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

I'm very pleased to be able to introduce Stoneridge turning to Deutsche Bank's Global Automotive Industry Conference. Stoneridge is a global supplier, safe and efficient electronic systems and technologies. Company operates in 3 segments, Control Devices, Electronics in Brazil, each positioned for long-term success in the transportation industry. Presenting today will be President and CEO, Jim Zizelman; as well as CFO, Matthew Horvath. Jim?

Well, good afternoon, everyone. Thanks for spending some time with Stoneridge today. And Brian, thank you for having us here to provide some details on the latest status of Stoneridge. So first off, let's -- why don't we just kick off by looking right at a bit of a company overview. I'll sort of high level, and I'll get down to some very specific things, including some details around products and the impact that they're having in the industry. So first off, for those who may not know Stoneridge well. We're a global supplier of electrical and electronic technologies and systems. And our primary space in the industry is commercial vehicles and passenger cars as well as off-road. So off-road being construction and ag and passenger cars, it also means not just the cars themselves, but also light trucks like pickup trucks and sport utilities and so forth. We have had a very transformed product portfolio over the last few years. And this transformation really comes from us really paying close attention to the industry mega trends. And the industry -- in these industries that we're talking about here, things like a hybridization and electrification of vehicles as well as a much greater focus on safety are changing megatrends or enhancing megatrends that are driving changes in our product portfolio. And we'll talk a lot about that transformation as we go through the material here. But one thing we will talk about often is this idea of drivetrain-agnostic technologies. What that means is no matter where the drivetrains go, whether they be pure internal combustion engine-based or hybridized or electrified, the way we are engineering our products, we're doing so in such a way where we have agnostic technology, meaning that the technologies themselves can be applied to any drivetrain type. The product may be different but the base technology, that platform from which we are working, that really is remaining constant. And it's allowing a company like Stoneridge to be much quicker, much more nimble to address changes in the market. It makes us more resilient to changes in the market. OEs are out suggesting that electrification will come at some rate, but it comes at some slower rate or some faster rates. We're well equipped to address that change by the nature of those agnostic approaches to our product. The company itself as you can see by the slide, has a really strong 5-year backlog of $3.5 billion. And this really is connected to a 5-year revenue growth of 10% CAGR. 10% CAGR in these end markets is well, well beyond where those end markets will be over that same 5-year period. And this level of growth really comes from our new products, our new product launches, the innovation that we're bringing forward. We also are working very substantially on excellence in execution, in manufacturing plants, in upfront development. This all allows us to drive expanding margins as well. Let me move on here and talk a little bit about the segments inside of our company. And this -- on Page 4 here, Slide 4, for those who might be on the webcast. Now the company itself is really comprised of 3 primary segments. And I'll talk about them briefly here and then get into some greater details around products in each, so you get a clear picture of where we're going as a company, and how we expect to get the kind of growth we're going to have. So first off, I'll start with Control Devices. And this segment comprises almost 40% of the revenue in our company. And this particular segment in our company also was focused more so on the passenger car side. And as you might guess, especially in passenger power, there's been a very significant transformation of our products here, again, utilizing that drivetrain agnostic approach. The products themselves and again, I'll get into some greater detail on these are things like actuators, control valves, sensors, connectors and switches. And again, we'll touch on the critical ones as we go forward here a bit in the presentation. On the Electronics side, this segment price is almost 60% of our revenue in Stoneridge and this particular division or segment is focused nearly entirely in the commercial vehicle segment. And our products in this segment are things like Driver Information Systems like instrumentation clusters. For example, electronic reconfigurable instrumentation clusters, Vision and Driver Assistance, and we'll talk a lot more about that here as we go forward. Some Connectivity devices, those things that allow the commercial vehicle to speak to the outside world as well as controls in the vehicle. And later, we're going to talk about some of the details in this segment. And specifically, we'll detail our product called MirrorEye, which is a Camera Monitor System for over-the-road trucks. And also something called Tachograph, which is a compliance device, which allows various governmental agencies to monitor their usage and distances that trucks are utilized in the commercial space. Now Stoneridge Brazil is a much smaller segment that comprises about 5% of our overall business. Historically, Brazil has been focused nearly entirely in the aftermarket. We've been pushing a transformation there as well, moving it more towards original equipment manufacturing. So moving from aftermarket audio systems and aftermarket car alarms, products that are really serving the OE base and most specifically in the commercial vehicle space. So this segment is mostly aligned with our Electronics segment, they had historically produced electronic parts and accessories and now moving more so into the OE space, supporting our global customers in Brazil. All 3 segments have great growth potential, and all of them have a role in the growth and the margin expansion that we have here in our company. So let's talk a little bit next here on Page 5 about revenue diversification. So we are very well diversified across geography, across our end markets and across customers. And as I said before, we primarily serve commercial vehicles as well with passenger car end markets and primarily in North America and in Europe. Now we have a business in China. It's a growing business. That business is also, to some degree, serving both passenger car and commercial vehicles. We don't talk a lot about that because it's still more in the smaller stages but that, too, can be a play for us in the future as we continue to grow the business. Okay. As part of our launches or the ramp-up of products that have already been launched, and the bringing forward of new products to the market through each of these 3 segments, we do see a lot of revenue growth for the company and a lot of opportunity to outpace our weighted average end markets. All right. So now let's -- as I promised, get into some of the detail around some of these products and our strategies. So first off, here for Control Devices, we'll start there. That's on Page 7. As I said now a few times already, the product lines for the most part are drivetrain-agnostic and we are -- if you look at the slide here, you can see that about 88% of the products we sell within Stoneridge are, in fact, drivetrain-agnostic. So the strategy that I talked about relative to making sure that the technologies at the base are common, we very much put in the practice. And yes, the products are different from an electric vehicle to a commercial or to a conventional internal combustion engine vehicle, but that base technology from which those products grow, that is common. And that could be very helpful for speed and agility relative to changing markets, but also speed to market when a customer is looking for some help. So if we talk a little bit more about the products themselves, we have a very large part of the Control Devices business in actuators. So some might ask, "Well, what do you mean by that? Actuators, it's a pretty general term." So think about your car today, if you have an electronic shift and you hit a paddle or press a button and it says, "Go from Park to Drive." There's an actuator somewhere in the vehicle, some usually electric device that basically carries out your command of pressing that button. That's what we mean by actuators. And they're all over both internal combustion engine-based vehicles as well as electric vehicles. The actuator business in the Control Devices segment is now over 50% of the total business in that segment. So it's really growing rapidly as you're getting into more and more electrically controlled functions on those vehicle. And where are we primarily focused in actuators, think about Axle Disconnect in 4-wheel drive vehicles where you connect the front axle to engage 4-wheel drive, disconnect to go back to 2-wheel drive; electronic shifting actuators like I just exemplified; and also, various control valve applications as well for controlling liquid and gaseous flow. We again, have utilized this agnostic approach. I want to give an example, a very specific example here. So it's clear really what I mean by this. Everyone's heard of a Chevrolet Corvette, right? And if you heard of the Corvette, perhaps you've heard that they've introduced a new model called the Chevy Corvette E-Ray. The E-Ray is the hybridized version of the Chevrolet Corvette, happens to be the most powerful, fastest Corvette in history, that in case you needed one. And it utilizes the internal combustion engine to drive the rear wheels, but it has a selectable electric motor drive for the front wheels. So when you really want the power, it actually automatically engages those front wheels with electric power and provides acceleration you're asking for by whatever you're putting into the accelerated pedal. There's an actuator that connects or disconnects those front axles to the motor. That actuator is a still product. That actuator uses a base technology that is used on the conventional axle disconnect that we have on the 4-wheel drive pickup trucks. The ones that connect and disconnect the school axle in the front of the vehicle or a pure 4-wheel drive function. So same base technology, 2 different products again, easy to come to these 2 products when the base technology is common. That's a -- just to try to exemplify and give you a good feel for what I mean by that. And we carry that across really all the product lines in Stoneridge. In our sensing business, going on to that, we are continuing to align that business with the industry megatrends. You think about the temperature sensing and automotive. You think about cooling temperature or oil temperature. Often, we'll see that on your own instrumentation cluster. But in electric vehicles, they have a need for a lot of temperature sensing as well. And it's not so obvious. At least, when you take a first look at an electric field, you think well, "Electric motor has got no cooling system. It has no radiator." It's actually not true. The cooling systems on electric vehicles are actually far more sophisticated than what you have on conventional internal combustion engine vehicles because you have batteries. Big battery packs in these purely electric vehicles like a Ford Lighting or a Tesla, for example. And the way you get efficiency out of batteries is to make sure that the temperature of the battery is kept within a range, an optimal range. They do that through liquid cooling. And so there are a lot of temperature sensors and control valves that are put in place to ensure that you've got that proper control. You also are controlling the temperature of motors. You're controlling the temperature of some of the electronics on board. All of this utilizes temperature sensors and control valves. So we've transformed our business so that our temperature sensors are equally as applicable in the electric and hybrid space as they are in the internal combustion space. And in fact, 25% of the temp sensors we sell today are actually sold into electric vehicles. And as you can see, 85% of the electric vehicles in the market today produced here in the U.S. actually contain, at least, 1 Stoneridge product. So we're rapidly making sure that this agnostic approach is truly applied both in the internal combustion space as well as the electric space.

Okay. So -- and maybe one last shot at this whole idea of diagnostic and I'll try to stop saying the word after that. This -- what you see on the slide are 2 pictures of 2 different vehicle chassis. One is an electric vehicle chassis and one is a more conventional internal combustion engine vehicle chassis. And the point of the slide is to show that, again, through this approach that we've been using to engineer our products at this platform level, nearly every single product that we have on the internal combustion engine side is usable, I should say, not product. Every single technology we use to generate product for the internal combustion engine side is also used in the electric side across all the product lines inside of Stoneridge Control devices. And so there's a different way to apply. There may be a different combination of parts and components. But in the end, they're almost all applicable. So 2 very different drivetrain families, one base family of technology to drive the whole thing. So in the end, as we transform control devices, some folks had an underlying concern that it's a powertrain-based segment and maybe that could be in decline on the contrary, right? We've engineered according to the mega trends. We've engineered according to this approach in our technology base. And because of that, as well as our focus on continuous improvement, we see a lot of potential for growth and margin expansion inside of Control Devices. All right. So with that, let me move to our other major segments. We'll actually combine both Electronics in Brazil in this case and talk about our Electronics product portfolio. Well, to summarize the portfolio, generally speaking, then I'm going to speak more specifically about 2 of the true industry-changing technologies that we've been bringing to market recently. In Electronics, again, it's got a very substantial backlog of business and awarded programs. And we really do believe that we've got a lot of opportunity here to drive growth within Stoneridge with the products inside of Stoneridge Electronics. The first major area for products within Electronics is something called Driver Information Systems. Again, like I mentioned before, the clusters. Now over the last several years, we've launched and ramped up a number of commercial vehicle instrumentation cluster programs. And these are now known as Driver Information Systems because there's so much data that's transmitted and there's some interaction with these clusters as well. The response to the product has been extremely positive. The truckers like the reconfigurable approach and like the -- I'll say, the adjustability that comes with that configuration. Also sets us up for great growth within the company. The other major technology area or product area that we have in Electronics is our Vision & Driver Assistance products. And we have a lot of off-highway applications there. So think about ag and construction. So tractors and combines as well as kid steers and front loaders, right? We have vision systems on all those types of products. We also have MirrorEye, our Camera Mirror System, which replaces the standard side-view or rear side-view mirrors on Class 8 over-the-road trucks. And we'll talk a lot more about that product here in a moment. It is an industry-changing technology. It's driving significant growth for us right now, and we expect it to drive much more growth as we go over the long term here for Stoneridge. And then lastly, product area called connectivity. So most passenger cars are connected to the outside world today through some Connectivity system. So to our over-the-road trucks in our Commercial Vehicle segment view and for the most part, our key products in this space is something called a tachograph. And it -- we just introduced the next generation of tachograph, which is replacing all of those that exist today in Europe. It's a compliance device that allows, again, government agencies to ensure that they're able to know where the vehicle is, how far it's gone, how long it's been utilized so that the driver remains in compliance with the country or the local laws. We see a lot of momentum in Electronics with these products, both the existing products as well as those that are currently in launch and we have a long pipeline of advanced activities that will continue to drive our momentum and again, continue to drive our revenue growth as well as, again, further margin expansion. So with that, as promised, let me talk about our Camera Mirror System. I have a couple of different slides here on camera mirror. And first off, take a look at the picture. What do you see in the picture that looks different than what you would normally see for buses or over-the-road trucks? Side-view mirrors, right? The sideview mirrors are very large. They create a large surface area that is very significant in terms of the aerodynamic drag on the vehicle. So it's just like if you're out in the wind, heavy wind and you put your -- even your arms out, you can feel the drive pushing you back. The side-view mirrors on trucks are enormous, and they create a lot of drag. And this technology called MirrorEye allows us to move from that large rear-view mirror, side-view mirror to a very aerodynamically designed wing that contains the Mirror System via high-definition cameras. And this product has again given us a lot of short-term growth. We also expect significant long-term growth from this. It provides significant improvement in fuel economy for the end user. 2% to 3% improvement in fuel economy. And in the trucking industry, that is really significant, right? The payback on this is very short, simply because of the fuel economy benefit. It also provides a markedly improved field of view. So when we think about mirrors on over-the-road trucks like that, they articulate around the front of the trailer. So when you turn the cab of the truck, the mirror actually gets a great view of the size of the trailer, right? You can't see the wheels. You really can't see what you might be hitting, alongside the direction into which you're turning. These cameras actually articulate, and I'll put that in quotes, "They pan." So when you make the turn, the cameras also their field of view changes so that you are always looking alongside the trailer, not into the trailer. And we have some machine learning and AI built into these systems as well so that you can actually see a prediction for where the trailer wheels will go. The way up the curve? Will they crush the bicycle? Will they perhaps cause some human injury? So very important. Very significantly improved field view on these types of products. So with that, let's talk maybe more specifically about some of these benefits. So I talked about the fuel economy benefit as well. And let me also translate [ to ] fuel economy benefit in the CO2. So a lot of governments have fuel economy and emissions regulations. And CO2 is often one of those things that is regulated. And these systems on a per truck basis reduce the amount of carbon emissions, CO2, by 5,000 pounds of CO2 per year. Significant reduction. So when the governments are asking stock OEs to really meet a fuel economy or a CO2 requirement as part of their legislation. It's technologies like these that really make a difference. So in addition to providing a real benefit, a real safety benefit, a real significant improvement in field of view, they also bring us to a point where we have substantial improvement in the toxic emissions as well. So maybe moving on from that. In addition to the conventional things that we have mentioned here in the fuel economy and emissions, there are a few other things as well. Think about the ability to record activity with these mirror systems. Now there's an option here to build in a digital video recorder. I think about the best of terms that comes with that, but also think about the liability improvement that comes with that. So if you have an accident on the road with an over-the-road truck, it gets blamed most of the time? It's the big truck, right? Because he was a bully and he just moved over and maybe in the majority of the cases, it's true. But I can tell you for sure that the tendency, even for law enforcement, is to look at the truck. With these systems, right, the truth will prevail, right? Truth will prevail. You're going to see with the recorded image of what happened, was the trucker really the problem in the collision or was it something else? And so that's a real benefit and fleets really do love that as well. Also, as we move forward here with MirrorEye, it's not just rear-view mirrors or side-view mirrors that is important in this case. Think about the expansion of this type of technology. And we are working with a company called [ Roadie ] to introduce the first rear-view camera, right? So something that goes on the back of the trailer. Well, now you have these side-view mirrors, which articulate. You see the entire side of the vehicle or articulate from when the trailer moves. But you also now have a camera, a wide-angle lens camera at the back. So you essentially get to 270 degrees from the rear-view mirrors back, all the way around the backside of the trailer. Really important. It's starting to look a little bit like the 360 cameras you have on some passenger cars today, where it's a bird's-eye view. You're starting to get that kind of view around an over-the-road truck. Look, if you are behind an over-the-road truck and you can't see the rear-view mirrors, right, driver can't see you either, right? And sometimes that's 40-, 60-, 70-feet, right, a distance before that driver continues. With the rearview camera, you can 100% see everything that's backed all the time. Again, a very big safety improvement and very much enhances the safety character of the vehicle. Okay. Let me go ahead and move on to the next slide. Again, MirrorEye base. Okay. So market adoption. This is what we're getting at. So the way we started in this market is we started with fleet. Started with fleets in North America. And North American fleets have a lot of influence on the truck OEs. We wanted to make sure that we got the ear of fleet owners and drivers in those fleets to get feedback on our early systems, and really start to get them out in the market. So it wasn't just fresh going through an OE and checking an option box in an order fab. And we have engaged a number of different fleets, more than 40 in North America. And almost entirely, we're getting extremely positive reviews from the fleets. We're continuing to expand our fleet business with numbers from customers as well as within each of the fleets that we've landed. And this is a great starting point for us, and it really did get the attention of a lot of our OE customers as well. When you look here, you can see some of the names for the fleet partners. I mean for those that know the trucking industry, there's some big names in there like Maverick and Schneider, amongst others. All right. So on the OEM side, we have booked a number of programs on the OEM side. 4 awarded programs with global commercial OEMs really very significant market share. we have won every single North American commercial OEM award that was put out there to bid. We won every single one. And the European side, we've got about 1/3 of the business in Europe as well. And when we book these businesses, we book it on a take rate. We'll assume some kind of option acceptance rate. Usually a pretty low number, 15% or something like that. What we've been finding is that for the most part, when the OEs put it into production, they actually start selling these things at a higher rate. Like for example, our first customer was DAF in Europe. That's a division of PACCAR, which is a North American company. And that product right now is selling at about twice the take rate that was anticipated in the original business case for the program. And again, the more that these systems are out there, the more acceptance there is, the more knowledge there is about them and the quicker they've been growing. We are -- you may have seen something in the press recently. We have recently launched Volvo truck in Europe. And that was about 6 or 8 weeks ago. We began that launch. And they will follow up with their North American side of that launch in the first quarter of 2025. PACCAR, in addition to having that first program with DAF in Europe, they also launched the Peterbilt and the Kenworth brands here in North America over the last year or so. Then we have one more launch coming for which we cannot disclose the customer name, but that will launch here in North America, also the first part of 2025 as well. So again, significant launches have happened, others just launching now and obviously, several more to come. A very, very big part of the growth profile of Stoneridge. Okay. Let's talk about that technology called tachograph. So in this particular technology, as I mentioned, it's more of a compliance device and it's a very interesting device relative to how it's being put out there in the market. Again, as I said, it monitors truck position, truck drive time, truck usage, distance, et cetera. And again, reports back through Connectivity modules to government agencies to ensure that you've got the right compliance by the driver. Now this technology is interesting in that, first off, any new product that is produced today in the EU that does international travel really must have this version of the tachograph, this generation of the tachograph. So anything new being produced utilizes the tachograph. What they've done in Europe is that any old vehicles that require tachograph, regardless of the type of technology it was using, they need to go back and retrofit their vehicles. So it's sort of unusual in most places where there's legislative requirements, you're grandfathered in or whatever you have in the vehicle at the time of sale. In this case, they're requiring that things be replaced if they're not up to the latest standard. And so that -- there's a certain amount of time that's allotted for that. You see that on the right side of the slide, the timing associated with that. And then lastly, they're actually expanding the vehicle types on which this technology must be placed. So right now, it's 3.5 tons or greater in terms of vehicle weight. By 2026, it's going to be 2.5 million tons or greater, but opens up a whole host of additional opportunity for us as we get into these smaller vehicles as well. So number one, it's a great OE business, again, growing our revenue, a very good margin. It's also growing our aftermarket business because of all the retrofit that's necessary and in the aftermarket business, of course, the margin is even better. So for us, we view this as a key part of the growth of Stoneridge and a key part of our margin expansion as well. Okay. So maybe just finishing up here, then we can open the floor for questions. On Page 16, obviously, we've got a great focus on revenue growth in the company and 1.5 years into being CEO of Stoneridge I'm really proud that we're continuing to drive the revenue growth. But also provide -- or are proud of the fact that we've been very consistent now in our approach to the business performance. We've been executing our long-term strategy as was laid out a few years ago. We've been focused a lot on excellence in execution, driving improvement in our manufacturing plants, driving improvement in our upfront work in the development process. Overarchingly, making sure that we're building a better company. A stronger, more resilient, more capable company. And those activities, those actions around excellence and execution, in addition to the revenue, are also allowing us to drive not just the revenue growth of course but to drive the expansion on margins regardless of revenue growth. So it's been a key focus here for us over the last years. And when you look at what we're talking about in terms of numbers and we're talking about moving forward and getting to between $1.35 billion, $1.55 billion revenue over the 5-year plan by 2028. And that significantly outpaces the growth in our end markets as we see them today. Now same goes on the margin expansion. Again, all of the improvements I talked about, along with the revenue growth, will allow us to drive that margin expansion that is very important, of course. We should be pushing to the higher end of our normal contribution margin as we start to see the benefits of some of the excellence and execution that we're putting in place. So again, strong technology platforms, agnostic, a long line of launching products, a long line of innovation coming down the pike, innovation and excellence in execution that really does drive a lot of great strength, great strengths in revenue, great strengths in margin for Stoneridge going forward. So with that, Matt, we can join for questions?

Hopefully, this is one kind of right down the middle. But it seems like you guys have been making gains on cost controls as well as have some pricing tailwinds behind that. Is it maybe just -- I know you kind of tapped into it a little bit there, but maybe talk to us a little bit. Are you seeing more gains from your margins in terms of being able to raise prices? Or is it more coming from like the cost controls and some of the innovation that you have?

Yes. So we basically commercially restructured our whole portfolio over the last couple of years. primarily reacting to material cost increases and the supply chain challenges we saw during and after COVID. Pricing generally is fairly fixed over a period of time. The things we're talking about, not just cost reduction, but improvement in manufacturing efficiency, material cost reduction as a part of continuous improvement. So not necessarily price as a primary driver. This is foundational excellence and execution. And then the return to what has been a normal benefit from a price down versus material cost relationship historically.

I'd almost add, Matt, that from a price perspective, we really addressed the cost that came from COVID, but no material costs. There were logistics costs. There were things that were just more expensive. There were inflation. Pricing changed. They sort of covered that, right? So the expansion we're seeing now really is on a fundamental improvement in how we're operating the company, whether it be through margin-accretive technologies or products being brought forward or that excellence in execution that really drives cost out of your cost of goods sold. Okay. What else? Any other questions?