Welcome to the Stoneridge Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event's being recorded. I would now like to hand the conference over to Kelly Harvey, Director of Investor Relations. Please go ahead miss.

Good morning, everyone. And thank you for joining us to discuss our second quarter results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted on our website at stoneridge.com in the Investors section under Webcasts & Presentations. Joining me on today's call are Jon DeGaynor, our President and Chief Executive Officer; and Bob Krakowiak, our Chief Financial Officer. Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties, and actual results may differ materially. Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-Q, which has been filed with the Securities and Exchange Commission under the heading Forward-Looking Statements. During today's call, we will also be referring to certain non-GAAP financial measures. Please see the appendix for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. After Jon and Bob have finished their formal remarks, we will then open up the call to questions. I would ask you that you please keep your question to a single follow-up. With that, I will turn the call over to Jon.

Thanks Kelly, and good morning, everyone. Let me begin on Page 3. In the second quarter, we continue to navigate through supply chain challenges resulting from the global pandemic. This impacted material availability, production schedules, product mix, labor availability and cost, logistics and even our tax rate, as earnings and expenses experienced unusual jurisdictional shifts. Despite these headwinds, we continue to position the company for long-term profitable growth through new business awards, continuous improvement in our manufacturing facilities and careful cost control to drive profitability. Our second quarter sales of $191 million resulted in an adjusted gross margin of 22.5%, translating to an adjusted operating loss of $1.9 million. Adjusted EPS for the quarter was negative $0.14. Our second quarter performance was significantly impacted by external headwinds, which in total, unfavorably impacted adjusted EPS by approximately $13 in the quarter relative to our prior expectations. I will provide a more detailed review on the performance drivers of our second quarter results later in the call. During the quarter, we continued to make progress with our MirrorEye platform, preparing for OEM launches and expanding our retrofit programs. Additionally, the value of the MirrorEye technology is beginning to resonate in our other end markets, including the bus market, where we have sold over 1500 units of MirrorEye and bus applications year-to-date, and we recently signed an agreement with a major bus OEM to supply MirrorEye in Europe. In addition, we continued the transformation of our global footprint during the quarter by completing the sale of our Canton, Massachusetts facility for net cash proceeds of $35.2 million. The cash proceeds from this transaction were used to pay down our revolving credit facility balance, further strengthening our balance sheet and creating additional capital that we can use to drive future growth. Finally, this morning,…

Thanks Jon. Turning to Slide 13, sales in the second quarter excluding the best of product lines were approximately $189 million, which was in line with the prior quarter. Adjusted operating loss, excluding the best of product lines was $2.6 million, or negative 1.4% of adjusted sales, which declined 300 basis points versus the prior quarter. The reduction in margin performance is primarily due to supply chain related headwinds, negatively impacting operating margin by an incremental $1.4 million or approximately 80 basis points during the second quarter. In addition, the second quarter had higher operating expenses versus the first quarter, primarily as a result of planned incremental engineering expenses to support program launches. I will provide additional detail on segment performance and a brief discussion of our expectations for each segment for the remainder of 2021 on the subsequent slides. As Jon discussed earlier in the call, we are guiding to the high end of our previously provided revenue guidance for the full year based on first half performance and current production forecasts. Despite our expectation of strong revenue performance, this morning, we are reducing our full year 2021 adjusted EPS guidance by $0.30 to a midpoint of $0.25, primarily due to higher continued supply chain related costs and an unfavorable income tax rate both during the quarter as well as for the full year. Page 14 summarizes the drivers of our current 2021 adjusted EPS guidance. Including the incremental impact in the second quarter, we expect that supply chain related costs will reduce our adjusted EPS by $0.11 to $0.13 for the full year relative to our prior expectations. This includes continued premiums related to material cost and freight offset by our expectations of cost sharing and price increases. Similarly, we expect that continued supply chain disruptions will create…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Gary Prestopino with Barrington Research. Please, Gary, go ahead.

Hey, good morning, everyone.

Good morning Gary.

Good morning Gary.

I'd like you to maybe comment on some of the supply chain issues. There's a lot of talk about transitory versus embedded inflation. What are you guys thinking on that? I mean is these kind of step up in the prices of what you're having to pay for inputs through the supply chain. Are those going to hold? Or do you anticipate that as everything normalizes we should see some snapback reduction in some of the price increases that you're having to deal with right now?

Gary, I think the answer is we see both. We see overall inflation as well as short-term crisis based activities. So we do see a level of we some of it that will normalize just over time as supply chain stabilize and some of it that will be more permanent. It's why we're having very transparent conversations with both our suppliers and our customers on real cost increases. And it's why as we talked about during the call, there's aspects of this that where we said, what 6 million of the 10 million that we're forecasting for the year, we've already seen as an impact, where the impact - the recovery will lag the impact. Because it's - some of it is transitory, and some of it is more permanent. And we're working to offset both of those with work with our supply chain and driving efficiencies as well as work with our customers from a pricing perspective.

Yeah, Gary, let me just add to that. This is Bob. We're seeing things with respect to the industry that we haven't seen before. On some components, we're getting calls from suppliers and they're announcing dramatic price increases for us and basically telling us, we want the product, here's the new price. So obviously, there's not much we can do in the short run on those types of those types of issues. But rest assured we are going out and having conversations with our customers and doing all the things that the shareholders are expecting us to do, try and recover as much prices we possibly can.

Okay. And then, in terms of some of the longer term targets that you set at the beginning of this year, I mean, are you still comfortable, I think it was a 15% adjusted EBITDA margin by what 2025 given what you're internally doing to position the company on a product basis as well as expense basis.

So Gary, the way that I respond to that is we are obviously, right in the middle of these historic price increases, we're still - there's still lots of work that needs to be done in terms of assessing what is the overall impact going to be to the company as a result of the inflation and the increases that we're seeing. So we're not commenting on our long-term guidance, we'll be in a better position, once we go through our annual planning process and begin negotiations with our suppliers around pricing for next year to be able to say more about that. But I will tell you, on the positive side, from a revenue perspective, we talked about what we're expecting for 2022 and our weighted average end markets are growing at over 10%. And we expect to continue to grow above the market for the foreseeable future, as a result of all the great work that's been done by the sales - by the commercial organization with respect to our new business awards.

Okay, and then lastly, and then I'll jump off. Could you maybe comment on how some of these fleet trials that you were doing, from here how they're going and what number of units you've got these potential - well, what number of units you're doing fleet trials with at this point.

So Gary, we continue to expand our fleet trails, we don't have any major fleet expansion announcements to talk about today. But what we're seeing is we're seeing - as we said, In previous calls, and as we've talked to you about, the safety leaders with whom we worked, and originally developed this, that's setting the stage and it's flowing down through the broader market. So we're seeing some of these midsize fleets coming to us with more interest. And so whether it's at the National Product Carriers Association, or at other events, where we're getting a significant level of interest, because they've heard about it, they seen who the leaders are in the industry that are working with it and we we've had a large - a very positive interest from midsize fleets. What we also are seeing and probably the most important thing, and I talked about it in our script is the fleet's are talking to the OEs and we're hearing feedback from the OEs with regard to the fleets wanting to figure out how to have it on their trucks. So we talked about the Pre-Wire expansion, remember, that's just with one OE. And when you have as much expansion as we had just in a month-over-month basis, it gives you a sense for the level of interest that is coming from the fleets that's going, they can't get it on their OE, trucks that they want it Pre-Wired. And we're seeing other OEs working with us to say, how do they also Pre-Wire their trucks? So we continue expand our fleet trials. We don't have any specific major announcements with regard to specific fleets. But there's a whole series of safety consortia and other midsize fleets that we're working with that we feel really good about where we're going.

Okay, thank you very much.

Thanks Gary.

Thanks. Thank you for your question.

Our next question comes from Justin Long with Stephens. Please, Justin, go ahead.

Thanks and good morning.

Good morning Justin.

Good morning.

So the supply chain issues are very well known. But it does seem like the impact to Stoneridge has been a lot more pronounced versus a lot of the other suppliers out there. So can you talk about some of the reasons why this might be the case? And in terms of how long this lasts? I know it's a tricky question. You've given the second half guidance, but any thoughts about next year and if these challenges could linger into 2022?

So Justin thanks for your question. And, as we talked about, on many of these calls, the transformation of Stoneridge product portfolio to smart products, the good news is it sets the stage for the future, the bad news it exposes us to that - where the majority of our products have a chip in them. And so both then in the commercial vehicle end markets and in the pass car end markets were exposed that way. So that's piece number one that's internal to us. Secondly, the exposure that we have to some of the light duty OEs and their specific impact, and what our end market exposure and customer exposure is not completely balanced across all of the OEs. And in that situation, there's a little bit of additional impact because of where we're balanced with our OEs on the light duty side. What I would say with regard to how long this lasts, we are getting - we continue - we speak with all of the chip manufacturers - we buy from all the chip manufacturers and we're getting feedback from them all the time. We do see the tightness going at least through the end of the year. And that's why we are conservative with regard to the guidance that we provided. We know that others have given different points of view. This is the best view that we have for our shareholders. What we are doing is working actively with our total supply chain and with our OE partners to look at what we can do from a redesign standpoint, not only to address the situation in the near term, but make permanent corrective actions in the future.

Okay, thanks, Jon. And maybe next one is for Bob, I wanted to ask about incremental margins, as we look forward to 2022, you gave the color that your weighted average end markets will be up 10%. You expect to outgrow that. But as I just think about 2021, and albeit supply chain headwinds, elevated D&D cost, it seems to set the stage for incremental margins that could be above your long-term framework, maybe even meaningfully above that framework. So, just wanted to get your thoughts around that, if you would agree with that statement, or if there's something that could offset some of the tailwinds in the next year.

Yeah. So Justin, it's really not appropriate for me to comment on 2022 right now in the middle of kind of - what's going on with the current supply chain situation. So what I would prefer to do is allow us to go through our normal planning process and have the conversations with our customers and our suppliers that we're having right now. And rest assured we're having a lot of those conversations to get a better line of sight to what the impact's going to be and how it's going to - if it's going to impact the long-term margin profile the company and what that looks like. And when we have something to say - when we have something more to say about that, we'll be out with that as soon as we possibly can. But right now, it's not - I just feel like now's not the time to really talk about that given where we're at right now in this - in the middle of the supply chain issue. But we'll come back down that.

Okay, understood and maybe just lastly, on the tax rate. That was a surprise in the quarter and the guidance, but you made the comment, as we get into next year we should normalize. What do you view is that normalized tax rate for the business?

Yeah. So Justin thanks for the question. And let me just - let me expound upon the tax rate a little bit because I think it's important. So we talked about a little bit in the prepared remarks. But you can imagine just with all the headwinds that we've seen in the quarter, with the supply chain, and the incremental engineering efforts that we're moving forward on to support our new program launches and our future growth. The impact of the incremental expenses, it's not occurred evenly throughout all the jurisdictions of the world where we do business. So that's going to - really the net result of that you have relatively strong earnings in certain higher tax jurisdictions, and then incremental expenses in some lower tax jurisdictions as well, even including some pretax losses in certain jurisdictions where we have valuation allowance and so you don't get any kind of tax benefit, you don't recognize any kind of tax benefit from that. So the net impact of that it will result in a tax expense for the quarter despite a pretax loss, which obviously is unusual and a negative tax rate. We do expect the earnings trend to continue through the remainder of this year. We're looking forward to 2022 and beyond. We're looking at the tax rate to return to the normalized range that we've given before, which is the 22.5% to 27.5% range.

Okay, great. That's helpful. I appreciate the time.

Thanks Justin.

Thanks Justin.

Our next question comes from Scott Stember with CL King. Please, Mr. Stember, go ahead.

Good morning, guys, and thanks for taking my questions.

Good morning.

Good morning Scott.

Good morning Scott.

Maybe talk about Electronics a little bit. If you were to add back, I guess for the first half of the year, the supply chain costs and the obsolescence charge, you're still I guess, floating around breakeven this year, maybe plus or minus a little bit. Can you maybe talk about some of the other issues? Primarily, I guess, product launches and the timeline for that to hit or for that to abate just to see when we can start getting back to some profitability in the segment.

Yeah. So Scott, thank for the question. And I think it's one of the greatest sources of frustration that we have in the organization is how well many things are going in spite of these headwinds. If you look at our - look at the progress on our plants and look at the progress with our launches, it gets overwhelmed with the supply chain turbulence. But what we've talked about many times, and what we've talked about with you many times is the number of launches that we have going on in Electronics right now between the instrument clusters, between the MirrorEye programs as well as the advanced development activities and also just the rotation of capabilities. So we're seeing all of those things happen right now and as you add back the supply chain disruptions and the inventory right that you talked about, what you see is a business that's absolutely well positioned as things like the PACCAR instrument cluster ramps up and the MirrorEye programs ramp up, and things like SMART 2 and other programs ramp up, this business is completely positioned for great growth and great profitability.

Got it, okay and with regards to I guess, cost sharing, and Bob, you talked about how none of this is really guaranteed. But is there any of that in the guidance for the remainder of the year? Have you put any in and if you did how much?

Yeah. Scott, thank you so much for the question. We haven't put very much in - with respect to the guidance for the balance of the year. We have - we're absolutely active in discussions with our customers, as Jon mentioned, we also had $2 million of the 5 million of increases that we saw during the quarter. So as I said before, we're moving quickly, we're responding, having conversations with our customers on a daily basis around the increases that we're seeing relative to the supply chain. But overall, with respect to the guidance Scott, we have not included much in terms of from a recovery perspective in those in the numbers that we've provided.

Got it and then just lastly on MirrorEye, It seems like you've made some more traction here and the retrofits and Pre-Wire's seem to be accelerating nicely. Can you just give us an estimate of total MirrorEye related revenues that you would see for 2021? How much of that is in your guidance?

So remember, we've talked about relatively small numbers in the couple of 1000 systems that are in our guidance. What we're seeing here - what we're seeing Scott is the opportunities are accelerating. We talked about the bus opportunity, that's an expansion, an opportunity that's accelerating. And we're seeing these midsize fleets which when we originally set the guidance for the couple of 1000 MirrorEye retrofits, we didn't expect to sort of pull out the midsize fleets necessarily that we're seeing right now. So we're really positive about what Pre-Wire's doing, what this safety results are doing and what the safety leading fleets and how that's trickling down. I think there's also an important thing to note that MirrorEye retrofit often is done on new trucks. And when there is constraints in the marketplace with regard to the availability of new trucks, it doesn't change the interest from the fleets, but it does change the ability - it does change when they can get those trucks. So we know that there are fleets that want to put their new trucks in service, and retrofit their trucks with MirrorEye that are constrained by when they can get a new truck. So what we're seeing and what we talked about earlier and what we will continue to talk about is we see the demand there, we see the interest there, we see the pole expanding. Right now, the supply chain constraint not only impacts us from a financial performance standpoint, but it impacts us with regard to our end markets and what trucks our customers can get access to so that they can be retrofitted. Does that make sense? Did that help you?

Yeah, it does. Yeah. Also, last quarter, you gave a number. I forgot what the number was. But it was immaterial. But I guess you would expect it to be relatively material for the full year, obviously, a lot of that for next year.

Yeah, but again, our fleet services activity with retrofit also is a critical portion of developing this MirrorEye platform. So what it is that we're providing for the OEs and how do we provide a true safety platform going forward? So I look at the retrofit also as a way - in the fleet services activity as a way to create more pull for OE programs going forward. So when we talk about the OE programs that are launching at the end of this year and into early next year and we talked about a 15% take rate, the more market awareness and more market poll, as we see it through retrofit also should drive additional take rate beyond the 15%. So there's synergy between those activities, we work very hard to make sure that there's that synergy and work with the OEs that way and it will create opportunities on both sides into 2022.

That's all I have. Thanks, guys.

Thanks Scott.

Thanks Scott. Thanks for your questions.

This concludes our question-and-answer session. I would like to turn the conference back over to Jon DeGaynor for any closing remarks.

Yes, I want to thank everybody for your participation in today's call. In closing, I can assure you that our company is committed to continuing to drive shareholder value through strong operating results, profitable new business and focused deployment of our available resources. Our management team will respond efficiently and effectively to manage and control the variables that we can impact and we will continue to drive strong financial performance. We're confident that our actions will result in continued success for 2021 and beyond. Thank you all for being here.

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