Stoneridge, Inc. (SRI) Earnings Call Transcript & Summary

good morning. Thank you for joining us today. I'm very pleased to welcome Stoneridge back to the Deutsche Bank Global Automotive Conference. Joining us today Stoneridge's Jim Zizelman, President and CEO; and Matt Horvath, the CFO. Stoneridge is a leader in sensors and systems for passenger cars and commercial vehicles that make a safer ride possible going on the road. With that, I'll hand over to Jim.

Thanks, Emmanuel. I appreciate it. Thanks for affording us the time here this morning to talk about our company. And I'll kick this off. And once I get through some of my commentary, then Matt will finish up. And of course, we'll open the floor for Q&A at that point. So what I thought we would do here initially is talk about the leadership changes that have happened at Stoneridge over the last few months. And maybe first off, starting with me. As Brian said, I'm the President and CEO of the company, also now a member of the Board. That all happened at the end of January for me. And for me, in general, relative to Stoneridge, I've been with the company for a little over 4 years now. And the first year or so, I actually was situated as a consultant to the company. So the former CEO brought me in, and I consulted quite a bit on the Control Devices segment space, but also I did some consultancy for company strategy in a general sense. And as I went through that consulting after about a year, I then joined the company full time becoming President for the Control Devices segment. And in that role, I was really quite integral to the development and the execution of strategy, not just for the division of control devices, but also for the company as a whole and really helps at the product development and the innovation strategy just our mentality toward addressing the mega trends in the industry as they go through some substantial change here over the last well, probably 5 years, but looking forward, it looks like there's more change coming. And overall, for me, I bring about being well over 30 years of industry experience from the automotive side, both in engineering and in general management. But also in the mechanical and powertrain space as well as the Electronic software active safety space. So I'm really well perched to take up the leadership role here for Stoneridge. And my history in a general sense goes back to a lot of execution. I've done strategy in my past and set up strategic plans. But what I've done in the last half of my career really is launched a lot of products. So dozens of products have been launched under my guidance or even by me directly. And I really found a way to understand what it takes to truly execute with precision, right, really make sure that you build in quality upfront across all your functions and drive excellence in the operation space to really provide efficiency and maximize margins for the company. Now with that as an intro, let me talk a little bit about the other two gentlemen you see here on the slide. First off, Rajaey Kased. With my transition to CEO, we named Rajaey, President of the Control Devices division. Prior to that, he had been Vice President of our sales organization and product line management. And Rajaey was responsible really for a lot of the strategic thinking that went into control devices. And in his role, he also oversaw a lot of the divestiture of noncore businesses in that segment. And that's really important as we realigned ourselves towards the mega trends to truly make ourselves available to address the mega trends as they change. And as he takes on his new role, of course, as President, he'll be responsible for all the business performance as any President would, but also the commercial relationships. He has really formed an excellent capability there as well. He's an excellent strategist who will be responsible for product development, of course, and all the innovation strategy within the segment. And then lastly, Troy Cooprider. Troy is a recent promotion in the company. In April, we named him Vice President of Global Technology and he is exceeding the outgoing CTO. He was most recently the Vice President of Advanced Engineering and engineering process excellence within the company. And he was really responsible for developing a lot of the next-generation products that we have at Stoneridge, including some of the follow-ons to our industry-changing MirrorEye technology. And he's brought in a lot of new customer engagements, a lot of engagements at the advanced level, including the recently announced partnership with Grote relative to wired rearview trailer cameras for commercial vehicles. I know Troy for a number of years, and he is a prolific inventor. He brought significant innovation to Stoneridge. And in his short tenure at the company, there's already 25 patents filed by Stoneridge that actually include Troy's name. So he's really thinking on that kind of mentality here at Stoneridge as well. In addition to the obvious leadership he'll have for driving technology in the company and strategies overall from a technical perspective, he's also now responsible for the global process for engineering, making sure that we have an engineering process that is efficient and drives excellence into our products upfront, minimizing the potential for errors as we launch and go into the field. Also, again, Troy's ability to truly engage at the advanced level with customers. He's also been named our key technical interface for advanced programs. So when we're developing new relationships on new products to be launched 2, 4, 5 or 10 years down the road, he is the guy leading those interfaces with the customers. The last thing I want to say about the changes, I actually recruited both Rajaey and Troy into the company. I did that because they were really needed for the skills they were bringing at the time, but it was also for an eye toward progression in the company. And I now believe we have an extremely strong executive team with the addition of these two gentlemen. I think we've really made some great progress driving the strength in the company. And then let me now get into more conventional description of the company itself. And I think you all know that we're a fairly well-established global Tier 1, we're really well diversified also from the standpoint of segment end market geography and even customer. And some of that diversification comes across our segments but it's diversified nonetheless. And in Stoneridge, there has been a lot of transition in the product portfolio over the last 5 years, again, as a result of the changing mega trends. And a lot of this is to align with the increased focus on safety and of course, the movement towards hybridization and electrification of drivelines as well. And we, in our approach to product development, we really try to make sure that as we develop new products, we're doing so in an agnostic fashion, meaning it would not matter what type of driveline was out there. The base technology itself can be or should be applicable regardless of driveline type. And we've been pushing this very hard over the last years. And by the time we get to, say, to 2027, we expect about 90% of our product to be driveline agnostic. So we are making some excellent strides toward achieving that goal. Yes. Maybe one last comment on backlog. As you can see here, we have a very robust backlog, $3.6 billion. And this supports a 5-year revenue growth of almost 10% CAGR, right, which has put us at a situation where we would be really outpacing the end market. So we're doing a good job of getting into new areas and adding content on vehicles where our growth will be well beyond the markets. So maybe now talking more so about the specific segments. So you get a clear view of how we're going to do the things I just talked about in terms of where the company is going. And first off, starting maybe with control devices. It's a significant segment within Stoneridge. We have about 41% of our adjusted revenue in this segment. This segment includes very highly engineered products, electromechanical and electromagnetic actuators also includes the temperature sensors and connectors. And all of these, again, with the intent to be applicable to both electrified vehicles as well as internal combustion-based vehicles. Our actuators segment is actually now more than 50% of the business in control devices, and it's our strongest growth business in control devices as well. And when you think about actuators from a Stoneridge perspective, these are the kind of products like disconnect actuators, think of 4-wheel drive vehicles where you connect or disconnect the 4-wheel drive mechanism. The new electric shifting mechanizations on vehicles where you touch the button or throw the pedal, there's an actuator somewhere that's telling the transmission what to do. That actuator, for example, is our product in many different vehicles. Also, as you go toward the electrified side, disconnecting axles for electric motors to save battery distance or actually protect motors so you don't overspeed motors. Those are the kinds of things that we do in the actuator side, which is a very big and growing business on the electric vehicle side. Much more actuation required on electric vehicles actually than internal combustion engines to make sure that you control that vehicle appropriately. Now temperature sensor business, I think, is something worthwhile mentioning as well. I think many people will think about temperature sensors as sensors that are primarily for coolant temperature or engine oil temperature, more conventional things. But when you get into electric vehicles, there's a very big challenge to maintain temperature control on battery packs, maintain temperature control in the very high power electronics and even temperature control, the motors themselves when you use them under heavy load. So we're actually expanding our temperature sensor business and really breaking very strongly into that electrified market as most of those vehicles will use far more low temperature sensors than what you would see in the conventional internal combustion engine. So maybe with that, I'll move on to Electronics. And Electronics is actually a slightly bigger segment, comprising of about 53% of the revenue of the company. And in Electronics, our product space is in driver information systems, connectivity devices and vision and safety products, including this emerging technology we call MirrorEye. And we'll talk a lot more about MirrorEye as we go through the presentation here. The MirrorEye itself, it's essentially a replacement digital mirror system for the rearview cameras on the vehicle. And again, that's getting extremely positive commentary from the market. For those of you who are inclined to go on TikTok, I ask you maybe search on Stoneridge and MirrorEye, and you'll see a lot of real fleet owners or actual drivers commenting on how well received this MirrorEye technology is. In addition, we've got some new digital instrumentation cluster programs. This is fairly new in the commercial vehicle space. And the reception of that technology also very positive for Stoneridge. There's a lot of connectivity and a lot of interaction and reconfigurability in those clusters, which is really important to the commercial vehicle driver. And of course, there's a whole segment of our products in electronics that is focused on connectivity. We have a Smart 2 tachograph that's launching here later this summer. That technology really is a tracking technology that is communicable to the out the world to let fleets and even government agencies understand and know what is out there relative to the usage of that truck. So in any event, the Strongbridge Brazil, maybe one final short comment on Stoneridge Brazil. Primarily, that business has been aftermarket historically, but we've been transforming that business there to be more supportive of our global customers, and we've been seeing some good success there as we move more so into the OE business in Brazil. In fact, we recently communicated the announcement of a new infotainment business for one of the global commercial vehicle OEs that is present in Brazil. Now in addition, Brazil serves as a very strong technical center for us, serving a lot of the software and electronics needs of the company and software and electronics are needed both in the Control Devices division as we have smart actuators as well as in the electronics side where you have purely electronic componentry. So it's becoming more and more an important segment for us and certainly growing its business -- changing its business model as well. So moving forward now, let's talk about some of this diversification, some of the breadth that we have, maybe in a little bit more detail. And as I said earlier, we're clearly a global company. And when you look at some of the third-party forecasts for what we have coming for this year and for next year. In the commercial vehicle space, it looks very strong for this year. And for the automotive, I think also stable, right? I think there's some concern in the second half that we'll have to address. But I think that we're well perched still even with maybe a weaker second half for automotive and perhaps some concern on CV in 2024, we think we're well perched to outperform the end market. And so why is that? So first off, we will continue to ramp up our first European application at MirrorEye. And there's more incremental truck production utilizing the MirrorEye technology. And we're seeing, again, very strong customer reaction, very strong customer take rates. So from that perspective, it's increased content per vehicle from us and a greater likelihood for our customers, even perhaps in a lower volume environment to be selecting this for the vehicles that they're producing. In addition, we've just launched this year our first North American MirrorEye program just launched in April. That's ramping up slowly. So throughout the course of the year, that will ramp up more so. And as we get into next year, the take rates we expect there to go up as well. And then some of those digital instrumentation clusters, I mentioned were introduced in 2022 midyear. And so in 2023, we have a full annualization of the revenue associated with those clusters also. And then lastly, on MirrorEye, and I'll talk more about what this really is. We have a retrofit program where customers are placing MirrorEye on trucks that have already been produced. So they're removing the rearview mirrors and they're placing this MirrorEye technology on them. Of course, we're working conjunctively with them to do that. And we're seeing a pretty big ramp-up of that as well, rising to about 5,000 units, in 2023. So that too is a growing business as the reputation of the product starts to pass from fleet to fleet. And also on the Control Devices side, with all of these actuators and the increase in the number of actuators on electric vehicles compared to internal combustion engine vehicles we're seeing a lot of increase in revenue from that with a lot of our products placed on vehicles like the Mustang Mach-E, for example, where you've got excellent penetration into the market.

Okay. So maybe enough on our diversification and what the end markets look like and how we will perform in those markets. Why don't we go ahead and move forward right?

I'm not seeing an advance here. So let me continue, and we'll get the slide up here in a moment. And what I wanted to do, given MirrorEye's importance and the revenue of the company and the growth, I wanted to talk therein a little bit more detail about that technology. So it's essentially a Mirror replacement technology, as I said, replacing the rearview mirrors on a commercial vehicle. Some cases, we'll call it a mirror enhancement technology because some customers will actually integrate the MirrorEye system into a smaller side-view mirror. And when you think about the technology itself, it really offers an enormous increase in field of view for the customer. Typical mirrors on commercial vehicle trucks when you turn a truck the mirror looks directly in the side of the trailer. In this case, you have articulation of the cameras. So you continue to see down the likes of the trailer. So it really provides an incredible increase in the field of view. Also, what you get from this is substantial safety improvement. With all that view improved, and the full color night vision that also comes with this technology, the safety associated with this is really a significant improvement. And we're hearing a lot back from our fleet customers talking about what they're seeing in terms of incident rates and the reduction in those with this type of technology in place. And then it's sort of obvious what -- it's sort of obvious what you would get from the elimination of a side mirror, it's a big flat panel that's out there in the wind. You get a significant improvement in aerodynamics around the truck itself, because MirrorEye systems are typically in wings, aerodynamically designed and the first selling point of the product, the fuel economy. And we're now getting some commentary back about what fuel economy benefits are actually seeing in field, not just through projections. And it's quite significant even in cases where they still have a small mirror, 1.5% fuel economy improvement, which is enormous for a fleet customer, very big savings. Now we sell these products in three different ways. It's a retrofit, it's pre-wire, and it's OEM installation. So I already talked about retrofit and what that is per se. We're working very much in that space with the North American fleet. And we're on a lot of fleets that you'll know the names of, companies like Maverick and Schneider, Nussbaum, KLLM Fast Food Express. These are all customers of ours that have taken trucks that they purchased from the OEs, eliminated their side view mirrors and place the MirrorEye system in place. And the pre-wire, it's really also a retrofit, but it's making the retrofit a bit easier. So it's working with the OEs to make sure that they are placing the right brackets, the right wiring, the right connectors so that when a retrofit occurs, it's more of a plug-and-play kind of approach than it is drilling and making work something that was not initially designed for the mirror. The OEM programs are obviously what they are selling directly to the OEM. It would be checked off as an option on the vehicle order panel to receive the MirrorEye on those vehicles. And we have four programs awarded globally on MirrorEye, and we've got very significant market share in this space. In North America, we consider ourselves at 70% -- or 75% market share. And in Europe, about 33% market share. So we've really penetrated quite quickly with this technology. And then when we book these businesses, we typically consider a fairly low take rate and a fairly low take rate, it builds the business case, and we understand what we would get from that. But what we're seeing, generally speaking, is a take rate well above what we had planned for from a take rate perspective. And for example, our first OEM program in Europe, take rates have gone way up to 40%, almost double what we had additionally anticipated. The second OEM in North America, the take rates are projected at about 10% or 15%, but that's really too early to tell. It's only in the field of being produced over the last 60 days or so. So we're quite optimistic that we'll see those take rates go up. And then our third OEM program is, I'll say, the European leg of a global commercial vehicle manufacturer. It launches about 9 or 10 months. And the expected take rate as projected by the OEM is 45%. So really a strong take rate, at the beginning and we again expect potential for revenue and upside from these products because we think the take rate will go up even beyond that. So with that, I wanted to talk about a couple of program launches that we're excited about, one in the Control Devices segment and then one in the Electronics segment. First one here I'll talk about is our drive unit clutch actuator, which is an actuator in the new Corvette E-Ray, and I mean we all know the Chevi Corvette. We know there's 8 generations. It's been around for 70 years. GM often will put first innovations, new technologies into the Corvette first and then spread that across the product lines over the years. And we're very happy to say that we've been involved with GM in the development of this vehicle and helped enable this new electrified Corvette. So the Corvette itself has a conventional internal combustion engine and drives the rare wheels. There's an electric motor added that drives the front wheels. And we produce the actuator that either connects or disconnects that front-wheel drive that comes electrically. What comes from this is 655 horsepower and the fastest Corvette ever produced 0 to 16, 2.5 seconds. So I can't wait to get my hands on one of those. And it's a fun vehicle. I actually got up and close and inspected one carefully about 10 days ago. Also on the MirrorEye side, we want to talk a little bit about this first introduction of MirrorEye in North America. And it utilizes of course, the base MirrorEye platform. But as I said earlier, this is a little bit of a different application because in North America, NSA for brand-new vehicles will not allow the elimination of the side-view mirror. They'll allow it in a retrofit, but not as vehicles are produced. So this particular customer chose to integrate the digital mirror system into the rearview mirror itself. But they minimize the size of the rearview mirror. So this was launched in April that brings all the safety features. They're seeing 1.5% improvement in fuel economy already with this. And we all believe there will be upside to take rate for that product. So again, execution is key here. We really need to make sure that all these launches are executed well. When you do that to satisfy the customer and you really open yourself up for a lot of additional growth. And that's really my final slide here before I pass this over to Matt. In taking control of the company, as I said earlier, I'm a strategist, but I really have a lot of expertise in execution. And first things first, I wanted to make sure that every single one of our launches came off as flawlessly as possible. Now focus on quality in that manufacturing operation, focus on quality with delivered componentry that you're using to build those products, focus on delivering on time and at the right quantity. And of course, also focusing appropriately on cost control, so the margin that Stoneridge sees is correct, right, and as expected by the business cases. So we have really restructured our teams to focus strongly on those launches to make sure that those are absolutely the very best that they can be. And when you're launching, it's a little bit of a look back to make sure you've got things right. Now the other two items on here are looking forward. As I said, I'm big on execution. That doesn't necessarily mean execution relative to operations, right? It means execution upfront, and if you have your various organizations and functions working properly, working with the right data, an appropriate database organization, the right vetted processes, adherence to those processes, strict rigor and discipline on how you execute so that any issues that come up in the course of development, in any function, they have to use a technical function that you're addressing those issues upfront and early so that you don't let those get into the production space. You don't let them interfere with operations, you don't let them interfere with launching that product and getting it to a customer. It really is the built-in quality side of the automotive industry and absolutely, we are -- we now have the rigor, the discipline, the process control so that, that will be a continued improvement tier for Stoneridge. And of course, cost control, it's always in everyone's minds. It's the responsibility of every person inside of Stoneridge, right. After production start, there's always got to be a continuous improvement in methodology, whether it be cost improvement on componentry, whether it be engineering simplifying, whether it be logistics, all elements of costs need to be well controlled so that the margin grows as expected based on our long-term forecasts. With that, I'm going to pass it over to Matt. He's going to talk about those long-term targets right now.

Great. Thanks, Jim. It looks like we're having a little bit of technical difficulty in the room here. So for those following along, I'll reference Slide 12. One of the ways that we measure our future growth opportunity is through backlog. Our backlog is simply 5-year awarded programs at IHS forecasts at constant currency expectations. So this is purely awarded business, without the option take rate expectations that Jim had outlined previously. We do expect the MirrorEye has some upside opportunity, but the backlog that you'll see represents only that at customer quoted take rates, okay? So our 5-year backlog has grown 6% year-over-year. That has primarily been driven by both segments, both primary segments. On the Control Devices side, like Jim mentioned, some significant growth in the actuation space particularly around products and platforms that are winning in the market, one of the highest content per vehicle programs that we're on is the Ford MACH-E, and you've seen that Ford has had a significant amount of market penetration with their electric vehicle platforms. So we've seen good growth on the actuation side. And then similarly, on the other side of the business on the electronics side, we've seen continued adoption of our digital instrument clusters, both in North America and Europe. As well as the incremental MirrorEye take rates that Jim mentioned, both on our first program to launch in Europe as well as the expectation that those take rates will continue to increase in North America and future launches. One thing I will note, the second program that's launching in Europe, has increased their expectation of the take rate almost double since the time it was awarded. So you're starting to see the OEs listen to the fleets, understand the pre-wire opportunity that we have in the market already and really advance those expectations to take rate forward. So again, our 5-year backlog, very strong, 6% growth year-over-year to about $3.6 billion, which represents more than 5x our annual OEM revenue. So a significant amount of growth in our already awarded backlog. Flipping to Slide 13 then, if you look at what that translates to from a revenue perspective, we expect between $1.3 billion and $1.5 billion of revenue coming from -- by 2027, our 5-year target, coming from a midpoint of about $975 million this year, which represents almost a 10% CAGR over the next 5 years. That's 2.7x our weighted average end market growth. So very significant top line growth expectations. Primarily around awarded programs with the opportunity to even outperform that as we look at MirrorEye upside. When you think about then what that means from an earnings power perspective, we typically get 25% to 30% contribution margin on incremental revenue which means that our EBITDA margin should advance from mid-single digits where we expect this year to about 11.5% to 13.5% in over a 5-year period. So you can see that because we have strong contribution margins, we have a tremendous amount of expected growth over the next 5 years. We do expect that EBITDA margin will advance to that mid-teens level over a 5-year period. Okay? And then finally, on Slide 14, we are expected to outperform the market significantly over the next several years. Our target is 2.5 to 3x weighted average in the market growth, that puts us at revenue of $1.3 billion to $1.5 billion over that 5-year target, which translates to very strong earnings potential for the company over that 5-year period. You look at EBITDA margins in the mid-teens, that suggests over $125 million of EBITDA in a 5-year period here. So we remain really focused on the future. Obviously, we're very excited about the technology platforms and products that Jim walked through, it creates a tremendous amount of growth for the company. Our focus now is really on execution and making sure that we turn that tremendous amount of growth into strong earnings power over the next 5 years.

So I know we've really got a couple of minutes left. But with that, I think we'll open it up for any Q&A.

I was just curious in terms of the opportunity with the OEMs, and it sounds like it's a regulatory hurdle there. Just any kind of insight in terms of what that opportunity could look like if that overhang came off? And what's the justification behind restricting that on new vehicles and not on the retrofits.

Yes. So there's two real regulations in North America -- or in the United States. One is driven by the FMCSA, which governs what has to be on the vehicle when it's on the road. They have already allowed us to take mirrors off the truck. So the retrofit and pre-wire examples that Jim gave, those trucks don't have mirrors on them for the most part today. MISO, which is what's required to roll off the line when a truck is made, still requires a small mirror. So regulatory -- I wouldn't expect a big jump as a regulatory hurdle changes from MISO because the FMCSA already allows for that benefit of fuel economy. Obviously, the safety benefit is there, whether you have the mirrors or not. But MISO has tested the system. Those agencies are aligned generally, we just haven't seen the regulation change in the MISO side. And frankly, it's because we just launched in North America with the first OE program. There hasn't been a big impetus to change that regulation. I think we'll start to see some traction there as we launch the program in North America.

[indiscernible] Just a follow up on that. Is that the key reason why the margin is so much bigger in Europe versus the U.S. with the take rates?

No. So when you look at the margin -- when you look at the segment margin, Electronics, that North American program still falls in Electronics. So it's not necessarily U.S. versus Europe. The margin profile between the systems is not much different.

Just looking at some of these profiles. Can you talk a little bit about the supply chain security in terms of how you're thinking about that with respect to your 5-year outlook?

[indiscernible] 2022, maybe get far less production [indiscernible] change special selling suppliers in electronics pace specifically [indiscernible] about [ 3x ], right? The really good opportunity to work with customers to have them understand that. So their ordering commitments are also now aligning with [indiscernible]. We have to make material kind of products going forward. The far few organ [indiscernible]. So from that perspective, we really do think that we're over the largest [ pump ] of the supply chain shortage. So looking forward, designing [indiscernible] dual sourcing, making sure you've got alternative design, those safety features are being built into products that you can [indiscernible].

And so just kind of ask a follow-up clarification. When you said working with your customers to understand sort of those commitments, are you having to make any kind of cash outlays in terms of to be able to secure some of that supply from your suppliers?

Matt, maybe you want to...

Yes. It depends on the situation. In some cases, we've got such long lead times that you've seen inventory build for us, for example, over the last 2 years. In some cases, we've got long lead times, in some of these product cases, they're newly adopted technologies, for example, in the digital instrument clusters or they have a variable take rate to them. So we're working with customers to understand better what that long-term forecast looks like so that we're able to secure material in a normal supply chain and also an offset costs, which, in most cases, we have passed on to our customers. So we're buying things within a tighter window or actually a broader window now, but a tight window relative to the overall supply chain. Generally, we're passing that spot buy on to customers. So we'll work with customers to understand what the longer-term forecast looks like relative to a typical industry norm and then able to secure the supply chain at a reasonable cost to supply it. Other questions?

Okay. Thank you very much.

Thanks, everyone. Appreciate it.