Good day, and thank you for standing by. Welcome to the Stoneridge Fourth Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that this call is being recorded. And I would now like to hand the conference over to our speaker today, Kelly Harvey, Director of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us to discuss our fourth quarter and full-year 2022 results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted to our website at stoneridge.com in the Investors section under Webcast and Presentation. 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 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-K, which will be filed today 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 Jim and Matt have finished their formal remarks, we will open up the call to questions. Turning to Page 3. I would like to introduce Jim Zizelman, who was recently appointed as President and Chief Executive Officer of Stoneridge, and was also appointed to the Stoneridge Board of Directors effective January 30. After a year of consulting with the company, Jim joined Stoneridge almost three years ago as President of the Control Devices division and has played an integral role in developing and executing on the strategic priorities, product development, and technical vision for both Control Devices and Stoneridge more broadly. Jim brings a wealth of knowledge and experience, and we are fortunate to have a proven business leader and experienced executive step into the CEO role.

Thank you, Kelly. I am fortunate enough to have already spent a significant amount of time at the company as President of the Control Devices division and as a member of the executive staff, where I was able to have a broad impact on the overall strategic direction of the company. I focused on aligning the segment with industry megatrends, while sustaining strong margins during challenging macroeconomic conditions by placing a key focus on rigor and discipline across all elements of the business. I look forward to working closely with our Board, our senior leadership team, and our dedicated global teams as we continue to execute on a strong long-term strategy focused on sustainable, profitable growth. Turning to Page 4. With my transition to CEO, Rajaey Kased was appointed as President of the Control Devices business. Rajaey was most recently the Vice President of Sales and Product Line Management for Control Devices, where during his three-year tenure, he demonstrated the leadership and strategic thinking that has helped advance the division's priorities and performance. Rajaey was responsible for overseeing a number of divestitures of noncore business that help shape the Control Devices portfolio to better align with industry megatrends that will drive growth going forward. In his new role, Rajaey will be responsible for driving business performance, commercial relationships, product development and our continued innovation strategy within the segment. Turning to Page 5. In the fourth quarter, we continued to see sequential revenue improvement with 5.2% growth, compared to the third quarter and EBITDA margin expansion of 100 basis points, excluding an adjustment related to a prior quarter correction. This $0.10 correction was driven by the FX impact on non-operating gain recorded in the second quarter related to a derivative security and not material to our operations or baseline operating performance.…

Thanks, Jim. Turning to Slide 13. Sales in the fourth quarter were approximately $225.2 million, an increase of 5.2% relative to the third quarter. Operating income was $6 million or 2.7% of adjusted sales. More specifically, Control Devices sales were approximately $86 million, which was a decrease of approximately 3.9% compared to the third quarter, resulting in operating income of $5.5 million or 6.4% of sales. Electronics adjusted sales of $134.8 million increased by 15%, compared to the third quarter, resulting in operating income of $4.9 million or 3.7% of sales. Stoneridge Brazil sales of $13.1 million decreased 5.5%, compared to the third quarter, resulting in operating income of $800,000 or 6.4% of sales. This morning, we are establishing guidance for our 2023 financial performance. We are guiding 2022 revenue to a midpoint of $975 million, implying an increase of approximately 16% versus our 2022 revenue, which is more than 13x our underlying weighted average end market growth. Despite continued pressure on gross margin, we are expecting to leverage our existing cost structure to drive overall margin expansion on substantial growth. We are guiding adjusted gross margin to a midpoint of 20.9%, adjusted operating income to a midpoint of 1.9%, and adjusted EBITDA to a midpoint of $54.6 million or 5.6% of sales. Our midpoint guidance implies EBITDA margin expansion of 210 basis points and almost $29 million relative to 2022. As a result, we are guiding to a midpoint of breakeven adjusted earnings per share for 2023. I will provide additional color on the drivers of expected sales and adjusted earnings per share performance later in the call. Turning to Page 14. Before we discuss the factors impacting operating performance in the quarter, I'd like to provide some detail on a prior quarter correction that impacted the fourth quarter.…

Thank you. [Operator Instructions] Our first question will come from Justin Long of Stephens. Your line is open.

So, I just wanted to take a step back. The company's results have obviously been pretty volatile recently. And while revenue performance seems to be a bright spot as you outperform the market, there's been a struggle taking this to the bottom line. Jim, as you step into the CEO role, what are the steps you plan to take to, number one, improve the predictability of earnings? And number two, improve the profitability of this company?

Thanks, Justin, for the question. I think the steps I'm taking actually will address both of those concerns. And where I'm focused more so going forward is on execution, you know driving rigor and discipline in the company across all elements of the business, making sure that we have a program management focus. By doing so, we will seriously minimize the potential for any surprises that had historically had the opportunity to creep in to our numbers. And I think by holding us accountable to these, I'll say, elevated elements and rigor and discipline across all elements of the business, I think that we'll more successfully drive excellence and execution and again, drive out issues that have, again, historically crapped in.

Okay. And I guess, secondly, when I look at the 2023 guidance, your implied contribution margins are in the high teens, just using the midpoint of the outlook. I know you called out the wage inflation and incentive comp, but I feel like those are headwinds that you probably saw coming on the horizon for a while. So, I guess my question is, why not get more aggressive with price? And it sounds like you are pushing price, but is there more of an opportunity in response to the higher supply chain costs and the higher labor costs that you're seeing in addition to the fact that the company's margin profile is below target?

Yes, Justin, thanks for the question. The EBITDA contribution margins next year are definitely influenced by a significantly increased burden on inflationary labor costs. So, while we could see some of that coming, it is substantially greater than what we've experienced in prior years across the business. Now, that said, like you suggested, as those conditions change, like I said in the prepared remarks, we are taking aggressive, but appropriate actions with our customers and even beyond that with our supply chain, with our – with engineering design of existing products to make sure that we are recovering those costs, but also maximizing our opportunity to improve margin as we go forward. Like we've said previously, we have expected incremental costs. We do expect that our recovery will lag those costs. But as you saw last year, we were extremely successful in offsetting those costs through the playbook that we ran with customers, supply chain and product engineering. So, there's certainly that opportunity to continue to be aggressive and we are. In all of those cases that we expect will drive a run rate for the second half of the year that is significantly improved to the first, similar to what we saw last year and provides a really good trajectory as we head into continued growth beyond next year.

Okay. And as I think about what you said about the first half versus the second half, so from an EPS perspective, first half guidance is negative $0.40, which implies second half of positive $0.40 to get to the midpoint of the guidance. How much of that improvement first half to second half is just a function of price versus other items? I mean, I know the implied revenue guidance is a little bit better in the second half, but maybe you could just give us a sense for your level of visibility essentially into the second half.

Yes. So Justin, it's a great question. We have a lot of visibility on the top line because like we've talked about in the past, a good portion of that is OEM programs that are obviously awarded and have visibility into production volumes. We've obviously seen macroeconomic conditions be volatile over the last 18 months. So, I wouldn't say that we have perfect visibility there, but we have good visibility to that topline growth, including the launch of the North American MirrorEye program and the Smart 2 program, which are both incremental this year as we go into the second half. So top line, there is still some variability, obviously, in aftermarket or non-OE products, but top line, we've got pretty good visibility to the cadence of our expectations there. That does drive incremental contribution, obviously, in-line with those historical averages as we go through the quarters of the year because the incremental labor cost will have already been considered in the beginning of the year. There is – we do expect and there is assumption of incremental price that obviously impacts – we believe retroactively once those price negotiations are complete. Again, similar to last year, but will impact the second half of the year as well on incremental volume. So, it does have a compounding effect as you increase price.

Got it. Thanks. And I guess last one for me is on the Board. There have been some changes recently. You've talked about this refreshment strategy. But can you share what the catalyst was to drive these changes? And why this is the right timing in the midst of a CEO transition as well?

Yes. So, Justin, I'll take the first start, and then maybe Jim can chime in. I don't want to speak for the Board, I'm not on the board, but you can see that there's been a progression of Board transformation over the last several years that starts with the appointment of Frank Sklarsky, who is our Audit Committee Chairman and has continued now with the announcement of our most recent Board member, [Carson] [ph]. So, I think you've seen the Board has been very clear with our expectation of continued transformation to align expertise with the business, and they've delivered on that over the last several years. And Jim, I don't know if – being on the board, if you have any...

I think it is a normal natural progression. The Board is very cognizant of its tenure. They're also very cognizant of the skills necessary in a business that is changing dramatically. We're going from an automotive parts company to a systems company, more technology-focused company and sometimes skills required to ensure that you've got good support of the management team from the Directors in the Board. Sometimes that needs some refreshment, and the Board is very cognizant of that and is willing to allow for those adjustments and positions to be made.

Okay. Understood. Thanks for the time.

Thank you. And one moment please for our next question. Our next question will come from Gary Prestopino of Barrington Research. Your line is open.

Good morning, Matt, Jim, Kelly. A couple of questions. First of all, on the rate of revenue that you're projecting for the MirrorEye business. Does that – given that level of volume that you're doing, does that become adjusted EBITDA margin accretive to bottom line results in 2023 or does it flatline it or is it lower than what you're looking at?

Gary, I would say, with a ramp-up in that program that percentage-wise is so substantial year-over-year, you will see accretive EBITDA performance from that level of growth. And we expect that level of growth to continue, obviously, as we are increasing the forecasted take rates on the second European launch substantially, almost double, and obviously, have a relatively lower take rate on the first North American program currently forecasted that we rightfully saw we're optimistic around given what we're seeing in other OEM products or our first OEM program and the MirrorEye retrofit momentum in North America. So, it will have an accretive impact this year, and I expect that, that will continue and accelerate because of the substantial growth opportunity in not only this program, but this platform, this vision and safety platform going forward.

Okay. And I want to get back to some of those new endeavors with MirrorEye in a second. But what I want to call – direct your attention to is, the sales guidance for this year. And I guess the prior question was the, you know how do you – what is your confidence level in that sales guidance? So, if I look at – you're looking at a $10 million lift from IHS production forecast, which that could very much move around. That's just based on what production could be. But the 108 to 138 of specific growth and price recoveries, how much of that is actually in the books? And how much of that has to come from maybe increased – better than increased production rates, better than increased price recoveries, I'm just trying to get an idea of the visibility, the confidence you have in these numbers because as the other analysts mentioned, the numbers have been all over the place? It's a situation where you start the year off with a certain cadence of guidance, and then as the year goes by, things are less than what we initially expected.

Yes. I appreciate the question, Gary. So, I would say a couple of things. One, the Stoneridge-specific drivers there are not – do not require some incremental market performance versus what production levels are showing or any sort of price outperformance. It's what we expect from a price perspective and what the market is suggesting from a production perspective. Those things are much more related to content that is specific to us on those vehicles. So, for example, our digital information – our digital driver information systems are annualizing at very [high risk] [ph] as the new model trucks ramp up. That provides a significant annualized tailwind versus last year. We talked about MirrorEye. So Gary, to your comment on predictability, it obviously relies on production volumes, but it is specifically driven year-over-year by something that is specific to us, not just peanut butter to production volumes. Similarly, on the MirrorEye programs, we talked about all of the incremental revenue there. It's driven by a new program. It's driven by the annualization of higher take rates for a full-year on full-year production volume for our existing program, and the expectation that we will continue the momentum we're seeing in the retrofit market. So, of those things, the retrofit market obviously has more variability, but is also a relatively smaller portion of that overall revenue pie. So, if you think about the relative rank of volatility, that's how I would think there for MirrorEye. And then similarly, we are launching a new connectivity product with Smart 2. We're seeing the ramp up of some of those recently launched connectivity programs, and we're seeing continued expansion on the actuation side. We talked a little bit about some of the platforms that we're on, for example, with park-by-wire, right, in those electrified vehicle platforms. For example, the [indiscernible], we've talked about that historically being one of our largest content vehicles. That platform for [indiscernible] performing tremendously. So, it's Stoneridge-specific growth, Gary, around forecastable OEM content that's growing, some variability from the aftermarket, although less so than the OEM side, and being on the right platforms with the right customers to facilitate that growth versus the underlying weighted average end market.

Okay. That's very helpful. So, I want to get back to the MirrorEye slide, Slide 7 for – on my presentation. So, this partnership with Grote Industries, industry to introduce the first wired rearview trailer camera. I mean that strikes me as interesting and possibly, a big breakthrough for this product overall because there's got to be more trailers out in the market than there are the trucks that drive them. Is that a correct assumption on my part?

Yes. Gary, that is, in fact – everything you said actually is, you're correct and in-line with what we're thinking. First off, we do think this is a major breakthrough and a real opportunity for us to expand the MirrorEye platform. And there are just a very, very large number of trailers out there in the market. Right now, best estimation for trailers existing in the U.S. is 6 million. And also, if you look at the yearly production in just the U.S. for new trailers, it's about 300,000 a year. So, this is a very substantive market. And you think about the technology and what it can bring here with looking directly behind the trailer, looking inside the trailer, there's a lot of things that the driver could benefit from seeing relative to risk mitigation, relative to product he's carrying, but also relative to safety. So, this is a major step forward. And the technology itself, there is so much innovation in this. I mean oftentimes, people say, well, you're just adding a camera back there, but think about what we're talking here. Adding several cameras without the need to add any additional wiring to the trailer. The innovation really is around how we've [encoded] [ph] the signal of the camera to be pushed through the power lines and the existing wiring harness in the trailer up to a connector that's exactly the same as the connector today to drive the signal into the cab itself. It's an extreme innovation. We were at the TMC exhibition in Orlando, Florida this week, and we saw extreme interest by trucking companies and trailer companies relative to this technology. So, we are very optimistic about the expansion of MirrorEye based on this new addition to the family.

Yes, Gary, I would add to that. When you think about the speed of implementation there because it uses existing technology that's already on the tractor or the trailer, there's a benefit of speed of implementation, but also, this is more broadly, Gary, this is a testament to the significant investment we have made over the last several years in this platform. You're seeing these things start to pay off, not only in the OEM programs and the retrofit along with the – aligned with the MirrorEye product, but this vision and safety commercial vehicle platform in total. So, developing these capabilities and these technologies and applying them in the right way as we work with the fleets to better understand value proposition and where these things are applied most beneficially to the fleet to our ultimate end customer, driving the adoption and development of these advanced technologies that we agree with you, we think are changing the industry.

So, as I look at this, I mean you can actually port the technology and the actual product itself. I don't know how much you have to reconfigure it to be on a trailer versus a truck, but in terms of actually having this product out in the market, how long would you anticipate that event to occur from now?

Yes. Okay. So, I think you're asking, Gary, when would we anticipate the introduction of such a technology into the market?

Right. Exactly. Yes.

Yes. So, I think in volume, you’d start to see it next year, early part of next year. As I said, you know as we were speaking, there's some opportunity perhaps for some trial fleets or something of that nature as we get to the tail-end of this year, but pure commercial sales in the next year, that's most likely.

Okay. So, really, this partnership with Grote Industries is, kind of more or less like – I mean, Grote is what? Is that a trailer company or is that – what is that?

There are harness – I don't want to misrepresent them, but they're essentially a harness and lighting company. So, they don't really produce the trailers, they provide the electric structure in the trailer.

Okay. Thank you very much.

Thank you, Gary. Appreciate it.

Thank you. [Operator Instructions] I'm seeing no further questions in the queue. I would now like to turn the conference back to Jim Zizelman for closing remarks.

Well, thank you, everyone, for joining us for the call. I know your time is very important, and we truly appreciate your willingness to engage us today. We couldn't be more excited, I think, as you can tell, about our industry-changing product platforms and the growth it brings to our company. Our focus is now on rigorous and disciplined execution, which will bring the performance we outlined today. So, thanks again, everyone.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.