridge, Inc. (SRI) Q2 2021 Earnings Report, Transcript and Summary

Welcome to the Stoneridge Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event's being recorded. I would now like to hand the conference over to Kelly Harvey, Director of Investor Relations. Please go ahead miss.

Good morning, everyone. And thank you for joining us to discuss our second quarter results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted on our website at stoneridge.com in the Investors section under Webcasts & 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-Q, which has been filed with the Securities and Exchange Commission under the heading Forward-Looking Statements. During today's call, we will also be referring to certain non-GAAP financial measures. Please see the appendix for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. After 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 Kelly, and good morning, everyone. Let me begin on Page 3. In the second quarter, we continue to navigate through supply chain challenges resulting from the global pandemic. This impacted material availability, production schedules, product mix, labor availability and cost, logistics and even our tax rate, as earnings and expenses experienced unusual jurisdictional shifts. Despite these headwinds, we continue to position the company for long-term profitable growth through new business awards, continuous improvement in our manufacturing facilities and careful cost control to drive profitability. Our second quarter sales of $191 million resulted in an adjusted gross margin of 22.5%, translating to an adjusted operating loss of $1.9 million. Adjusted EPS for the quarter was negative $0.14. Our second quarter performance was significantly impacted by external headwinds, which in total, unfavorably impacted adjusted EPS by approximately $13 in the quarter relative to our prior expectations. I will provide a more detailed review on the performance drivers of our second quarter results later in the call. During the quarter, we continued to make progress with our MirrorEye platform, preparing for OEM launches and expanding our retrofit programs. Additionally, the value of the MirrorEye technology is beginning to resonate in our other end markets, including the bus market, where we have sold over 1500 units of MirrorEye and bus applications year-to-date, and we recently signed an agreement with a major bus OEM to supply MirrorEye in Europe. In addition, we continued the transformation of our global footprint during the quarter by completing the sale of our Canton, Massachusetts facility for net cash proceeds of $35.2 million. The cash proceeds from this transaction were used to pay down our revolving credit facility balance, further strengthening our balance sheet and creating additional capital that we can use to drive future growth. Finally, this morning, we are adjusting our full year guidance based on current market conditions and forecasts. We continue to see strong revenue performance and our guiding to the high end of our previously provided range. Additionally, based on current production forecasts, we expect significant top line growth to continue into 2022 as our weighted average end markets suggest production growth at 10% next year, and we expect to continue to outperform our end markets. That said we do expect continued supply chain challenges and the resulting impact on our tax rate to negatively impact our adjusted EPS guidance for 2021 relative to prior expectations. I will discuss some of the actions we are taking to help offset these substantial headwinds later in the call. Page 4 summarizes our key financial metrics relative to prior quarter results, excluding the divested soot sensor business in all periods. During the quarter, we experienced significant volatility in OEM production schedules, primarily in our passenger vehicle end market. However, these headwinds were offset by continued strong performance in our commercial vehicle and off-highway and markets. This resulted in adjusted revenue, approximately in line with the prior quarter. During the second quarter, we continued to experience the unfavorable impacts of component shortages, incremental material and logistics costs, labor volatility and an unfavorable product mix. These factors contributed to adjusted gross margin and operating margin declines of 180 and 300 basis points respectively, relative to the first quarter. The second quarter included incremental supply chain related costs of approximately $3.7 million, which was $2.5 million higher than previously expected, and $1.4 million increase versus the first quarter. These incremental costs reduced gross and operating margin by 80 basis points relative to the prior quarter. During the second quarter, operating expenses were slightly unfavorable, compared to the first quarter primarily due to planned incremental engineering expenses to support program launches. This was partially offset by a reduction of annual incentive compensation program costs. We continue to focus on managing engineering and SG&A costs in consideration of current market conditions, while ensuring that we are structured to support critical program launches and continue to invest in advanced technology development. While we expect additional headwinds related to external factors for the remainder of the year, we also expect that our facilities will continue to execute at a high level and that we will limit controllable costs. Page 5 summarizes the second quarter drivers of adjusted earnings per share. As I mentioned earlier, our second quarter performance was negatively impacted by external factors resulting in $0.13 of headwind during the quarter. This includes incremental supply chain costs, unfavorable product mix, other incremental COVID related costs and variable costs inefficiencies, and the resulting impact on our effective tax rate. Finally, continued volatility in our customers production schedules drove incremental direct labor costs, as we were required to run more overtime and incur higher direct labor wage rates than we previously expected. As a result of our current forecast, we reduced our annual incentive program expense, which offset external headwinds by approximately $0.04 during the quarter. During quarter we recognized an inventory obsolescence charge primarily related to previous MirrorEye generations, which impacted results by approximately $0.03. Fleet trials have been critical both as we expand MirrorEye retrofit volumes, and also as we continue to develop the system to address the features and functionality that drive the greatest value proposition to our end customers. For example, one of the most common requests from our fleet partners was to integrate video recording. As a result of changes made to the hardware and design of the system to accommodate some of the requests, we were required to obsolete some of the older MirrorEye components as they were no longer utilizing retrofit systems. With these improvements to features and functionality now incorporated, we do not expect additional inventory charges as we continue to ramp up MirrorEye production. We continue to gain control of our operating costs and take actions to offsets some financial headwinds. These controls favorably impacted results and approximately offset the inventory adjustments during the quarter. Turing to Slide 6, I would like to provide a more detailed update on the specific supply chain disruptions impacting our business, our current view of the financial impact of these disruptions for the remainder of the year, and the actions that we are taking to offset these incremental costs while continuing to support our global customers. I'd like to stress that this is our current view of the situation and as such is the basis for our updated 2021 guidance that Bob will discuss in more detail later in the call. We recognize that this situation will continue to be dynamic as we move forward in the second half of the year, and we are committed to take the necessary actions to offset costs as much as possible. In summary, supply chain disruptions have become incrementally more challenging. We continue to incur significant material costs increases and premium freight costs. Supply chain shortages have also resulted in significant market volatility and OEM production schedules. This has resulted in labor and other operating inefficiencies during the second quarter. To combat the price increases and shortages, we continue to actively negotiate a sharing of these incremental costs with our suppliers and customers. In conjunction we're developing strategies to recover these impacts when markets return to a more normalized state. And we continue to look for efficiencies within our overall supply chain to fully offset these incremental costs going forward. These actions include working with our customers who review our product designs and developing a long-term supply chain strategy to better optimize the flow of product. For example, we were successful in the second quarter in passing through $2 million of the $5.7 million in increased costs incurred during the quarter. Based on current market conditions, we have updated our expectations for incremental supply chain costs from approximately $5 million to $5.5 million for the full year as of last quarter, to almost double, or $9.1 million to $10.3 million for the full year. To date, we have already incurred $6 million of net incremental costs. We continue to monitor the global supply chain and the impact on our OEM customers to ensure we respond efficiently and effectively any disruptions. As it relates to current production volumes, Slide 7 outlines the most recent IHS and LMC information for our OEM end markets for the remainder of 2021 and 2022. As we have discussed in previous calls, our passenger vehicle customers reduced production schedules in the first half of the year, with a more significant impact during the second quarter. Production in our commercial vehicle and off-highway and markets remain strong, which we expect to continue for the balance of the year. Looking forward, current forecast and production levels have been adjusted for the expectation of continued supply chain related issues for the remainder of the year and into 2022. As a result of the continued global supply chain disruptions, passenger car forecasts have declined while commercial vehicle forecasts have remained relatively stable or have improved. This results in a forecasted decline of approximately 1.6% in our weighted average and markets for the full year 2021 relative to production forecasts as of our last call. Despite this decline, we are guiding to the high end of our previously provided revenue guidance, primarily due to our performance in the first half of the year and the expectation that our product portfolio will continue to outperform our underlying end markets. Bob will provide further details on our revenue guidance later in the call. Looking forward to 2022, we expect to continue to strengthen demand in our end markets as IHS and LMC are forecasting that our weighted average end markets will grow by approximately 10% compared to 2021. That growth is expected to be led by the North American passenger car market where growth is expected to be approximately 16%. North American and European commercial vehicle markets are expected to grow at 10% and 9%, respectively. We expect to continue to outperform our underlying end markets which imply significant growth in 2022 for the company. With the actions we continue to take related to our cost structure and operating efficiency we are positioned to take advantage of the forecasted growth next year. Turning to Page 8, we continue to make progress in our MirrorEye programs in all of our existing end markets and are starting to gain traction in additional end markets as the value proposition for MirrorEye is translating well to many applications. This morning, we are announcing that we have signed an agreement with a major OEM bus manufacturer to supply MirrorEye and began accepting orders in Q2. Overall, we have already installed MirrorEye in over 1500 buses in Europe and expect to install systems on approximately 2000 buses by the end of 2021. This momentum outside of our traditional Class 8 commercial vehicle market shows the true power of MirrorEye's technology to improve safety and efficiency across multiple applications going forward. Similarly, Pre-Wire orders continue to gain momentum in Q2. Year-to-date we have orders for approximately 500 units, with approximately 200 of those in July. While total Pre-Wire orders are still relatively small. The progression and growth of the orders suggests increasing acceptance of the technology by fleets across the US and is a good indication of growing momentum. This momentum is also gaining the attention of other OEMs who continue to work with us to develop Pre-Wire applications. Finally, our first two OEM MirrorEye programs are expected to launch later this year and early 2022. These programs can comprise $29 million of peak annual revenue at 15% estimated take rates. While we are not able to speak more specifically on systems until after OEMs officially launched the programs, we are encouraged by the amount of excitement generated by our OEM partners for the MirrorEye system as they begin their marketing activities related to their new platforms. We continue to believe that their end customers will see the significant value in MirrorEye applications and select to have MirrorEye installed on their trucks directly from the factory. Turning to Page 9, our Electronics segment continues to build momentum in product areas beyond MirrorEye as exemplified by several key program launches and a significant new business award in our connectivity platform. In the second quarter, we were proud to support PACCAR as they launched their new model 579 truck with Stoneridge's first fully configurable digital driver information system. The system, a 15 inch digital display is the largest in its class and enables system diagnostics, gauge customization and advanced driver assistance features. Additionally, every conventional Class 8 Peterbilt truck will feature this display going forward. This is one of the largest program awards in Stoneridge's history estimated at $40 million of peak annual revenue. In the second quarter, we were awarded our first SMART 2 Tachograph platform with a European OEM. Our next generation tachograph enables over the air software updates to efficiently respond to changing regulatory requirements, extending the life of the platform and making sure our customers and their customers have the most current technology on their trucks. Our platform makes drive time analysis more flexible and consistent and provides us with an opportunity to add features and functionality to the platform going forward. We expect to launch the program in 2023 aligned with new European regulations requiring advanced features on tachographs. With the launches of previously awarded business and our continued success winning new business such as our SMART 2 Tachograph program, the Electronics segment is set up for significant growth going forward. Turning to Slide 10, our Control Devices business continues to launch programs and win business to supports the electrification of our customers' vehicles and enables advanced technologies throughout the vehicle. In the third quarter, we will launch two additional Park-by-Wire programs on the Ford E-Transit and Maverick platforms to add to the launch of the Mach-E program last fall. Following up on those programs, we will launch an additional Park-by-Wire program for an electrified light truck platform in 2022. Finally, we launched the next generation of our Shift-by-Wire programs with Geely Auto's new SUV in China in July 2021. These awards comprise a total of $30 million of peak annual revenue for Stoneridge. As an example of the overall shift from traditional powertrains to electrified applications, it was announced earlier this year that the Ford E-Transit platform in partnership with Oshkosh Trucks was selected as a replacement for the current United States Postal Service fleet as they modernize their vehicles. Electrified powertrains are becoming the standard of efficiency. And we are proud to support Ford and all of our global customers as they transition from the internal combustion based powertrains to the electrified powertrain platforms that will drive future growth. This morning, we are providing detail on two additional business awards within our Actuation product line launching in 2023 and 2024. The first a $28 million peak annual revenue award continues our success supporting four by four applications with our Front Axle Disconnect product on next generation light truck and SUV platforms. The second award for our Smartbar product was $11 million of peak annual revenue is applicable to a new, more specific end market where our off road demands require performance in the harshest conditions. Smartbar enables vehicles to operate their wheels on different planes as they traverse rough terrain to ensure maximum traction at all times. We continue to refine our product roadmaps and technology development to expand our capabilities and electromechanical actuation to take advantage of the continued growth in this segment. Finally, this morning we're announcing a new award and our Trailer Tow product line on multiple electrified light truck and SUV platforms. Our advanced trailer tow connection facilitates a fully digitized connection from the trailer to the cockpit, which enables advanced camera technologies on the dash trailers. We expect that the continued expansion of our electronic capabilities, which help advanced technologies for our customers will continue to open doors to new opportunities. Turing to Page 11, in summary, the second quarter was challenging as we continue to face the impact of the global pandemic and the cascading impact it has had on global supply chains. We remain committed to delivering on our strategic priorities and continuously improving the business to drive strong financial performance and stable long-term profitable growth as we prepare for significant growth in 2022 and beyond. At Stoneridge, we will continue to execute on the things that we can control and respond effectively and efficiently to a challenging environment. We'll maintain our focus on our long-term strategy, driving continuous improvement and refining our capabilities to deliver shareholder value. And with that, I'll turn it over to Bob to discuss our financial results in more detail.

Thanks Jon. Turning to Slide 13, sales in the second quarter excluding the best of product lines were approximately $189 million, which was in line with the prior quarter. Adjusted operating loss, excluding the best of product lines was $2.6 million, or negative 1.4% of adjusted sales, which declined 300 basis points versus the prior quarter. The reduction in margin performance is primarily due to supply chain related headwinds, negatively impacting operating margin by an incremental $1.4 million or approximately 80 basis points during the second quarter. In addition, the second quarter had higher operating expenses versus the first quarter, primarily as a result of planned incremental engineering expenses to support program launches. I will provide additional detail on segment performance and a brief discussion of our expectations for each segment for the remainder of 2021 on the subsequent slides. As Jon discussed earlier in the call, we are guiding to the high end of our previously provided revenue guidance for the full year based on first half performance and current production forecasts. Despite our expectation of strong revenue performance, this morning, we are reducing our full year 2021 adjusted EPS guidance by $0.30 to a midpoint of $0.25, primarily due to higher continued supply chain related costs and an unfavorable income tax rate both during the quarter as well as for the full year. Page 14 summarizes the drivers of our current 2021 adjusted EPS guidance. Including the incremental impact in the second quarter, we expect that supply chain related costs will reduce our adjusted EPS by $0.11 to $0.13 for the full year relative to our prior expectations. This includes continued premiums related to material cost and freight offset by our expectations of cost sharing and price increases. Similarly, we expect that continued supply chain disruptions will create an unusual jurisdictional mix in our earnings and expenses for the remainder of the year, creating $0.08 to $0.12 headwind relative to prior full year expectations. We expect that our 2021 total tax expense will be approximately $5 million to $5.5 million, implying an effective tax rate that significantly exceeds our prior guidance. We expect that as earnings and expenses normalize in 2022, our tax rate will return to a more normalized level. Similar to the incremental supply chain costs in tax expense incurred in Q2, we have considered the other net performance drivers Jon outlined previously for the quarter in our full year guidance. Finally, while we expect incremental D&D primarily related to supporting the significant number of new program launches over the next several quarters, we expect to approximately offset the incremental expenses with reductions to SG&A. As a result, we expect full year 2021 adjusted EPS to be $0.20 to $0.30. To give a perspective on our cadence of earnings for the remainder of the year, we anticipate continued supply chain related expenses while revenue is expected to continue to grow as we progress through the year and incremental revenue. We expect stronger operating performance in the third quarter to be partially offset by continued elevated tax expense, resulting in an adjusted EPS for the third quarter at or slightly above breakeven. Our full year guidance suggests second half revenue performance will be slightly weighted to the fourth quarter with adjusted EPS performance also significantly weighted to the fourth quarter. I want to emphasize that our updated guidance is based on our current view of the market conditions and production forecasts, recognizing that we expect continued volatility in these assumptions for the remainder of the year. We have also included a modest amount of cost sharing with our customers and suppliers in the updated guidance, which is not guaranteed, but we feel as appropriate given the current conditions. We continue to work to offset the external factors that have impacted our operating performance and position ourselves to best take advantage of future growth as we move into 2022. Page 15 summarizes our key financial metrics specific to Control Devices. Control Devices' second quarter adjusted sales, excluding the divested soot sensor business were approximately $84 million, which is a 13.5% decline versus the first quarter of 2021 adjusted sales primarily due to the OEM production shutdown in the passenger vehicle market as a result of supply chain related issues. Adjusted operating income, excluding the divested business was $6 million for the quarter, or 7.1% of adjusted sales. Adjusted operating income decreased by 400 basis points versus the first quarter, primarily due to unfavorable leverage on fixed costs as a result of lower sales during the quarter due to volatility in production schedules. The second quarter included approximately $1 million of net increased material, labor and expediting costs due to the global supply chain related issues, or 120 basis points. This was consistent with the first quarter supply chain related impact of approximately $1 million or 100 basis points. As discussed earlier in the call, we continue to transform our manufacturing footprint and product portfolio to align with future growth opportunities. During the second quarter, we completed the sale of the Canton, Massachusetts facility for net cash proceeds of $35.2 million. As discussed earlier on the call, the cash proceeds from this transaction were used to pay down our revolving credit facility balance, resulting in reduced net debt. Also discussed earlier on the call, we successfully launched previously awarded Park-by-Wire programs in several electrified vehicle platforms, with several additional programs launching later this year and in 2022. In addition, earlier today, we announced several new business wins in the Control Devices segment, including multiple awards for our Actuation products, and an award for an advanced trailer connector that enabled advanced technologies for our customers. We continue to expand expect gross margin headwinds, as global supply chain issues continue to impact the business. We are continuing negotiations with our suppliers and customers to offset incremental costs as we focus on leveraging our existing cost structure to expand margin with revenue growth. Despite these headwinds, Control Devices remains well positioned to take advantage of future growth and drive margin expansion. Page 16 summarizes our key financial metrics specific to Electronics. Electronics' second quarter sales were approximately $97 million, an increase of 9.7% versus the first quarter of 2021. Adjusted operating income decreased by approximately 110 basis points relative to the first quarter, primarily due to material and expediting costs headwinds as a result of continued supply chain issues, which impacted the quarter by $2.5 million, or 250 basis points compared to $1.1 million or 120 basis points during the first quarter. In addition, as discussed earlier on the call, we recognized an inventory obsolescence charge of $900,000. As discussed earlier in the call, we think product wins in our Electronics product portfolio will provide us with future growth opportunities through the continued ramp up of our MirrorEye programs, both in our traditional end markets, and new end markets as well as the expansion of our connectivity capabilities of our SMART 2 Tachograph product. As we continue to invest in our future, we require incremental investment in engineering resources to support these technology developments and future program launches. We have continued to implement initiatives to ensure efficient use of our existing resources and take advantage of a global engineering footprint to limit incremental costs while we increase capabilities and engineering capacity. We continue to expect strong revenue growth in the second half of 2021 driven in part by the ramp up of recently launched programs, including the PACCAR, digital instrument cluster that launched earlier this year. We continue to expect growth margin headwinds as global supply chain issues continue to impact the business. We continue to work with our customers and suppliers to offset the financial impact of these externalities where possible. Operating income is expected to improve with revenue growth despite supply chain related costs, headwinds, unfavorable product mix and the continued and necessary investment in engineering resources. Page 17 summarizes our key financial metrics specific to Stoneridge Brazil. Excluding the favorable foreign exchange rate impact of $500,000 Stoneridge Brazil's second quarter sales increased by $3 million, or approximately 26% relative to the first quarter of 2021, primarily due to higher demand in our aftermarket and OEM product lines. During the quarter, adjusted operating margin improved by $1.1 million compared to breakeven in the first quarter of 2021, primarily due to lower SG&A costs and fixed costs leverage and higher sales. Although our second quarter financial performance was strong, macroeconomic conditions in Brazil remain challenging. We will continue to utilize our local engineering resources to support our global electronics business and remain focused on the ramp up of local OEM business to drive growth for the segment. Turning to Page 18, net debt decreased by approximately $23 million in the second quarter, resulting in net debt of approximately $75 million or 1.4 times trailing 12 month adjusted EBITDA. As discussed earlier in the call, the reduction in net debt was primarily due to the reduction of the revolving credit facility balance as a result of the use of cash proceeds from the sale of the Canton facility. Stoneridge remains well positioned with relatively low leverage and significant available capital. Moving to Slide 19, in closing, I am confident that we will continue to do everything within our power to offset the significant incremental external costs we expect for the remainder of the year as a result of challenging macroeconomic conditions. And similarly, we will continue to position the company to take advantage of the growth opportunities, both macroeconomically and as a result of our significant backlog of business awards and growing content throughout our portfolio to drive future profitable growth. Stoneridge is committed to driving shareholder value, and that focus remains at the forefront of all of our strategic initiatives. With that, I will open up the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Gary Prestopino with Barrington Research. Please, Gary, go ahead.

Hey, good morning, everyone.

Good morning Gary.

Good morning Gary.

I'd like you to maybe comment on some of the supply chain issues. There's a lot of talk about transitory versus embedded inflation. What are you guys thinking on that? I mean is these kind of step up in the prices of what you're having to pay for inputs through the supply chain. Are those going to hold? Or do you anticipate that as everything normalizes we should see some snapback reduction in some of the price increases that you're having to deal with right now?

Gary, I think the answer is we see both. We see overall inflation as well as short-term crisis based activities. So we do see a level of we some of it that will normalize just over time as supply chain stabilize and some of it that will be more permanent. It's why we're having very transparent conversations with both our suppliers and our customers on real cost increases. And it's why as we talked about during the call, there's aspects of this that where we said, what 6 million of the 10 million that we're forecasting for the year, we've already seen as an impact, where the impact - the recovery will lag the impact. Because it's - some of it is transitory, and some of it is more permanent. And we're working to offset both of those with work with our supply chain and driving efficiencies as well as work with our customers from a pricing perspective.

Yeah, Gary, let me just add to that. This is Bob. We're seeing things with respect to the industry that we haven't seen before. On some components, we're getting calls from suppliers and they're announcing dramatic price increases for us and basically telling us, we want the product, here's the new price. So obviously, there's not much we can do in the short run on those types of those types of issues. But rest assured we are going out and having conversations with our customers and doing all the things that the shareholders are expecting us to do, try and recover as much prices we possibly can.

Okay. And then, in terms of some of the longer term targets that you set at the beginning of this year, I mean, are you still comfortable, I think it was a 15% adjusted EBITDA margin by what 2025 given what you're internally doing to position the company on a product basis as well as expense basis.

So Gary, the way that I respond to that is we are obviously, right in the middle of these historic price increases, we're still - there's still lots of work that needs to be done in terms of assessing what is the overall impact going to be to the company as a result of the inflation and the increases that we're seeing. So we're not commenting on our long-term guidance, we'll be in a better position, once we go through our annual planning process and begin negotiations with our suppliers around pricing for next year to be able to say more about that. But I will tell you, on the positive side, from a revenue perspective, we talked about what we're expecting for 2022 and our weighted average end markets are growing at over 10%. And we expect to continue to grow above the market for the foreseeable future, as a result of all the great work that's been done by the sales - by the commercial organization with respect to our new business awards.

Okay, and then lastly, and then I'll jump off. Could you maybe comment on how some of these fleet trials that you were doing, from here how they're going and what number of units you've got these potential - well, what number of units you're doing fleet trials with at this point.

So Gary, we continue to expand our fleet trails, we don't have any major fleet expansion announcements to talk about today. But what we're seeing is we're seeing - as we said, In previous calls, and as we've talked to you about, the safety leaders with whom we worked, and originally developed this, that's setting the stage and it's flowing down through the broader market. So we're seeing some of these midsize fleets coming to us with more interest. And so whether it's at the National Product Carriers Association, or at other events, where we're getting a significant level of interest, because they've heard about it, they seen who the leaders are in the industry that are working with it and we we've had a large - a very positive interest from midsize fleets. What we also are seeing and probably the most important thing, and I talked about it in our script is the fleet's are talking to the OEs and we're hearing feedback from the OEs with regard to the fleets wanting to figure out how to have it on their trucks. So we talked about the Pre-Wire expansion, remember, that's just with one OE. And when you have as much expansion as we had just in a month-over-month basis, it gives you a sense for the level of interest that is coming from the fleets that's going, they can't get it on their OE, trucks that they want it Pre-Wired. And we're seeing other OEs working with us to say, how do they also Pre-Wire their trucks? So we continue expand our fleet trials. We don't have any specific major announcements with regard to specific fleets. But there's a whole series of safety consortia and other midsize fleets that we're working with that we feel really good about where we're going.

Okay, thank you very much.

Thanks Gary.

Thanks. Thank you for your question.

Our next question comes from Justin Long with Stephens. Please, Justin, go ahead.

Thanks and good morning.

Good morning Justin.

Good morning.

So the supply chain issues are very well known. But it does seem like the impact to Stoneridge has been a lot more pronounced versus a lot of the other suppliers out there. So can you talk about some of the reasons why this might be the case? And in terms of how long this lasts? I know it's a tricky question. You've given the second half guidance, but any thoughts about next year and if these challenges could linger into 2022?

So Justin thanks for your question. And, as we talked about, on many of these calls, the transformation of Stoneridge product portfolio to smart products, the good news is it sets the stage for the future, the bad news it exposes us to that - where the majority of our products have a chip in them. And so both then in the commercial vehicle end markets and in the pass car end markets were exposed that way. So that's piece number one that's internal to us. Secondly, the exposure that we have to some of the light duty OEs and their specific impact, and what our end market exposure and customer exposure is not completely balanced across all of the OEs. And in that situation, there's a little bit of additional impact because of where we're balanced with our OEs on the light duty side. What I would say with regard to how long this lasts, we are getting - we continue - we speak with all of the chip manufacturers - we buy from all the chip manufacturers and we're getting feedback from them all the time. We do see the tightness going at least through the end of the year. And that's why we are conservative with regard to the guidance that we provided. We know that others have given different points of view. This is the best view that we have for our shareholders. What we are doing is working actively with our total supply chain and with our OE partners to look at what we can do from a redesign standpoint, not only to address the situation in the near term, but make permanent corrective actions in the future.

Okay, thanks, Jon. And maybe next one is for Bob, I wanted to ask about incremental margins, as we look forward to 2022, you gave the color that your weighted average end markets will be up 10%. You expect to outgrow that. But as I just think about 2021, and albeit supply chain headwinds, elevated D&D cost, it seems to set the stage for incremental margins that could be above your long-term framework, maybe even meaningfully above that framework. So, just wanted to get your thoughts around that, if you would agree with that statement, or if there's something that could offset some of the tailwinds in the next year.

Yeah. So Justin, it's really not appropriate for me to comment on 2022 right now in the middle of kind of - what's going on with the current supply chain situation. So what I would prefer to do is allow us to go through our normal planning process and have the conversations with our customers and our suppliers that we're having right now. And rest assured we're having a lot of those conversations to get a better line of sight to what the impact's going to be and how it's going to - if it's going to impact the long-term margin profile the company and what that looks like. And when we have something to say - when we have something more to say about that, we'll be out with that as soon as we possibly can. But right now, it's not - I just feel like now's not the time to really talk about that given where we're at right now in this - in the middle of the supply chain issue. But we'll come back down that.

Okay, understood and maybe just lastly, on the tax rate. That was a surprise in the quarter and the guidance, but you made the comment, as we get into next year we should normalize. What do you view is that normalized tax rate for the business?

Yeah. So Justin thanks for the question. And let me just - let me expound upon the tax rate a little bit because I think it's important. So we talked about a little bit in the prepared remarks. But you can imagine just with all the headwinds that we've seen in the quarter, with the supply chain, and the incremental engineering efforts that we're moving forward on to support our new program launches and our future growth. The impact of the incremental expenses, it's not occurred evenly throughout all the jurisdictions of the world where we do business. So that's going to - really the net result of that you have relatively strong earnings in certain higher tax jurisdictions, and then incremental expenses in some lower tax jurisdictions as well, even including some pretax losses in certain jurisdictions where we have valuation allowance and so you don't get any kind of tax benefit, you don't recognize any kind of tax benefit from that. So the net impact of that it will result in a tax expense for the quarter despite a pretax loss, which obviously is unusual and a negative tax rate. We do expect the earnings trend to continue through the remainder of this year. We're looking forward to 2022 and beyond. We're looking at the tax rate to return to the normalized range that we've given before, which is the 22.5% to 27.5% range.

Okay, great. That's helpful. I appreciate the time.

Thanks Justin.

Thanks Justin.

Our next question comes from Scott Stember with CL King. Please, Mr. Stember, go ahead.

Good morning, guys, and thanks for taking my questions.

Good morning.

Good morning Scott.

Good morning Scott.

Maybe talk about Electronics a little bit. If you were to add back, I guess for the first half of the year, the supply chain costs and the obsolescence charge, you're still I guess, floating around breakeven this year, maybe plus or minus a little bit. Can you maybe talk about some of the other issues? Primarily, I guess, product launches and the timeline for that to hit or for that to abate just to see when we can start getting back to some profitability in the segment.

Yeah. So Scott, thank for the question. And I think it's one of the greatest sources of frustration that we have in the organization is how well many things are going in spite of these headwinds. If you look at our - look at the progress on our plants and look at the progress with our launches, it gets overwhelmed with the supply chain turbulence. But what we've talked about many times, and what we've talked about with you many times is the number of launches that we have going on in Electronics right now between the instrument clusters, between the MirrorEye programs as well as the advanced development activities and also just the rotation of capabilities. So we're seeing all of those things happen right now and as you add back the supply chain disruptions and the inventory right that you talked about, what you see is a business that's absolutely well positioned as things like the PACCAR instrument cluster ramps up and the MirrorEye programs ramp up, and things like SMART 2 and other programs ramp up, this business is completely positioned for great growth and great profitability.

Got it, okay and with regards to I guess, cost sharing, and Bob, you talked about how none of this is really guaranteed. But is there any of that in the guidance for the remainder of the year? Have you put any in and if you did how much?

Yeah. Scott, thank you so much for the question. We haven't put very much in - with respect to the guidance for the balance of the year. We have - we're absolutely active in discussions with our customers, as Jon mentioned, we also had $2 million of the 5 million of increases that we saw during the quarter. So as I said before, we're moving quickly, we're responding, having conversations with our customers on a daily basis around the increases that we're seeing relative to the supply chain. But overall, with respect to the guidance Scott, we have not included much in terms of from a recovery perspective in those in the numbers that we've provided.

Got it and then just lastly on MirrorEye, It seems like you've made some more traction here and the retrofits and Pre-Wire's seem to be accelerating nicely. Can you just give us an estimate of total MirrorEye related revenues that you would see for 2021? How much of that is in your guidance?

So remember, we've talked about relatively small numbers in the couple of 1000 systems that are in our guidance. What we're seeing here - what we're seeing Scott is the opportunities are accelerating. We talked about the bus opportunity, that's an expansion, an opportunity that's accelerating. And we're seeing these midsize fleets which when we originally set the guidance for the couple of 1000 MirrorEye retrofits, we didn't expect to sort of pull out the midsize fleets necessarily that we're seeing right now. So we're really positive about what Pre-Wire's doing, what this safety results are doing and what the safety leading fleets and how that's trickling down. I think there's also an important thing to note that MirrorEye retrofit often is done on new trucks. And when there is constraints in the marketplace with regard to the availability of new trucks, it doesn't change the interest from the fleets, but it does change the ability - it does change when they can get those trucks. So we know that there are fleets that want to put their new trucks in service, and retrofit their trucks with MirrorEye that are constrained by when they can get a new truck. So what we're seeing and what we talked about earlier and what we will continue to talk about is we see the demand there, we see the interest there, we see the pole expanding. Right now, the supply chain constraint not only impacts us from a financial performance standpoint, but it impacts us with regard to our end markets and what trucks our customers can get access to so that they can be retrofitted. Does that make sense? Did that help you?

Yeah, it does. Yeah. Also, last quarter, you gave a number. I forgot what the number was. But it was immaterial. But I guess you would expect it to be relatively material for the full year, obviously, a lot of that for next year.

Yeah, but again, our fleet services activity with retrofit also is a critical portion of developing this MirrorEye platform. So what it is that we're providing for the OEs and how do we provide a true safety platform going forward? So I look at the retrofit also as a way - in the fleet services activity as a way to create more pull for OE programs going forward. So when we talk about the OE programs that are launching at the end of this year and into early next year and we talked about a 15% take rate, the more market awareness and more market poll, as we see it through retrofit also should drive additional take rate beyond the 15%. So there's synergy between those activities, we work very hard to make sure that there's that synergy and work with the OEs that way and it will create opportunities on both sides into 2022.

That's all I have. Thanks, guys.

Thanks Scott.

Thanks Scott. Thanks for your questions.

This concludes our question-and-answer session. I would like to turn the conference back over to Jon DeGaynor for any closing remarks.

Yes, 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 strong operating results, profitable new business and focused deployment of our available resources. Our management team will respond efficiently and effectively to manage and control the variables that we can impact and we will continue to drive strong financial performance. We're confident that our actions will result in continued success for 2021 and beyond. Thank you all for being here.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.