Good day, and thank you for standing by. Welcome to the Stoneridge Fourth Quarter 2021 Conference Call. [Operator Instructions] I would now like to turn the conference over to your host Jon Sandison, Director of FP&A. Please go ahead.

Good morning, everyone. And thank you for joining us to discuss our fourth quarter and full year 2021 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 & Presentations. Joining me on today's call are Jon DeGaynor, our President and Chief Executive Officer; and Matt Horvath, our Chief Financial Officer. Before we begin, I need to inform you that certain statements today may be forward-looking statements. 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 Matt have finished their formal remarks, we will then open up the call to questions. I would ask you that you keep your question to a single follow-up. With that, I will turn the call over to Jon.

Thank you, Jon. Good morning, everyone. Let me begin on Page 3. In 2021, we navigated the direct and indirect challenges created by the global pandemic, including global supply chain-related issues. We focus on being responsive to fluctuating production schedules, managing our cost structure and implementing price and cost recovery actions to drive stronger margin performance as volumes recover. As a result of our continued focus on supply chain management and our ability to both recover historical costs and pass-through current costs, we were able to offset approximately 78% of the gross supply chain-related costs incurred in the quarter. I want to thank the Stoneridge team for facing and overcoming the challenges in 2021. In the fourth quarter, the production environment continued to stabilize, driving adjusted sales of $185 million, representing a sequential improvement relative to the third quarter and providing a strong indication of continued top line improvement as we progress into 2022. Similarly, fourth quarter gross margin of 22.7% and EBITDA margin of 1.3% represented sequential growth for the third quarter. Based on our current view of market conditions and macroeconomic factors, we believe that the third quarter of 2021 will be the trough for Stoneridge from an EBITDA outperformance perspective. Our 2021 adjusted sales of $750.5 million resulted in an adjusted gross margin of 22.4%, translating to an adjusted operating loss of $12.2 million or negative 1.6% of sales. Adjusted EPS for the year was a loss of $0.59. Most importantly, despite the external challenges in 2021, we stayed focused on our strategy and continue to invest in the resources necessary to develop and launch the technologies and product platforms that will drive future growth for Stoneridge. Our strategic focus and alignment with industry megatrends will continue to pay off in 2022 and beyond. This morning, we…

Thanks, Jon. Turning to Slide 12. Adjusted sales in the fourth quarter were approximately $184.7 million, an increase of 1.7% relative to the third quarter. Adjusted operating income was negative $7 million or negative 3.8% of sales. More specifically, Control Devices' adjusted sales were approximately $78.6 million, which was a decrease of approximately 7.4% compared to the third quarter, resulting in adjusted operating income of $4.1 million or 5.2% of sales. Electronics adjusted sales of $96.5 million increased by 15% compared to the third quarter, resulting in adjusted operating income of negative $4.7 million or negative 4.9% of sales. Stoneridge Brazil sales of $14 million decreased 15.1% compared to the third quarter, resulting in adjusted operating income of $300,000 or 2.5% of sales. This morning, we are establishing guidance for our 2022 financial performance. We are guiding 2022 adjusted sales to a midpoint of $880 million, implying an increase of approximately 17% versus our 2021 revenue. It is important to note that our 2022 guidance includes our view on current market conditions, including the potential impact of continued global supply chain disruptions and current production forecasts, both of which have been volatile over the second half of 2021. We are expecting continued material cost challenges, particularly early in the year. Our revenue guidance includes price increases to offset incremental material costs and adjustments to our contractual annual price downs to reflect current macroeconomic conditions. Despite continued pressure on gross margin, we are expecting to leverage our existing cost structure to drive margin expansion on substantial growth. We are guiding adjusted gross margin to a midpoint of 22%, adjusted operating margin to a midpoint of 1.25% and adjusted EBITDA to a midpoint of $48.5 million or 5.5%. Given the continued expectation for unusual mix of earnings in 2022 rather than guiding…

[Operator Instructions] Your first question comes from the line of Justin Long from Stephens.

So maybe to start with the supply chain. Obviously, a lot of moving pieces. But when you just kind of step back and look at things from a high level, could you comment on the sequential progression of the supply chain as we've kind of moved from the fourth quarter into the first quarter? And maybe what's baked into the guidance for 2022 for that sequential progression on a quarterly basis?

Yes. Thanks for the question, Justin. There's obviously a lot of moving pieces to the supply chain dynamics and how that impacts the financial performance. We do expect that we're going to incur incremental material costs moving from 2020 to 2021 -- I'm sorry -- from '21 to '22. That said, we do expect to be able to offset a significant portion of those costs, like we said, about 80%, and that's what's been included in the guidance. So sequentially, we are seeing incremental -- certainly incremental costs and a little bit of incremental net headwind as well as we move into 2022.

Okay. And the cadence that you gave on the guidance was really helpful, but there's a lot of noise below the line that's impacting EPS. Is there any way you could share kind of what you're expecting in terms of the cadence of EBITDA and EBITDA margins through the year? Because to your point, I think we're going to exit this rate at a much higher rate. And I just wanted to get a sense for what you're expecting in the guide.

Yes. So Justin, we expect, obviously, a similar cadence for EBITDA. There is a little bit of noise below the line, particularly as you look at comping year-over-year. You got to remember the equity interest in MSIL will come out as a comp, and we'll have a little bit of incremental interest expense as well when you look at the year-over-year net debt profile certainly in the beginning of the year. EBITDA will follow a similar pattern, though, where we expect stabilization and improvement from Q1 to Q2 with a pretty significant ramp-up and a fairly stabilized number as we head into the second half of the year. So you can expect that EBITDA will follow a fairly similar pattern to the adjusted EPS cadence that I outlined.

Okay. And just last one quickly on MirrorEye. Anything you can share on the contribution from a revenue perspective that's getting baked into the 2022 guide?

So Justin, well, we talked about good news with regard to take rates and continued expansion. What we have put in our guidance is we've put at this point, the contractual take rates because it's early days with -- what we gave you on the feedback from the OEM program is early days. So what's in our guidance is the contractual take rates. So we expect to see that trend positively over the next couple of months. But what we put in the guidance is the contractual side. As we've also talked about, we've got -- continue to see expansion from a retrofit perspective, we have a couple of thousand systems that are in there from a guidance standpoint on the retrofit side, and we see opportunities to expand that as well. So when we talk about being at an inflection point, if we put together the guidance, we wanted to be sort of middle of the road with regard to the guidance, but we see opportunities when we talk about the inflection point from MirrorEye.

Okay. Great.

And your next question comes from the line of Scott Stember from CL King.

Just looking at the different segments and relating it to '22 guidance, the Electronics segment, it looks like that will probably be one of the reasons why you're still -- I guess, the midpoint of earnings is around breakeven-ish. And you've talked in the past about, I guess, upgrading some base technologies that seems to have been sped up by some of the OEMs. And I'm just trying to get a sense of how -- what's holding that back? And when would you expect the Electronics segment to really turn to material profitability? Are we talking 2023? I know you're not guiding that far out, but just trying to get a sense of whether in '22, at least the run rate in the back half of the year should be materially positive.

Yes. So Scott, it's a really good question. I think it's important to understand that when you talk about material cost headwinds, most of those flow through Electronics, right? It's not balanced between the 2 divisions. Secondly, when we talk about the investing in resources to launch new programs, much of that is also flows through Electronics with all the engineering that's being done to launch the MirrorEye platform, the Smart 2 Tachograph. And historically, over the last 18 months to launch the digital driver information systems. So when we talk about the inflection point from MirrorEye and we talk about the ramp-up of those programs, what you see is we've been spending the engineering resources in advance of the ramp-up of the revenues, and that division has -- or that segment has seen the far and away, the greatest impact from a material cost inflation perspective. So while none of us are thrilled with showing the charts that we talked about with regard to Electronics, what we see is and is what we've talked about in each of these quarterly reviews, we have to continue to invest because it's the division that's driving the outsized growth. And while both sides are going really well, it's the one that's driving outsized growth. And on both sides, we need to invest -- continue to invest in the engineering resources to get us to that $1.25 billion and beyond.

Yes. And I would add to that, Scott. While we may not be thrilled with the current year financial performance, if we look at the chart, I will say we are thrilled with the ROIC that, that generates in the future. We've talked about a lot the fact that we really focus on ROIC and the way that we think about investing in resources. When you look at that backlog growth and you look at the long-term revenue growth profile of the company, there's a lot of expansion coming from the Electronics activity that we've invested in over the last several years. We're starting to see some of that MirrorEye investment pay off even earlier with take rates that are improved and really strong performance in the retrofit market. So as we talked about in the past, the investment will always precede the ROIC, and we're starting to see the benefit of our RIC as we ramp-up this inflection point for Electronics. I think to your point, it's also important to remember that the run rate coming out of next year as we see some of these material costs start to subside and the ability to offset them and have a reduced net impact, that will impact Electronics more so than certainly than the other segments because that's where the most of the headwind is coming particularly in the beginning of the year.

Got it. And just to be clear, when you guys talk about 80% recovery of -- covering of, I guess, overall supply chain-related costs, I know you guys have talked about 2 different buckets, I guess, more stuff that's related to spot buys and expedited freight and then the other part is inflationary. Are you talking about everything all together?

Yes. Great question, Scott. So this is a really important part of our guidance. The recovery of spot buys that are passed through to customers are included in our actual sales but not in our adjusted sales. So the guidance assumes that we will continue to pass-through a significant portion of those spot buys as necessary as we move through the year. So the headwind that we're talking about and frankly, the offset that we're talking about in the guidance is more related to more durable material costs and inflationary increases and offsets rather than the spot buy activity that we expect to continue to pass-through substantially to our end customer.

Got it. And then just last question on MirrorEye. The -- I guess, you're expanding your partnerships on the bus side over in Europe. Maybe just give us a timeline of when that will start materializing and hitting the P&L. Is that similar to normal OE type of business? Or is this more like of a retrofit kind of thing where it happens right away.

Yes. It's OE programs, but it doesn't have the same sort of development cycle as we do with the commercial vehicle OEs. So there's $10 million worth of revenue in -- roughly in 2022 for this. We've talked about MirrorEye as a platform for a long time, Scott. And what we said is we needed to get through the development. We need to make sure that we launch the first programs right and then we could expand on it. Here is an example of where we're living up to that commitment of doing the expansion. So the synergies between our retrofit activities, the commercial vehicle OEM programs and the bus programs, we continue to drive those synergies and there'll be additional end markets where we can see expansion. But the bus program has, like I said, about $10 million worth of revenue in 2022.

[Operator Instructions] We have our next question coming from the line of Gary Prestopino from Barrington Research.

Just want to understand some of these guidance buckets here. Your 2022 sales guidance, the $71 million specific growth to Stoneridge would really pertain to the program launches that you highlight in bullet point 2. Is that correct?

Yes, that's right, Gary. What we try to do is break apart what you see just on pretty strong production in our end markets, but also the fact that we expect to outperform that by almost the same amount or by actually a little bit more due to exactly like what you said, ramp-up of programs that we launched last year and new program launches this year.

Okay. And then the IHS production forecast of $61 million, obviously, kind of a leading question here. This IHS production forecast was developed before this war shot off in Ukraine. Have you taken into account in any of your projections here, the possibility -- I guess, the strong possibility of some IHS production forecast declines because we're already here and that the supply chain, particularly with the European manufacturers is really starting to turn negative here just because of what's going on in Europe.

Yes. So Gary, the answer is no. We haven't taken that into account yet because it's our -- the basis for this guidance is based on January 2022 HIS.

Okay.

But let me qualify a couple of things. One, it's important to remember the split between commercial vehicle and passenger car within Stoneridge. Secondly is remember that we have very little European passenger car exposure. So our -- when you start talking about the impact in Europe, particularly with vehicle sales, you're talking about -- in 2021, European pass car was 1.3% of our sales.

Okay.

So commercial vehicle is a bigger portion in Europe. But from a European standpoint, it's quite European pass car very, very small. So we watch it closely. We're watching the impact from a supply chain standpoint, but we are -- at this point, we don't have a huge exposure to the European pass car production.

Okay. And then you talked about the -- what you're doing for the -- I guess, it's the Mustang Mach-E. Is that correct? You talked about the actuation side.

Yes. That’s right.

Could you maybe just give us some other specific models where your -- maybe your actuation programs are also going to be driving growth on electrified platforms for this year?

So obviously, we can't talk about stuff that hasn't yet been launched, Gary.

Okay.

So we're on the Mach-E, which is in production, we're on the Chevy Bolt, which is in production. What you can imagine is platforms with customers, there's commonality, but we can't talk about the other -- the other vehicles that we would be on until they are launched.

Okay. All right. But suffice to say, you are on other platforms that are going to launch in 2022.

Yes, that's right.

We're -- I mean the Control Devices team has done a fantastic job, developing the right products for the future state. We've talked about it with regard to getting ourselves being modded-force-agnostic and rotating out of things that are solely exposed to internal combustion engines. That's why we got out of it. It's why we had the other portfolio changes that we've made in the engineering team and the commercial and strategy team within Control Devices has done a fantastic job of getting us positioned to grow with EV and hybrid powertrains. I'm really proud of what they're doing.

Okay. And then just lastly, on Slide 9, where you go through your long-term EBITDA target. Is that 14% number that you're looking for? Is that if everything goes right in your long-term plan? Or you feel very strongly about the 12.5% baseline?

So no, Gary. It is not if everything goes perfectly. What we wanted to do is give you an idea of how much -- first of all, how incremental the amount of revenue growth that we're expecting can be on the EBITDA margin expansion, given our expectation of strong -- continued strong contribution margins. So in my mind, that's just the floor for what we should expect going forward based on that really strong revenue growth. The material cost recovery, improved manufacturing efficiency and a more cost-efficient overall structure is what allows us to get to our target. And I think what you -- when you think about what Jon said, getting to and increasing over our target is really based on our ability to, first of all, get back on the curve when you think about the relationship between material costs and contractual annual price downs as we move forward. It's a really important thing to remember that in a normal year, we expect -- first of all, we have contractual annual price downs, and we expect to at least offset those price downs through supply chain strategy and productivity in our facilities. Over -- obviously, in 2022, as we outlined in the guidance and certainly last year, not only weren't we able to get -- to mitigate those contractual low price down, we had significant incremental material related costs. So you've got a pretty substantial net headwind when you think about long-term margin targets. Our ability to negotiate those longer term relationships is what helps us get back to or exceed that long-term target. So it's not -- if everything goes perfect, it's a reasonable target based on the way that we see both our current revenue opportunity and the contribution margin associated with that, as well as some very specific strategic plans to expand our margin.

And I am showing no further questions at this time. I would now like to turn it back to Mr. Jon DeGaynor for further comments. Please go ahead.

Thank you, and thank you, everybody, for your participation in today's call. In closing, I just want to reassure you that our company is committed to driving 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 continue to drive strong financial performance. We're confident that our actions will result in continued success for 2022 and beyond.

And this concludes today's conference call. Thank you all for participating. You may now disconnect.