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

All right. Good afternoon, everyone. We're saving the best for last with Stoneridge. For those who don't know, my name is Brian Willer. I lead U.S. Auto Equity Research. I'm very pleased to welcome the President, James Zizelman; and the CFO and Treasurer, Matt Horvath. By way of quick introduction, Stoneridge is a leading global supplier of safe and efficient electronic systems and technologies. Its product portfolio ranges from products that monitor, measure or activate critical vehicle functions as well as compliance solutions for commercial truck, bus and off-highway. With that, I'll hand it over to James. Yes.

Thank you. Appreciate it. Well, good afternoon, everybody. Thanks for making the time here for Stoneridge. I know this is the last presentation. So I'm probably standing between you and whatever happens next in your life. And we'll try to make this interesting, but I think we're going to fill the time because there's a lot to talk about here relatively. So maybe if we can get right to Page 3. I get to do that, don't I? How about that? Asking myself to get to Page 3. All right. So yes, here we go. So first off, as was indicated here in the introduction, we are a global supplier. And our product base is typically very highly engineered, focused a lot in the electrical and electronic spaces in both automotive and commercial vehicles. Our general strategy is to work in product areas that align well with megatrends. In our case, we tend to focus on safety, efficiency and vehicle intelligence. And you'll see as we go through this presentation, you see what we are -- where our segments are placed and what products we have and where we have growth in the industry, it really is around those megatrends. One of the things that we are also quite careful about is making sure that our products are driveline agnostic. Now in some cases, you talk about an interior technology or instrumentation cluster. Those obviously are independent of the driveline. But some products are quite driveline specific. And what we try to do is make sure that the base technologies are such that they can be applied to any driveline that is out in the industry, whether it be conventional internal combustion engine technology, hybrid electric or pure electric vehicle type applications. The base technology could be modified and turn into a product so that it can serve any of those 3. And you'll hear later that we've done a good job at ensuring that almost everything we produce has that agnostic nature. The company itself is really quite well diversified by geography, by end market and by customer. And again, you'll come to see here that we have a very impressive list of advanced technologies and products that are in production and growing or about to be introduced, and we'll talk about some of those. By the nature of how we're focusing on these megatrends, by the nature of our agnostic technologies and our diversity, we typically outperform our underlying end markets by a good margin. And therefore, we can drive a lot of margin expansion from that kind of approach. The company itself, as you can see on the slide here, operates in 3 segments, each with its own approach in terms of how they're driving success. I'll briefly talk about each of these segments here, and then I'll get into some greater detail later in the presentation. So first off, Control Devices. It makes up about 1/3 of our revenue in the company, and we're focused primarily on passenger vehicle applications in this segment. By passenger vehicle, I don't necessarily mean sedans. In fact, I don't generally need that. I mean more like sport utilities and pickup trucks, things that are actually quite popular and continue to grow in the market. One of the things that we've done in the past 4 or 5 years in Control Devices is that we've transformed the company to be more so along the lines of these agnostic products so that we can ensure that whatever happens and whatever regulation might come from any particular government, we're able to address the needs of the OE by having product at the ready because those base technologies are agnostic. So that transition occurred over the last -- started maybe 5 years ago and is now complete. And again, I'll cover in more detail the kind of products that we have in that space here in the next slide or 2. The Electronics segment is the second one you see there on the slide, and it comprises about 60% of the revenue of the company, and it's focused primarily on commercial vehicle applications, but also focused on off-highway as well as bus end markets. So a very different kind of customer base than what we have in the Control Devices segment. The products in that segment are around driver information systems, think electronic instrumentation, for example, clusters. Also a key focus on driver assistance, vision and driver assistance systems, camera mirror systems fall in that category, and we'll talk a lot more about that here in a moment. We also have products in the connectivity space, and we'll talk about products that we have there in a moment as well. And I think importantly, and sometimes doesn't get a lot of airtime is control modules. The base modules that are all over the interior of a passenger car or in this case, the cab in a Class 8 or over-the-road truck that controls all the interior functions, whether it be the power windows or the lighting systems or the key fob systems, there are controllers that sit there that manage all of that, and we're very active in that space as well. And I will -- as I go forward, I will give a lot more detail on these products and especially the MirrorEye product and talk a lot about our applications there as well. Then lastly, and much smaller than these first 2 is our Stoneridge Brazil segment, which you see in the bottom of that slide there. And we've been transforming that segment over the last years as well. It has historically been more of an aftermarket segment, doing aftermarket audio systems and alarms, things that are actually quite necessary and popular in Brazil. But as those things now are becoming more standard equipment on vehicles, even in Brazil, that business has trended off. So what we've done is we've transformed the Brazilian business more so into an OEM business. And there's more OEM business down there for us in Brazil now than there is aftermarket. So we've crossed that center point. And the focus of that business is a bit more in the electronics space, a bit more focused on commercial vehicles and much more aligned with our global customers in our electronics division. So maybe as an example, just to talk a little bit about how much more OE business we have. Quarter-over-quarter, we have 60% more OE business in the first quarter of 2025 than we had in the fourth quarter of '24. So it's rapidly improving, a lot of new business bookings there in the OE space. Okay. Let me move on to the next slide here and get into some of the detail of Control Devices. And this, as I said, aligned with the industry megatrends, drivetrain agnostic, as I said multiple times here, the key focal points for the technologies are really highly engineered electromechanical and electromagnetic actuators, temperature sensors, control valves, switches and connectors. Those are the key product areas for control devices. Again, products, if you do it correctly and you have the right base technologies applicable across a whole host of different driveline types. The graphic that you see in the slide, it shows an electric vehicle graphic. But if you look at the products, right, they can be applied in every case to either the electric platform or the hybrid platform or the conventional ICE platform. And I talked about having some success in getting to this agnostic approach so that we don't get stuck aligned with just one driveline type. And at this point, about 90% of the products in Stoneridge from 2024 are, in fact, agnostic. So only a slim number, 10% are specific to any particular driveline. We like to say that we serve customers all the way from rough and rugged basic sport utilities right up through supercars, and we'll talk about some of the products that do that here in a moment. So let me start down that path now and highlight a little bit of the products that you see there on the slide, starting with our actuation products. And as I said, they're mostly electromechanical or electromagnetic. And the area in which we're focused quite a bit is axle disconnect actuators. We're also focused quite a bit in transmission actuation. So what are those things? So axle disconnect actuation, raise their hands. Anyone in the room have a 4-wheel drive support utility, like a pickup truck or Tahoe or something. Somewhere in the vehicle, there's a button and you press the button and there's an actuator somewhere down underneath the vehicle that does the work, some rugged actuator that will connect that front axle or disconnect it. That's an axle disconnect or connect actuator. And then the transmission actuation, think about the push button or dial-based selection for gear shifting these days, park reverse neutral drive. It used to be moved to lever and that lever was connected to a transmission. Now you are commanding an actuator to do something. The actuator that does that, that's our space. We own that real estate. And we also have various control valve applications that a consumer would not see, but really acts more so in the space of controlling emissions or controlling powertrain functionality. So it will be under the hood, making the car operate well and operate in a clean fashion. And this business in the actuation side, it's now more than 50% of the business in control devices that continues to grow. As we focus more so on hybrid electrics and electric vehicles, there's even more applications as you disconnect electric axles, that's a requirement as well or manage torque coming from electric axles so that you can manage the drivability and control of the vehicle. A couple of -- let me just talk about 2 examples here very quickly that I'll say, put into light the agnostic approach of our technology. We have a product on the Corvette E-Ray. It's called a drive unit clutch actuator. And that is a super car, right? This actuator actually connects or disconnects the electric motor, the hybrid part of that vehicle. The same base technology is used in the axle disconnect actuator on the 4-wheel drive pickup trucks. So that base technology applied very differently in the form of a different product coming from that base technology that serves very, very different markets. So just an example of what I mean by an agnostic approach. And then the other product that I'll talk about here for Control Devices is our leak detection module. And this is a new technology just launched here in this year. It was launched actually in China to a Japanese, Chinese joint venture OE. And it's a product that springboards from some of our valves technology, along with our emission systems knowledge, we're able to bring forth a very cost-effective and very functionally effective product that helps certain customers deal with very difficult evaporative emissions conditions. A hybrid vehicle has a difficult time controlling evaporative emissions. Those are the emissions that come off the fuel tank in gasoline vapors. Also big vehicles that have giant fuel tanks also have a very difficult time managing the vapors coming off that fuel tank. That new technology is bringing to bear a new approach, a much more reliable, cost-effective approach, systems-based architecture to drive a solution to that challenge in that space. And that's the first launch. There's a number of additional development programs in process with that technology. We expect significant growth for that technology in that segment. Okay. So if I move on here to electronics, and we'll combine electronics and Stoneridge Brazil in this discussion. As I said, they're quite aligned as the Brazilian entity is moving more so towards the OEM side. And obviously, the nature of the name of the segment, right, it's electronics and software focused. It's a very significantly growing segment. It's a large backlog of awarded programs. As I said a little bit earlier, products in the driver information system space, the vision and driver assistance space, connectivity devices and control modules, primarily for the commercial vehicle. Stoneridge Brazil, again, the portfolio is more and more aligning with electronics and more and more aligning with the commercial vehicle space. And so we use them to serve our global customers down in Brazil. In addition, Brazil has become a very significant and critical engineering center for us. So as you might guess, with some of these products, it's really important to have some of your engineering or much of your engineering in-house. There's a lot of technology that's proprietary and a lot of innovation, a lot of intellectual property being generated. And we can manage, I'll say, engineering costs, right, by having engineering in various locations around the world. Brazil is one of those places, and they are our employees. And we have a significant portion of the engineering that we do for electronics now situated in. So let's talk a little bit about the driver information systems. And over the last several years, we've launched and ramped up new and replacement digital driver information system programs. It's been a significant growth element for the company in the electronics space. Very positive reaction to these electronic instrumentation clusters in the commercial vehicles as Class 8 over-the-road trucks. And they're fully configurable and the response again has been very, very strong. Vision and driver assistance products. First off, there's a significant off-highway business with Caterpillar and John Deere, a lot of the industrial companies that make forklifts and other industrial equipment that require cameras, a very big business really started in Europe, in the Netherlands and really was at the foundation for our MirrorEye product, which has recently launched on now multiple different OEM programs. And we'll talk a lot more about MirrorEye in a moment, but that base digital camera system is something that has been quite significant is at the foundation of a lot of the growth in the. Next area that you see there on the screen is connectivity programs. And we have both telematics and tachograph products. Tachograph is sort of a vehicle monitoring device, monitors location and duration of operation used by governments and by fleets and so forth to make sure that commercial drivers are abiding by the rules. We recently launched a SMART2 tachograph in Europe. It was August of last year when we launched that. It's a significant growth driver for us as well. It's both an aftermarket product as well as an OEM product. As it turns out in Europe, if you had an old version of a tachograph in your vehicle and you're required to have one, their regulation required you to update that. So it drove and is continuing to drive a significant aftermarket business. Again, very, very strong part of the growth profile for the company. And then in Brazil, we have something called track and trace products, and it really is for the commercial vehicle end market. And it helps fleets and owner operators do end-to-end tracking of their vehicle. And it also offers a complete telematics. So the vehicle is findable via a command center. And a lot of logistics companies, cargo haulers, security companies, fleet management, they all utilize this track and trace system that we have in Brazil. So look, we're focusing on a lot of our current products, driving a lot of enthusiasm and expansion there. And we're also focused on further developing and furthering these products beyond where they stand today with things like cockpit of the future. I mean think about in the electronics space, you've got screens, monitors from the MirrorEye system. You've got secondary displays, you've got body controllers. You've got telematic systems. You own a lot of electronics real estate in the cab of the Class 8 vehicle. In the future, when those things are perhaps combined and you get to a situation where perhaps 1 or 2 domain controllers controls all of that, we're the player that has much of the real estate at this point and can really step in and drive that next step toward cockpit of the future. So nonetheless, future growth and profitable growth, margin expansion, that's what comes from that kind of approach and thinking. So moving here on to the MirrorEye system. This is a camera mirror system. So it really is a very well-awarded industry-changing technology. It allows for the elimination of the giant side view mirrors that you see on a lot of these Class 8 over-the-road trucks. And by doing -- by removing those and replacing them with simple wings, right, a wing that's aerodynamic and has the various camera elements built into it, you have a substantial improvement in drag of the vehicle, the reduction in aerodynamic drag that results in lesser carbon emissions through better fuel economy. Fuel economy improvement is about 2% to 3% which in the fleet industry, people really go for that. That's a very significant number for them. In addition, and what perhaps doesn't get talked about a lot is the safety element, right? There's the complete elimination of many of the blind spots that you have with conventional mirrors. When you think about the mirrors on the truck that you see there, it's sort of a split image, MirrorEye on the one side and conventional mirror on the other. When you turn the truck, the mirrors turn with the truck. So one mirror will give you a direct image of the side of the trailer -- directly into the side of the trailer. The other mirror gives you an image out into whatever is on the other side, some field somewhere. It doesn't really give you a good image of what's at the wheel, and that's what's important because that's what will strike something. The MirrorEye system is far better than that. It gives you a much better ability to eliminate those blind spots. The cameras themselves have automatic panning. So they will electronically articulate, if you will, and allow for a constant view of that back wheel on both sides of the trailer. And again, just something you don't have today. And because of that, especially here in New York City, when you see a big truck coming down some of the roads, you'll see the drivers literally hanging out the window, not looking forward, looking to see where that trailing wheel goes. And that is completely eliminated. That nonsense is completely eliminated by our product. We are also expanding the capability, adding digital video recording and retrieval into these systems. And we are also adding connected trailer capability where a number of sensors, cameras, temp sensors, air pressure sensors, door position sensors, all are integrated in and all that information is transmitted into the cab where you can see that information as well. And we'll talk about that technology here in a moment. Nonetheless, this is a major long-term growth driver for Stoneridge and really, it's important for us, and we've been very successful. We have very significant market share in this product. And to that end, let's talk a little bit about market adoption. First off, we are absolutely by a country mile, the leading provider for these MirrorEye systems. We started this product space really in the aftermarket, right? We went to the North American fleets and brought them an aftermarket solution, and they really fell in love with the product and saw the benefits both in fuel economy and safety. And a lot of those voices from the North American fleet owners and drivers is what drove many of the OEMs to really sink their teeth deeply into this and make it an OEM product. Now on the OEM front, we've won 4 major programs, and you can see them listed there on the left lower side of that slide. And that encompasses 8 brand names. As you might guess, some of these truck companies have multiple brands, and we'll talk about those. And right now, we have won every single award in North America commercial vehicle market for camera mirror systems. Anyone who has put an RFQ or request for quote out there for such a system, we've won that. So -- and that's 75% of the market, by the way. We've got all of them. And the last one that is yet to decide, we have recently partnered with them with aftermarket solution. So working conjunctively with them, they are putting essentially the wiring harness into their vehicle upfront, and then we can sell them a quick aftermarket system through their service parts organization, and they can equip their vehicles at the dealerships with this product. Not to say we wouldn't pursue an OE solution where they would install at the factory. But for the moment, we've accelerated the process here by getting them a legitimate aftermarket solution as well. When we book these businesses, oftentimes, we book them with an anticipated take rate, how many -- what percentage of the vehicles built would have this premium system on it. And we estimated a fairly small number, right? 15% take rate is what we thought would be an appropriate conservative approach to understanding or estimating what kind of revenue we would get from this product. As it turns out, the take rates have typically been much, much higher than that. In Europe, for example, our estimation for forward take rates are about 40% to 45%. And in many of the platforms in Europe, we're seeing a lot of the OEs now taking the product and making it standard equipment. And that's obviously ramping up the volume that we see in Europe. In 2025, we expect about $120 million of revenue on our -- just on our MirrorEye system overall and $100 million of that is coming from the OE side. The rest is coming in aftermarket, whether that be in bus or commercial vehicles or something else. We would expect by 2029 this to grow to $300 million easily, and we think the total available market for this -- for the customers that we've booked, not the ones that are yet to be booked, is $0.5 billion. So there's a significant opportunity here for growth going forward. Now on the customers themselves, DAF in Europe, that's our most mature program started in the fourth quarter of 2022. Take rates there are currently about 40%, and they've made MirrorEye standard on a number of their long-haul truck models. The Volvo program launched at the end of last year. That includes the Volvo truck brand in Europe as well as the Renault truck brand in Europe. A little bit slower-than-expected ramp in the end of '24, but it's come really screaming out of the gate here in 2025. They've made a standard on their FH Aero new truck is a brand-new model that they put out there, and they've had absolutely tremendously strong customer feedback. If you go and look at the commercial vehicle press, you can see a lot of feedback on that truck. And oftentimes, the leading commentary on it is camera mirror system or the MirrorEye system. I'll talk about that first and how much easier it is to drive, how much quicker drivers can be trained and how much fuel economy and safety improvement that they've gotten from it. If you're at all on LinkedIn, these guys from Volvo are marketing is like really quite nice for us. And we expect, again, those guys will get to 45% take rate. And as I said, they're also launching in North America. Volvo is launching right now in North America and both on the Volvo brand in North America as well as their Mack truck brand, and they're marketing that very strongly, very high on the idea of marketing this as strongly here in North America as they did. It's also standard equipment -- not -- sorry, it's not standard equipment, but it's available on their all-new V&L. So another brand-new truck model from Volvo just being launched, they're putting this product on there as an option. And then PACCAR North America, 2 nameplates there, Kenworth and Peterbilt, well-known nameplates. They launched in mid-'23 and mid-'24, respectively. They're slower to ramp up, to be honest. And we're working with that customer to help them a bit with marketing. They chose a different configuration of the camera mirror system that perhaps would result in a lesser take rate, but we're also working with them on the opportunity for some different design options to help with that as well. And then lastly, Daimler Truck North America. So the Freightliner brand is the absolute dominant over-the-road truck brand in this country and throughout North America. This program is also just launching now. And this program is one of the ones that incorporates some of the more advanced features of MirrorEye, including features that are a bit more AI based, pedestrian detection and object and vehicle detection are part of that system. And again, that's just launching now, both that company as well as Volvo North America. So that will ramp up just like the others did, and we have very high hopes given how both of those companies have addressed the same type of product in Europe. Initial customer feedback from the Daimler truck activity is also very strong. And so again, it fuels our hope even more so that the take rate will exceed expectations. There is, as I said, one more North American customer that we're working with, and we do hope to convert them from the aftermarket solution to the OE-based solution. And we're also working with several new customers in Europe to finish all of the different truck manufacturers in terms of who is actually applying such a system on their vehicle. Okay. So getting tight on time here a little bit. Let me go through here to connected trailer. I mentioned this earlier as an extended electronics program. And this is a suite of products that we're talking about in this connected trailer. And it really allows, first and foremost, for the driver to see right behind the trailer. It acts like a backup camera to the trailer. You may ask yourself, well, what's so tough about that? You put a camera down there, run a wire, have a connection system and be done with it. Well, that's a way, but you have to run a whole harness on a bunch of old trailers sitting out there, and it's a difficult proposition. We've engineered a system that allows for that camera signal to be superimposed or placed into the existing wiring. So there's wiring back there for lights and perhaps some electronics for braking systems and so forth. We're able to put our signal from the camera onto those wires and deliver it through the existing connector. The connection system between a trailer and a Class 8 truck today has been the same connector for 40 years, right? So we can now drive our signal through those wires through that connector into the cab and then extract it off of those signal wires and display it appropriately for the driver. The special electronics and software box that we add that allows you to retrofit anything that's out there. And it goes beyond backup camera. There's also side view cameras. There's ultrasonic sensors on the side. There could be cameras inside to maintain a view of your cargo. There can be signals coming from air pressure or braking systems. Anything that has a sensor that has a signal that you want to know about in the cab can be placed into the system and then driven over the power or ground wires through the existing harness into the cab, no latency, no additional wiring. So really great innovation. We are currently testing the system with a number of fleets and we're working with them really to hone what features should be in here. So we're launching it softly with that kind of approach as we go through 2025, and it will grow fairly significantly here in 2025. So maybe last slide here. How is all this working out for us, right? All the agnostic approach and innovative technologies and both the powertrain and electronics and software kind of dual company are we -- is it working, right? So if you listened into our earnings call here at the end of the first quarter, you can see we've got a couple of quarters in a row where things are starting to really look positive, and we're really starting to see the fruits of the labor that I talked about here. And look, we're executing on our priorities very substantially. We have all of these products that are launching or have launched, we have new products coming down the pike. We're seeing strong growth in revenue. We're seeing continued margin improvement. We are seeing an improvement in the balance sheet. If you look at our overall first quarter numbers, we outperformed our underlying end markets in every single case. The MirrorEye was up 24% quarter-over-quarter, and we set sales records for both our MirrorEye product as well as that SMART2 Tachograph product in Europe. So the technologies and the solutions that we're bringing to market really are making quite a bit of a difference here. There's been operating margin improvement across every single one of our segments. We've had a gross margin improvement of 210 basis points, as you see in the slide. We've had just an incredible focus on improvement in quality. That brought a 220 basis point improvement as well. And we've had a lot of focus on structural cost reduction, and that's all beginning to show in the overall performance of the company. Cash performance, also very strong, really led by our reduction in inventory. Year-over-year, we had a $28 million reduction in inventory, very significant. And that -- those kinds of things, along with just driving overall operational excellence really has allowed us to drive improvements in the contribution margin and our cash performance. So look, we're also quite confident relative to tariffs, if you're anyone thinking about tariffs, a great majority of our products are USMCA compliant, but we've worked a lot of different methodologies here to maximize that, but also minimize what may happen in the future as some adjustments may happen to USMCA, we are ready to take on that challenge as well. And we've also engaged our customers, and they understand that if there are costs that we do see that they'll be paid a visit by us. And we'll be talking to them about the solution to that because we won't bear the cost of that. In any event, Stoneridge is really well positioned to continue to outperform our underlying end markets based on all of the technology and the approach and our methodologies that I've talked about. We've got great margin expansion that we've had, and we'll continue to see that. And we really do feel we're really generating a lot of long-term shareholder. So with that, if there is a moment, perhaps we can...

So MirrorEye seems like a great tool for drivers. But looking ahead with maybe the rise of autonomous vehicles, do you see that as a threat or perhaps an opportunity for further investment?

Yes. I actually think it's an opportunity because if we get to autonomous vehicles, and we can debate whether or not that's 5 months, 5 years or 10 or 15 years, the sensors that we have on these systems, right, the camera system, adding a radar systems adding an ultrasonics as part of our sensor suite. Those are the sensors, the perception sensors that are used in autonomy, right? And so we would expect that we would be part of a movement toward autonomy by, I'll say, a bit converting the purpose of MirrorEye to something that becomes an input to an overarching software set that is the autonomous vehicle. So we think it's an opportunity for us. And the more we establish ourselves now as a camera, ultrasonic, radar provider in this space, the more so we would be considered as part of our autonomous solution when or if it happens. Makes sense? Yes.

Yes.

Anything else? Okay. Appreciate the time. Appreciate you guys inviting us. Thanks, Brian.

Thank you.