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

Good morning, everyone, and welcome to the Stoneridge Business Update Webcast and Conference Call. My name is Jamie, and I will be your conference facilitator. [Operator Instructions] Please also note that the meeting today is being recorded for replay purposes. I would now like to turn the floor over to Kelly Harvey, Stoneridge's Director of Investor Relations. Please go ahead, Ms. Harvey.

Good morning, everyone, and thank you for joining us on Stoneridge's Business Update Call regarding the sale of the Control Devices segment. Today's presentation and the press release issued this morning was filed with the SEC and is posted on our website at stoneridge.com in the Investors section under Presentations and Events. Joining me on today's call are Jim Zizelman, our President and Chief Executive Officer; and Matt Horvath, our Chief Financial Officer. Before we begin, I need to inform you that today's presentation includes forward-looking statements about our expectations for Stoneridge's future performance. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties, and actual results may differ materially. Additional information about such factors and uncertainties that could cause actual results to differ may be found on Page 2 of the presentation and in the press release or most recent Form 10-K, Form 10-Q and other materials we filed with the Securities and Exchange Commission under the heading Forward-Looking Statements. During today's call, we will be referring to certain non-GAAP financial measures. Please see Slide 3 of the presentation for a more detailed description of these non-GAAP measures. And with that, I will hand the call over to Jim.

Thank you, Kelly. Good morning, everyone, and thank you for being with us on a relatively short notice. Let me begin on Page 4. This morning, we are pleased to announce that we have completed our review of strategic alternatives resulting in the sale of the Control Devices segment. On January 30, we completed the sale of our Control Devices segment to Center Rock Capital Partners, a private equity investment firm for a base purchase price of $59 million. This translates to roughly 5x the expected 2025 adjusted EBITDA for Control Devices. The total consideration will include adjustments for delivered working capital as of the date of the transaction as necessary. The agreement includes the sale of the Lexington, Ohio and Suzhou, China manufacturing facilities to Center Rock. Stoneridge will retain the Juarez, Mexico facility to support continued growth in the North American Electronics business. In order to ensure a smooth transition of ownership, we have also entered into a transition services agreement and supply agreements in Mexico and China. Stoneridge will supply parts from the Juarez facility as Center Rock prepares to manufacture independently thereafter. Similarly, Center Rock will supply electronics parts to Stoneridge from its Suzhou, China facility as we transition our products out of that facility. Finally, Stoneridge will support Center Rock with transition services, including IT, finance and HR support for as long as 1 year during the transition period. As I outlined in August, when we first announced our strategic review, we are seeing record-breaking business wins in several of our core growth platforms in both Electronics and in Stoneridge Brazil. This transaction will allow us to focus resources on our highest growth, highest return businesses and reduce overall organizational complexity, leading to a clear focused strategy for the company. Additionally, we intend to use the net sale proceeds to reduce our debt and related interest expense, creating immediate value for shareholders. Similarly, we believe the sale of Control Devices will allow that business to have dedicated ownership to focus on its specific needs, invest more deeply and facilitate new growth avenues for its employees and customers. Control Devices has a proud history within Stoneridge. And over the past decade, we've made significant strides to evolve its technology portfolio, improve its operational processes and enhance its market positions. We wish the Control Devices team continued success as they continue to grow the business. We are excited about this next stage of our long-term strategy. We believe this will create significant immediate and long-term value for shareholders and position us for sustainable success. Now turning to Page 5. Stoneridge's remaining portfolio will be focused on advanced technologies and electronic solutions, primarily for global Commercial Vehicle and Off-highway end markets. We will continue to utilize our global footprint to serve our global customers with manufacturing in North America, South America and Europe. Stoneridge will continue to serve 3 primary product categories: vision and safety, connectivity and vehicle intelligence and electronic controls, each with their own significant growth opportunities. We expect continued expansion of our vision and safety systems, including MirrorEye and adjacent products and advanced technologies through the maturity of our existing products and the introduction of new products to the market, including our connected trailer and surround view suite of technologies. As discussed on our recent earnings calls, MirrorEye continues to expand across the world through the ramp-up of existing programs, increasing take rates and record new business awards. As the dominant leader in camera monitor systems in the commercial vehicle space globally, we have significant opportunity to not only expand on our current products and technologies, but also introduce new technologies and capabilities to advance our systems. With focused resource deployment, we expect to further accelerate these opportunities. When coupled with our full suite of products and technologies, this allows us to expand our capabilities to focus on the cockpit of the future and domain integration. Between MirrorEye, our fully digital driver information systems, our secondary displays and our Tachograph and other connectivity devices, we develop and supply the products that drivers and fleets use to interact with the vehicle and vice versa. This will allow us to continue to integrate these complex electronic systems as a full cockpit domain and bring advanced technology to our customers to help differentiate their vehicles, improve vehicle safety and efficiency and provide opportunities for long-term profitable growth for the company. Similarly, with our global footprint, we will be able to continue to leverage these capabilities to expand in Brazil for the South American market. As we have announced previously, we are seeing record OEM awards in Brazil, and we'll continue to grow our business there by leveraging our global relationships and industry-leading technologies. In addition, by continuing to rotate our global engineering footprint to take advantage of a more cost-effective structure, Stoneridge Brazil has become a critical engineering center for our business. And as a result, we will continue to drive global growth and invest in the resources required to advance our capabilities within a more cost-efficient structure. As we continue to invest in these capabilities, we have generated a robust technology road map that will both enhance and expand our existing products and bring new products and technologies to the market. We expect this to drive growth that significantly outpaces our weighted average end markets, resulting in strong shareholder returns. Now turning to Page 6. After 3 years as CEO, I am proud of what we have accomplished. As I have stated several times on this call, we are excited about this next stage in our long-term strategy. And as such, our key focus areas remain the same. We must continue to execute on our key priorities to drive long-term value for shareholders. First and foremost, as I have discussed previously, we are focused on new product development, continued momentum with our existing products and technologies and continued expansion of our products into more substantial platforms that will drive long-term sustainable growth. In turn, we expect that these opportunities will drive significant growth over the next 5 years that will enable us to exceed our weighted average end markets by at least 2 to 3x, resulting in a 5-year compound annual growth rate of 8% to 12% through 2030. We remain focused on gross margin expansion through increased resources allocated to quality-related costs and processes. We have a robust pipeline of material cost reduction opportunities, both within the engineering of our products as well as within our supply chains, including reduced supplier complexity that we expect will accelerate with this transaction. We expect this to reduce quality-related costs and further improve material-related costs, driving gross margin expansion as we continue to grow. We also remain focused on our operating cost structure. This transaction streamlines the remaining organization and redefines our structural cost requirements. We will continue to evaluate and optimize our organizational structure, leveraging our global footprint to maximize our capabilities and output. With a clear focus on the remaining business, we expect to be able to reduce organizational complexity and streamline our global operating structure to accelerate our existing margin expansion initiatives. Finally, we are focused on a strong balance sheet. As discussed earlier in the call, net transaction proceeds will be utilized to pay down our existing debt. With a clear strategic plan in place and now streamlined business operations, we expect to amend our existing credit facility by the time we file our fourth quarter results in early March to give ourselves the time needed to refinance our revolving credit facility and put a capital structure in place aligned with the remaining business and our future expectations for growth. As is typical, we will provide our 2026 guidance and update our long-term targets aligned with our current business on our fourth quarter call, which will be held on Thursday, March 12. In closing, we believe this transaction will not only create immediate value for shareholders, but will help accelerate the future opportunities for the company. With a clear strategy, strong product portfolio, focused resource deployment and streamlined operations, Stoneridge remains well positioned to drive long-term shareholder value. Control Devices has a proud history within Stoneridge. And over the past decade, we've made significant strides to evolve its technology portfolio, improve its operational processes and enhance its market positions. I want to personally wish that team continued success as they continue to grow their business. And with that, I'll turn the call over for questions.

[Operator Instructions] Our first question today comes from Gary Prestopino from Barrington Research.

Congratulations on getting the deal done. I have several questions. First of all, you're getting $59 million. Is there any tax implications on the sale of this business that would reduce the net proceeds dramatically?

Gary, thanks for the question. Nothing -- no, nothing that would be dramatic. I mean there's -- depending on the jurisdiction of the entity that's sold, there's a little bit of tax here and there, but nothing significant, no.

Okay. So the bulk of whatever is after tax? Or is it the $59 million goes directly to pay down the debt on your balance sheet. Is that -- can we assume that?

Yes, the bulk of that would -- that's right, Gary. Yes.

Okay. And then in the sale, you didn't push any debt down in the sale to Capital Rock Partners. They just bought the business without any attached debt, right?

That's correct, yes.

Okay. So with the sale, you're keeping the Juarez, Mexico facility. And can you just remind me what -- beyond what you were doing in Control Devices, what else are you producing in Mexico at the Juarez facility? I assume there's got to be something for the Electronics segment, but I just -- I'm not too clear on that.

There's a number of products there, Gary. The 2 primary ones for electronics are the digital instrumentation systems, the instrumentation clusters for commercial vehicles as well as our North American MirrorEye product is produced in that factory.

Okay. Great. And then lastly, and I'll jump off. With the sale of this business, and I don't know if you can answer this right here and now. But if I look at 2024, your unallocated corporate was about $33 million. How much does that number get reduced on an absolute term from the sale of this business if it gets reduced at all?

Yes. So Gary, obviously, we can't talk too much about forward expectations given that we haven't given guidance yet for this fiscal year. But obviously, with the ability to streamline some of our operations here, there is certainly the opportunity to do that. And I would expect that we'll talk quite a bit more about that on our call in early March.

Yes. Okay. That's what I figured. All right, thank you very much and congratulations again.

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Jim Zizelman for closing comments.

Well, thanks again for joining us on this morning's call on such short notice. We couldn't be more excited about the opportunities that this transaction creates for the company. With a clear strategy, strong product portfolio, focused resource deployment and streamlined operations, Stoneridge remains very well positioned to drive long-term shareholder value. Thanks again, everyone.

And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.