Good day, and welcome to the Stoneridge First Quarter 2024 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kelly Harvey, Director of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us to discuss our first quarter 2024 results. The release and accompanying presentation was filed with the SEC and is posted on our website at stoneridge.com in the Investors Section under Presentations and Events. Joining me on today's call are Jim Zizelman, our President and Chief Executive Officer; and Matt Horvath, our Chief Financial Officer. During today's call, we will 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. In addition, 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 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 was filed with the Securities and Exchange Commission yesterday under the heading forward-looking Statements. After Jim and Matt have finished their formal remarks, we will then open up the call to questions. And with that, I will hand it over to Jim.

Thank you, and good morning, everyone. Beginning on Page 3. Our first quarter financial performance was driven by continued strong top line growth in Electronics and progression across each of our key priorities for 2024. Our efforts to reduce material costs and improve our operating efficiency contributed to a 170 basis point improvement in gross margin, a 160 basis point improvement in operating margin and a 120 basis point improvement to EBITDA margin over the first quarter of last year. Additionally, we remain focused on cash performance and improvement in our leverage ratio. During the quarter, we generated $9.1 million of operating cash, an improvement of $18.3 million compared to the first quarter of last year. This is due in part to our continued efforts to reduce our inventory balance, which declined by $7.9 million. As a result, our leverage ratio improved by approximately 1/4 of a turn relative to the end of 2023. Despite the significant momentum we have and the fundamentals of the business, we must continue to focus on mitigating some of the historical execution issues that resulted in $2 million of incremental warranty-related costs this quarter. Through recent actions taken to centralize and redesign product line and program management organizations, as well as our global engineering organization, we are specifically focused on improving built-in quality, reducing material costs and improving manufacturing efficiency to drive profitability. There is no question. We are seeing the positive impact of these structural changes and expect the momentum from these changes to drive improved profitability as we continue to grow. In fact, as a result of the improvement, we expect due to these changes, despite some of the challenges in the first quarter, we are maintaining our full year 2024 guidance. Matt will provide further detail on our first quarter performance…

Thank you, Jim. Turning to Page 9. Sales in the first quarter were $239.2 million, an increase of 3% relative to the first quarter of 2023. Adjusted operating income was $300,000, which resulted in a 160 basis point improvement in operating margin relative to the first quarter of last year. As Jim discussed earlier in the call, we are maintaining our full year 2024 guidance. Our full year sales guidance midpoint of $1 billion is expected to outpace our weighted average OEM end markets by over 8 percentage points. We expect to outperform our end markets driven by the continued ramp-up of recently launched programs, including both the OEM and aftermarket applications of MirrorEye and the SMART2 tachograph. We expect an improvement in our material costs for the remainder of the year will offset the incremental warranty costs we incurred in the first quarter. As such, we are maintaining our full year gross margin expectations with a gross margin midpoint of 22.4%, which implies a 140 basis point expansion versus the prior year. Based on our efforts to drive a more efficient global operating structure, we expect that operating performance will remain within our previously provided range, but improved slightly relative to our prior expectations. As such, we are maintaining our full year operating margin expectations with an operating margin midpoint of 3%, which implies a 130 basis point expansion versus last year. Similarly, we expect slightly improved operating performance to offset the nonoperating foreign currency and equity interest expenses incurred in the first quarter. As a result, we are also maintaining our expectations for full year EBITDA and EPS. Our expectation of approximately $67 million of EBITDA at the midpoint of our guidance range results in a 170 basis point improvement and 39% growth in EBITDA over 2023. We…

[Operator Instructions] The first question comes from Justin Long with Stephens.

So maybe to start, Matt, you gave some color on 2Q expectations for revenue and EPS. But I was wondering if you could provide a little bit more color around the EBITDA cadence. You mentioned it being more back half weighted. But as we move into the second quarter, would you expect EBITDA to improve relative to the $11 million number you talked about in the first quarter, if you exclude some of the nonoperational items and maybe you could just talk about your visibility to that forecast as well.

Yes. Thanks for the question, Justin. So yes, we would expect it to improve from there. As we had said in the first quarter -- on our prior call, we had previously expected kind of relatively flat performance between the first and second quarter. We now expect that to be improved. Even off of the adjusted number that you mentioned, really due to the base operating performance improvement that we expect not only in the second quarter but also for the remainder of the year. So yes, we would expect the second quarter to be improved. And then if you look forward, we would expect continued improvement. Certainly, as we launch the incremental programs, particularly the large MirrorEye programs in the back half of the year, particularly as the tachograph aftermarket continues to ramp up, that's generally at a pretty accretive margin on the aftermarket sales. So we have good visibility to improvement because of its fundamental base improvement in the business that we've already seen in the first quarter. And that would only be duplicative on the incremental revenue that we expect in the second half. So we do expect improvement in the second quarter, and we would expect that to continue on pretty strongly in the second half with the launch of those programs.

And Matt, I'd add to that. When you think about all the work that we've been doing to drive excellence in execution and drive efficiencies within Stoneridge. And we've talked very specifically about some of those actions even today. Those things clearly had an impact on the first quarter. A lot of the performance that you are seeing are reflective in the numbers that we're seeing here relative to gross margin expansion and cash generation, et cetera. That stuff also becomes duplicative, right? As you start taking that into the second, third and fourth quarter and beyond, right, those things actually will begin to add more and more to the financial performance of Stoneridge. So I am very, very confident that we're going to have the right pathway here going forward.

That's really helpful. And maybe to follow up on some of the things you just mentioned, Jim, it sounds like first quarter was a messy quarter, lots of puts and takes, but they was some improvement in the underlying kind of operational performance that's maybe a little hard to see just looking at the headlines. So as we think about the full year guidance, 2 things you mentioned were material cost tailwinds and pricing tailwinds. Is there a way to kind of quantify how meaningful those tailwinds could be or speak in a little bit more detail about some of the operational improvements and what that could translate to in terms of the bottom line?

Yes. So Justin, first on just kind of the quantification of that. We always talk about contribution margin as a good way to understand how much operational performance we're getting out of the business, right? Our typical contribution margin is 25% to 30% on incremental revenue. If you look at the first quarter, quarter-over-quarter, even including those incremental warranty issues, we had 50% contribution margin on $7 million of revenue growth, right? Excluding those warrant issues, we were like 80% contribution margin quarter-over-quarter. So that is an indication that the business is significantly improving at a fundamental level. And that's really driven by, like we said, those material cost improvements. Again, if you exclude that warranty issue, which we wouldn't expect to recur forward, gross margin would have been over 21% in the first quarter, okay? So fundamentally, material costs and the actions that we've taken on the operating side to centralize functions, get more out of the resources that we have, but also reduce cost at the same time, you're seeing that benefit quarter-over-quarter certainly, and we would expect that to carry forward. When you add the revenue growth to that, that contribution margin can get really accretive to the earnings power of the business in the second half of the year.

Okay. Got it. And I guess the last one for me is on 2 of the big revenue drivers this year. You've got the SMART2 tachograph and you've got MirrorEye. I guess on SMART2, any color you can give us on the revenue cadence or ramp you're now expecting within the guidance? And then I'm just curious if there's been any change to your forecast for MirrorEye. I think you've talked about that being $100 million of revenue this year, but I just wanted to confirm that, that was still your expectation?

Yes, Justin. So I'll take the easy one of those 2 first. MirrorEye, yes, no change in expectation for the remainder of the year. We're seeing good progress with the OEs as we march towards those launches, particularly the very large launch with Volvo in the second half of the year…

And on track on those launches.

Yes. That's right. And then -- yes, so no change in the expectation for MirrorEye. The tachograph business, there's kind of 2 responses here. One, we haven't seen any change in the addressable market. And like Jim laid out in the prepared remarks, the market is timed such that this year has the first step in that adoption cycle. So within the year, we don't see any expectation of change relative to our prior expectations. Obviously, we talked about the first quarter being a little lighter from an aftermarket perspective, because just the law of the numbers, because the market hasn't changed and the first quarter was a little lighter, we obviously expect the second quarter and forward to be more than previously expected. And again, that aftermarket product generally has an accretive margin relative to overall margins. So it's also a little bit harder to time out that aftermarket adoption. Relative to an OEM program where you've got production volume and forecast, even if they fluctuate a little bit, there's a pretty structured cadence around that volume. The aftermarket -- we have some ability to do things on the pricing side, with our distributors, their customers, et cetera, to push or pull adoption. But ultimately, there's a little bit more volatility and there will always be a little more volatility in the aftermarket. So in the short-term quarter-to-quarter, it's a little bit more volatile. But for the year, nothing has changed, which just means the second half of the year will be even stronger than we expected previously.

[Operator Instructions] Our next question comes from Gary Prestopino with Barrington Research.

I kind of jumped on the call a little bit late and just kind of assimilating what you were saying on the tachograph, Jim. Was there -- there were some issues with the fact that there wasn't as much on the adoption side in the quarter as you expected? Or -- and could you just very simply just go through that again, please?

Yes. So first off, Gary, we'll break it into 2 sections as well. On the OEM side, it's being adopted as expected. It's required for new vehicles being sold. If they're going to be registered for international transport, they have to have the next-generation tachograph. So the OEs are selecting this and they're 100% in line with the volume of vehicles that they're building. The variability, probably what you picked up was variability, and that's really coming from the aftermarket. As you know, trucks at 3.5 tons are higher have to be retrofit if they have the former analog or 1B digital tachographs in place. And just like anybody, if you have a deadline to get something finished or completed, oftentimes, people will push the compliance with that deadline to the deadline itself. And so it was a little slower here at the beginning as people were first required to make the change, but they do have to the end of 2024 to get it done. And so like Matt says, that regulation hasn't changed. The timing and the compliance date hasn't changed. The addressable market is already out there. These are existing vehicles. So we're expecting to see an uptick really in the sales into the aftermarket because it was a bit lighter in the first quarter.

Yes. And I would add to that, as Jim mentioned in the prepared remarks here, the European Commission, which governs this regulation has reiterated those deadlines and requirements.

Yes.

So not only do we understand the addressable market and expect the second half to pick up. It's very clear from the regulatory agencies that that's the expectation of folks as well. So we feel pretty comfortable that we understand the addressable market. And because the first quarter was a little bit lighter, that just suggests there's more to come here in the second half or second quarter forward.

Yes.

Okay. And...

Make sense, Gary...

Yes, yes. No, that's fine. I just wanted to clarify that. And in terms of the peak revenue, I mean, what year do you actually hit that? Is that somewhere in the 2026? Or does this keep going on? And I guess, I'm trying to get an idea of what is the actual size of the market and units? I know I realize it's all for international transport only, but when is that peak number hit?

Yes. So Gary, because the adoption started late last year, you obviously see a ramp-up this year. We really would expect to kind of hit those peak numbers in 2025, 2026. And then naturally, of course, you'll see a more stabilized number, there forward as the retrofits are completed and the OEM market remains strong. So we talked about market share a little bit on the slide there that at our peak annual revenue, we estimate we would have about 30% market share. Obviously, because that's an aftermarket product and not an OEM award, there is opportunity to improve that as we go forward, and we're working on that. But that gives you some idea of kind of the total addressable market for our product as these regulations roll through.

So by July 2026, all vehicles above 2.5 tons we'll have to have this, whether they're retrofitted or OEM. And then once that happens, you start going -- after you hit peak revenue, then it just basically becomes an OEM driven product. Is that the way to look at...

An OEM product with some service requirements as well going forward. Yes.

Okay. All right. So next question revolves around the quarter. First of all, is your guidance for this year pegged off using a $6.6 million EBITDA number or an adjusted number of $10.9 million?

Gary, to be clear, the guidance includes those issues in the first quarter. So it's the $6.6 million number is what our guidance is based off of.

Okay.

But because those things, one, are obviously not operating on the FX side. And 2, not expected to recur on the warranty side, we wanted to provide a kind of an estimate of what you should expect from a run rate forward in the true performance of the business. So the guidance includes the $6.6 million, but the performance of the business, obviously, was much, much better than that. We wanted to outline that in the remarks.

So you can say with some certainty that there's not going to be any more warranty expense going forward?

So Gary, here's what I would say. There's never certainty -- yes, there's never certainty that you can say that there won't be any more warranty expense going forward. As you would imagine, we have a typical warranty accrual on every product, right? These were 2 specific items in the quarter that we would not expect to recur going forward.

Okay. And then just lastly, as I read back on my notes, I think you had said that you had expected Q1 adjusted EBITDA to be less than that of Q4, which was $15.6 million. As far as the quarter goes, the sales were better than we expected, but obviously, the adjusted EBITDA wasn't. But you didn't really give specific guidance for Q1. I mean, when you factor out these nonrecurring items, did the quarter come in about where you thought it was going to be on an adjusted EBITDA basis?

Yes. Generally, Gary. We did talk a little bit about the mix of tachograph in the aftermarket business. Like we said, that aftermarket business does have an accretive benefit to margin. So I would say that was the only thing outside of the normal -- or I'm sorry, the things we called out between the warranty and the nonoperating impacts. But generally speaking, the quarter would have been in line with our expectations, had it had not been for those unusual items or nonrecurring nonoperating items.

Okay. And then just in general, when you start these new programs that are going to roll out well, the growth in the tachograph and then obviously, MirrorEye going from, what, $155 million to $100 million and $60 million of tachograph...

Yes.

Those margins, especially on MirrorEye, as you go into 2025, those programs that you're rolling out, should those margins really start seeing really good improvement as you start scaling that business?

Yes, Gary, a couple of things to that. One, as with any program, as you approach more stable or peak annual revenue, the margin will be -- will improve, right? The incremental volume, obviously, the margin will improve. And typically, there's a ramp-up of any program -- any normal program, not just those 2. Separately, like we said, the aftermarket tachograph product has an accretive margin profile. But also as we've talked about for quite a while now, incremental take rate to MirrorEye can be extremely accretive from a contribution margin, right? We -- as everyone knows, we have spent the engineering and structured the organization for the amount of growth that we expect from these MirrorEye programs, right? So as they ramp up, not only will the typical program to kind of quoted volume improve margin, but we've always said we think that there's upside to that as adoption improves and take rate improves, and that can be very accretive as well.

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

Thank you. Thanks, everyone, for joining us for the call this morning. I know your time is very important, and we truly appreciate your willingness to engage us today. As we discussed earlier on the call, we are delivering on the key priorities -- key priorities we outlined for 2024 and expect our efforts to continue to drive long-term profitable revenue growth and significant earnings expansion going forward. We will continue to deliver on our commitments by focusing on our long-term strategy, our broad operational improvements and excellence in execution. We expect that our performance, along with our unique mix of industry-changing product platforms will continue to drive stronger shareholder value. Thanks again, everyone.

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