Stoneridge, Inc. (SRI) Q1 2026 Earnings Report, Transcript and Summary

Welcome to the Stoneridge First Quarter 2026 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to Kelly Harvey, Director of Investor Relations. Thank you, and over to you.

Good morning, everyone, and thank you for joining us to discuss our first quarter 2026 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 Natalia Noblet, our President and Chief Executive Officer; and Bob Hartman, our Interim Chief Financial Officer. Before we begin, I would like to inform you that as a result of the sale of its Control Devices business segment on January 30, 2026, the company has applied the provisions of discontinued operations accounting guidance and has retrospectively presented the financial results of the Control Devices segment as discontinued operations in the accompanying presentation for all periods presented. Additionally, in connection with the retrospective presentation of Control Devices as discontinued operations prior period segment information has been recast to conform to current period presentation. More information on the basis of presentation will be included in the Form 10-Q, which will be filed with the Securities and Exchange Commission. During today's call, we will be referring to certain non-GAAP financial measures. Please see Slide 2 of the presentation for a more detailed description of these non-GAAP measures and the appendix for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. In addition, 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 on Page 3 of the presentation and in our Form 10-Q under the heading Forward-Looking Statements. After Natalia and Bob have finished their formal remarks, we will then open up the call to questions. And with that, I will hand the call over to Natalia.

Thank you, Kelly, and good morning, everyone. It is a privilege to speak with you today in my first earnings call as President and CEO and at a time when our industry is being fundamentally transformed with continued shift to automation and connected vehicle technologies as well as focus on advanced safety and vehicle efficiency. Our product portfolio is directly aligned with this transformation and represents significant growth opportunities. Now turning to the first quarter. Let me begin on Page 4. This quarter marks the next phase of our long-term strategy as we advance our key priorities to drive shareholder value. We made progress through disciplined execution, improved manufacturing and quality performance, net tariff-related recoveries and organization-wide cost control. More specifically, compared to the fourth quarter of prior year, first quarter adjusted gross margin expanded by 400 basis points and adjusted operating margin improved by 180 basis points. This resulted in adjusted EBITDA of $2 million, which exceeded our previous expectations of approximately breakeven EBITDA performance. European commercial vehicle market is at late cycle normalization and transitioning to moderate growth while North American market remains at the bottom of the production cycle with signals of recovery. Although we see the first positive signals in these end markets, macroeconomic and geopolitical headwinds continue to persist. That said, our first quarter revenue grew by 9.2% compared to the fourth quarter of prior year. This resulted in market outperformance compared to our weighted average OEM end market, which declined by 9.1% over the same period. As previously announced, MirrorEye set another quarterly sales record generating $33 million in sales, an increase of 11% compared to the fourth quarter of 2025. Similarly, Stoneridge Brazil OEM sales continue to grow as our local business accelerates resulting in first quarter sales growth of more than 54% and our off-highway sales improved compared to the fourth quarter as well. As previously mentioned, adjusted gross margin improved by 400 basis points compared to the fourth quarter. This demonstrates progress on our excellence in execution initiatives and in particular, company-wide quality improvements, manufacturing productivity and the recent tariff-related recoveries, including agreements with customers and the benefit of the tariff refund process. We remain committed to driving structural cost reductions by streamlining our SG&A costs to more effectively support our company's current structure and are on track with our commitment to reduce costs by at least $5 million this year. Our priority is delivering outstanding value to customers while collaborating with all of our partners to advance next-generation technologies for safer and more efficient transportation. We are excited to announce 2 major business awards totaling approximately $135 million of estimated lifetime revenue. First, we are announcing an award for an OEM integrated MirrorEye program with our fourth North American customer. We now have OEM programs with all 4 major Class 8 truck manufacturers in North America. Second, we are announcing a next-generation electronic controls program for a global off-highway manufacturer in Europe representing the increasing demand for integrated intelligence systems. Both of these awards highlight our ability to deliver reliable, high-performance solutions for our customers and build on our already strong backlog of growth products. I will provide more details on these awards later on the call. Additionally, we are reaffirming our base full year 2026 guidance. However, we are adjusting revenue and operating guidance ranges for the incremental impact of contract manufacturing associated with the sale of Control Devices. Bob will discuss this guidance update in more detail later on the call. Turning to Slide 5. As just mentioned, both the European and North American commercial vehicle end markets remain at low production levels. Europe went through a downturn, but significantly milder than North America and the market is expected to normalize this year. North America, however, went through a deep downcycle and now we see early signs of recovery in trucking demand and order intake growth. At the time of our fourth quarter call, IHS production forecasts were indicating growth of 7.1% for our weighted average OEM end market. As you can see from the chart on Slide 5, updated IHS production forecasts have now been reduced and are now indicating that our weighted average OEM end market will grow by just 1.8%. These updated forecasts are now more in line with our initial full year 2026 guidance expectation. Although we see the first signs of recovery in these end markets especially for the second half of this year, inflationary pressure and geopolitical headwinds continue to persist. Turning to Page 6. MirrorEye continues to gain momentum driven by increasing market acceptance as well as the continued ramp-up of recently launched programs in North America. At the same time, we are executing on new business opportunities with key strategic OEM customers as evidenced by our new program announcement with the fourth major OEM in North America. As already mentioned, first quarter MirrorEye sales set yet another quarterly record with $33 million. This represents 11% growth compared to the fourth quarter of 2025 and 32% year-over-year driven largely by our European OEM programs with continued strength in market penetration and take rates supported by our customers' focused marketing of this best-in-class innovative technology. Complementing this growth is the continued ramp-up of recently launched OEM programs in North America. While program ramp-ups remain in the early stages, we are seeing increased order strength and continue to receive positive feedback from the market. As we pass through the ramp-up phase, we are focused on engineering optimization that will allow us to benefit from platform approach while adding product features at the same time. With volume increase and maturity gain, we will also see higher capacity utilization and material cost improvement through supply chain optimization. By executing those key activities, we can fully realize the value of our technology. In addition to strong commercial performance and as previously announced, Stoneridge has now surpassed 150,000 MirrorEye systems produced globally marking a major milestone in the systems life cycle. This achievement reflects the growing confidence of OEM partners and fleet operators as well as Stoneridge's ability to scale production while maintaining the highest standards of quality and reliability. Reaching 150,000 systems is more than a production milestone. It's a testament to the trust our customers place in MirrorEye every day. As adoption accelerates, we remain focused on continuous innovation and production efficiency. Building on our momentum and success of the MirrorEye platform, we are excited to announce that we have been awarded the OEM integrated CMS program with yet another major North American Class 8 truck manufacturer. As announced last year, we began offering our standard version as an option on the current heavy-duty truck model. Through continued strength of this customer relationship and the trust we have built to create a foundation for continuous collaboration, we were awarded the custom program based on our next-generation camera monitoring system. This program is expected to launch in 2028 with estimated lifetime revenue of approximately $70 million and estimated peak annual revenue of approximately $20 million. We now have MirrorEye programs with 4 major OEMs in North America resulting in significant market share. MirrorEye and our strategy to create long-term growth for the platform is paying off with additional business awards and expansion across the global OEMs. We are deploying the resources necessary to optimize this growth platform and create long-term value for our shareholders. Turning to Slide 7. In addition to MirrorEye, we continue to win new programs in our other key product categories. As part of our strategy to expand our electronic control business, we secured a business award for a next-generation control program with a leading global off-highway vehicle manufacturer in Europe. Replacing our current generation control, this program will deliver upgraded products for the main electronic unit on several construction equipment platforms, including wheel loaders, articulated haulers and excavators. The program is expected to launch in the first quarter of 2028 and is projected to generate total lifetime revenue of approximately $65 million with estimated peak annual revenue of approximately $15 million. This replacement business with a long-standing strategic customer reflects our ability to consistently deliver exceptional customer service and reliable high-performance solutions to our customers. As the commercial vehicles are moving towards software-defined vehicles architecture, we are prepared to enable this transformation with our scalable ECU platform products. We expect this award to continue to position us for future business wins. Stoneridge remains focused on consistently delivering innovative next-generation solutions that meet our customers' evolving needs. And with that, I will turn the call over to Bob for the financial update.

Thank you, Natalia. Page 9 summarizes our key financial metrics for the first quarter of 2026 compared to the fourth quarter. Sales in the first quarter were $160.8 million, which were relatively consistent with our prior expectations. First quarter revenue grew by 9.2% compared with the fourth quarter driven by quarterly record sales for MirrorEye as well as higher sales in the Brazilian OEM business and off-highway end markets. This growth was partially offset by continued pressure in the commercial vehicle end markets. During the quarter, we also recognized $3.8 million of revenue from contract manufacturing related to the Mexico supply agreement associated with the sale of Control Devices. Driven by execution of key company initiatives, margins continued to expand in the first quarter. Continuous improvement in manufacturing performance, including company-wide efforts to reduce quality-related costs as well as favorable net tariff-related recoveries, contributed to the 400 basis point improvement in adjusted gross margin over the fourth quarter of last year. As a result of our continued efforts to remediate tariff-related costs incurred, we recognized a favorable net tariff benefit during the quarter resulting from both customer reimbursement agreements and IEEPA tariff refunds. First quarter adjusted operating income improved by 180 basis points relative to the fourth quarter of 2025. This was primarily driven by the gross margin improvement partially offset by higher SG&A due in part to the normalization of incentive-based compensation and higher D&D primarily driven by lower customer reimbursements. As Natalia mentioned earlier on the call, we remain committed to the $5 million structural cost reduction target this year. First quarter adjusted EBITDA was $2 million, which was above our previous expectations of approximately breakeven performance. Excluding nonoperating income and expenses primarily related to the foreign currency impact on intercompany balances, first quarter adjusted EBITDA expanded by 170 basis points compared with the fourth quarter. In summary, during the quarter, our top line and margin expansion demonstrated solid progress towards our long-term goals. Turning to Slide 10. As Natalia mentioned earlier on in the call, we are adjusting our full year 2026 guidance ranges to reflect the incremental impact of contract manufacturing revenue expected to be recognized this year from the Mexico supply agreement related to the sale of Control Devices. While the estimated benefit of this agreement was previously included in our adjusted EBITDA guidance as nonoperating other income net, we are updating full year revenue and operating margin guidance ranges to align with the revised revenue recognition treatment. As such, we are updating our full year revenue guidance by $20 million. This results in full year revenue guidance of $645 million to $670 million and adjusted operating margin of approximately breakeven to 0.5%. Adjusted EBITDA guidance remains unchanged at $20 million to $25 million resulting in 3.1% to 3.7% of sales. That said, our base guidance remains unchanged supported by our solid progress to start the year. While commercial vehicle production volume forecasts are continuing to improve, macroeconomic and geopolitical volatility continues to persist. We remain confident in our initial outlook and the meaningful progress we are making across our key initiatives. Furthermore, we also remain focused on driving organizational efficiencies and have already taken actions to reduce structural cost to better align our cost base with the company's current scale, which will position us to deliver sustainable long-term performance. As it relates to the cadence of our guidance, we are expecting second quarter revenue to be slightly above the first quarter. We are expecting EBITDA to continue to improve in the second half of the year aligning with expected revenue growth and the ramp-up of benefits from material and structural cost improvements. This expected cadence would result in improved EBITDA in the second half of the year compared with the first half. In summary, we are still expecting revenue growth, continuous improvement in our operating performance and structural cost reductions to drive EBITDA expansion in 2026. Page 11 summarizes our key financial metrics specific to Electronics. First quarter sales of $144.9 million were 8.7% higher than sales in the fourth quarter. Stoneridge-specific growth factors continued to offset production volume headwinds. More specifically, MirrorEye set another record for quarterly sales growing to $33 million or 11% relative to the fourth quarter of 2025. Furthermore, our sales in the European and North American off-highway end markets increased compared with the fourth quarter driven by stronger market adoption of our products. This growth was partially offset by lower Smart 2 tachograph sales in Europe as expected due to the completion of the regulatory retrofit campaign. Also included in first quarter sales was $3.8 million of contract manufacturing revenue from the Mexico supply agreement related to the sale of the Control Devices segment. First quarter adjusted operating margin expanded by approximately 260 basis points compared with the fourth quarter of the prior year driven by higher gross margin as a result of manufacturing performance improvements, reduced quality-related costs and the favorable impact of net tariff recoveries. The impact of contract manufacturing under the Mexico supply agreement, which began in the first quarter of 2026, was incremental to the fourth quarter. This was partially offset by higher SG&A driven by normalized incentive compensation and higher D&D costs primarily driven by lower customer reimbursements. We remain confident that Stoneridge-specific growth drivers, including MirrorEye, will drive market outperformance going forward. We will continue to focus our efforts on material cost and manufacturing performance including quality-related cost improvements to build a more efficient scalable operation that consistently delivers high quality products and results. Page 12 summarizes our key financial metrics specific to Stoneridge Brazil. Stoneridge Brazil's first quarter sales totaled $18.1 million, which represents a $1.6 million or 9.4% growth relative to the fourth quarter of last year. This increase was driven by higher local OEM sales, which expanded 54% compared with the fourth quarter. We remain focused on expanding our local OEM business to grow our presence in Brazil and unlock opportunities with our global customers. First quarter adjusted operating income of $1.7 million or 9.5% of sales improved by 140 basis points compared with fourth quarter 2025 primarily driven by fixed cost leverage on higher sales and lower SG&A costs due to lower incentive compensation. This was offset by unfavorable sales mix caused by a lower proportion of service fee revenue. We continue to shift our portfolio in Brazil to more closely align with our global growth initiatives and further expand our local OEM programs to support our global customers such as our second quarter launch of an audio product for a global automotive OEM. Brazil remains a critical engineering center where we utilize their local capabilities to cost effectively support our global business. Turning to Page 13. In the first quarter, net debt improved by approximately $42 million compared to the fourth quarter as the proceeds from the sale of Control Devices were used to pay down our debt balances. We remain focused on driving strong cash flow conversion through both disciplined working capital management and capital expenditure oversight. As a result of these efforts, we reduced inventory balances by approximately $16 million year-over-year while continuing to scrutinize capital expenditures. As disclosed last quarter, we completed an amendment of our current credit facility to extend the maturity date to July 1, 2027, to allow ample time to refinance. In April, we initiated this refinancing process to replace our existing credit facility with a capital structure that will more align with the long-term structure of the company and support future growth opportunities. We are targeting completion of the refinancing process by November of this year. Finally, based on our current EBITDA guidance and our amended covenant ratios, we expect to remain in compliance with all of our covenant ratios and have sufficient liquidity to navigate continuing volatility. With that, I will turn it over to Natalia to provide an update on our progress against our key priorities.

Thank you, Bob. Turning to Slide 14. To summarize. In the first quarter, we advanced our key strategic priorities driven by our focus on technology-led products, excellence in execution and the strong performance culture enabling meaningful progress across shareholder value of market outperformance, margin expansion and cash flow conversion. First, our focus on advanced technology solutions continues to drive market outperformance. Our top line growth exceeded our weighted average OEM end markets by more than 15% driven by execution in our core programs, including MirrorEye, the Brazilian OEM business and off-highway products. Furthermore, our strong customer intimacy and deep customer integration resulted in the new business awards I outlined earlier on the call. Driven by our robust backlog and differentiated innovative technologies, we expect to drive market outperformance of 2x to 3x over the long term. Second, driven by our focus on excellence in execution, we made meaningful progress towards improving margins and advancing long-term sustainable performance. We continue to reinforce strong consistent practices across our processes to enhance operational efficiency and product reliability, which in return have driven modestly lower quality-related costs compared to the fourth quarter primarily thanks to lower warranty-related costs. As a result, first quarter gross margin expanded by 400 basis points compared to the fourth quarter of prior year. In addition to margin performance, we are focused on cash flow conversion through disciplined working capital improvement and capital allocation. We continue to prioritize cash generation and a strong balance sheet through operating performance, inventory reduction and strict capital spending. As Bob already mentioned, we have reduced our year-over-year inventory balances through working capital initiatives and have significantly reduced our net debt compared to year-end through the use of proceeds of the sale of Control Devices. These actions have strengthened our balance sheet and strengthened our financial position going forward. As a team, we are also mobilized to mitigate arising inflationary pressures especially in semiconductor space and volume uncertainty due to the current market and geopolitical situation. By fostering a culture of accountability, creativity, collaboration and continuous improvement; we are focused to execute our plan for this and next years to come. And with that, I will turn the call over to questions.

[Operator Instructions] As we have no questions, I would now like to turn the conference over back to Ms. Natalia Noblet for closing remarks.

Thank you for joining us for the call. I know your time is very important. And as always, we truly appreciate your willingness to engage us today. While the external environment remains dynamic with ongoing inflationary and geopolitical risks, we are focused on what we can control. We are executing with discipline, strengthening our operations and focusing to mitigate risks. We remain committed to delivering consistent performance, improving results and creating sustainable value for our shareholders. Thank you again and we look forward to updating you on our progress next quarter.

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