Good day, and thank you for standing by. Welcome to the Stoneridge Fourth Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your 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 2023 results. The release and accompanying presentation was filed with the SEC and is posted on our website at stoneridge.com in the Investors section under Webcasts and Presentations. Joining me on today's call are Jim Zizelman, our President and Chief Executive Officer; and Matt Horvath, our Chief Financial Officer. During today's call, we will be referring to certain non-GAAP financial measures. Please see slide 2 for a more detailed description of these non-GAAP measures and in the appendix -- in the appendix for a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. In addition, 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 later this week with the Securities and Exchange Commission under the heading forward-looking statements. After Jim and Matt have finished their formal remarks, we will open up the call to questions. And with that I will hand the call over to Jim.

Thank you, Kelly and good morning, everyone. Let me begin on page 4. I am extremely proud of our progress in 2023. We delivered on our financial commitments throughout the year driven by an unwavering focus to both execute our long-term strategy and drive continuous operational improvements. Although, the supply chain environment continued to improve, the transportation industry continued to face many challenges throughout the year including the UAW strike, higher interest costs and the slower than expected penetration rate for electric vehicle platforms. However, by focusing on the execution of our major program launches, continuous improvement in our manufacturing facilities and the execution of operating expense initiatives to both reduce cost and improve efficiency, we were able to navigate through these challenges. And as a result we achieved full year sales, operating performance and adjusted EPS in line with the expectations we set forth at the beginning of the year. And we're not done yet. Throughout this process, we've identified multiple areas for further improvement and expect our efforts to continue to drive long-term profitable revenue growth and significant earnings expansion going forward. I will discuss some of our key priorities for 2024 in further detail later in the call. Our fourth quarter adjusted EPS of $0.12 was in line with the expectations we outlined in the third quarter call and is a $0.02 sequential improvement compared to the third quarter and Matt will provide further detail on the fourth quarter results later in the call. We continue to focus on product platforms that will drive future growth. In 2023, we continued to build momentum with our MirrorEye programs with continued strong take rates with the DOT program in Europe and the launch of our first OEM program in North America with Kenworth. Earlier this week, we announced our…

Great. Thank you, Jim. Turning to Page 12, as Jim mentioned earlier on the call, we are proud of the progress we made last year. In the fourth quarter, we delivered on our previously provided EPS expectations, driving sequential improvement of $0.02 from the third quarter to $0.12 in the fourth quarter. Adjusted sales were approximately $229.4 million, a decline of 3.3% relative to the third quarter. This was primarily due to the incremental impact of the UAW strike of approximately $5.5 million in the quarter as well as the continued softening of demand for Electric Vehicles relative to prior expectations. Fourth quarter adjusted operating income was $6.2 million or 2.7% of adjusted sales, a decline of approximately 40 basis points versus the third quarter. This was due in part to the incremental impact of the UAW strike of $2 million over the third quarter, as well as continued costs related to the distressed supplier we discussed during our last call of approximately $1.1 million. Adjusted EBITDA for the quarter was $15.6 million or 6.8%. Turning to page 13, on our third quarter earnings call, we guided fourth quarter adjusted EPS to a range of $0.10 to $0.20 with an expected revenue midpoint of $238 million. Unfavorable FX movements reduced sales by $7 million will reduce production volumes resulted in a $0.02 headwind relative to our previously-provided guidance, primarily due to the slowing growth of Electric Vehicle platforms. Fourth quarter operating performance resulted in a $0.04 headwind during the quarter versus previous expectations. During the fourth quarter, we observed, higher we absorbed higher manufacturing costs than previously expected primarily related to elevated warranty and inventory costs on higher than normal inventory balances. This was partially offset by continued run rate material cost improvements as well as reduced operating expenses primarily…

Thank you. [Operator Instructions] And our first question is going to come from the line of Justin Long with Stephens. Your line is open. Please go ahead.

Thanks, and good morning.

Hi, Justin.

Hi, good morning. So maybe to start by just taking a step back, when I think about the 2024 guidance, it implies that you'll be growing EBITDA in excess of 30% in an environment where the weighted average end markets are down about 5%. So can you just speak about your level of visibility and confidence that you have in this 2024 guidance, but you say the end markets end up being worse than anticipated? Can you speak to your ability to adjust and flex the business for?

Yeah, Justin, I really appreciate the question. Our guidance this year is very much aligned with some very specific Stoneridge drivers. When you think about the launch of the MirrorEye programs in midyear, the continued adoption of Smart 2 those things are really not market dependent on any significant improvement in production forecast. That's really a Stoneridge specific product that will drive a lot of content for us in the back half of the year. So I feel very confident in our ability to look at that as improvement for the back half and on the contribution margins that we get on that type of content, you can expect pretty strong EBITDA growth as well to follow that. In addition, the aftermarket products generally have a higher margin than the overall business. So those products in particular can drive some pretty significant earnings expansion as well. So when you look at the volume side, I feel pretty comfortable that we have enough Stoneridge specific drivers that we have a lot of momentum going into the back half of the year with those launches. And I'll let Jim comment on this a little bit too. But when you look at the operational performance and what we really have set as a foundation in 2023, the continued annualization of those initiatives should drive some pretty significant improvement both starting in the first quarter. But, obviously, as revenue ramps up, it gets compounded in the second half. So I feel really good about the runway that we're on, which drives improvement in the first half. And then it follows pretty significant revenue growth in the second half with that improvement. So I feel very confident in our ability to see the year and that kind of split.

Okay, great. And maybe to follow up on MirrorEye. So the guidance for the full year is $100 million in revenue, but it sounds like that over as we move into the second half. So is there anything you can share in terms of the annual run rate for MirrorEye revenue as we exit 2024?

Yeah. So you're going to see continued ramp in 2025. We've got -- we've announced the first of all the Volvo program will be launching in North America in 2025 as well as another program that we haven't given a tremendous amount of detail yet on specifically but we've got two programs in 2025. You'll also get the annualization of the programs that we are launching mid-year this year both in North America and in Europe with Volvo. So, MirrorEye will continue to grow significantly 2024 to 2025 just based on program launches annualization. And Justin, I would also argue that and we announced three additional fleets this morning, the more the system becomes available at the OEs, the more the fleet see the system, the more we expect adoption of the OE system and retrofit opportunities as these fleets kind of commit to full adoption over their fleet. So, I think that you'll get not only normal annualization program launches, but you'll get some increased take rate and retrofit expansion as we continue to address that market, particularly in North America.

And that will also see some benefit from the platform technologies that really are sponsored by the base MirrorEye platform, specifically things like the review trailer camera and its connectivity into the MirrorEye system along with other technologies that will really grow from that or even more forward into the cockpit of the future that we mentioned this morning. So, there's a lot of opportunity here for substantive growth beyond just the base platform of MirrorEye as well.

Okay. That's very helpful. And I guess the last one for me would be on the balance sheet, and specifically free cash flow. I think you mentioned a couple of times in the prepared remarks that there was an opportunity inventory levels and getting those back to historical averages. Can you help us kind of understand the order of magnitude, in terms of the working capital opportunity in 2024, and what you're assuming for free flow generation and the guide?

Yes Justin, it's a great question. So really an area of focus for us as we come off some of these supply chain challenges last couple of years and things have started to normalize. Our inventory balances and turns are relatively worse than what they've been historically. Some part of that is planned obviously to support the tremendous amount of growth that we expect this year and going forward. But the normalization of supply chain will help us burn down some of that inventory and generate cash out of the working capital that's currently on the balance sheet. So, it's right now we're five turns or so. We can expect that to improve by a turn or two in a relatively shorter-term as we burn down existing inventory that should generate $20 million to $30 million of cash. We also expect, because earnings are growing that -- we're pretty cash efficient and we should generate cash on a normal base business. So, if you look at the implied guidance for the end of the year, it does obviously include some expectations for cash generation. [Technical Difficulty]

Please remain on the line. Your conference will resume shortly. Again, ladies and gentlemen, please stay on your line. Your conference will resume shortly. Speakers, I see you guys reckon continue.

Sorry. Sorry, I think we may need to make sure we know where we were. did Justin's question complete or was it cut during his question?

Hi, Jim, Matt. this is Justin. Can you hear me okay?

Yeah, Justin, we can hear you. Can you hear us?

Okay. Great. I can hear you, Matt. I think I heard your $20 million to $30 million of kind of cash generation opportunity from inventory and then it cut off shortly thereafter. So I can let you finish that up.

Yeah. And sorry for the technical difficulty there. We are -- inventory has really built as we prepare for some of the growth, particularly electronics as we look at some of the components that have long lead times there. So if we think about a return to historical inventory averages, or we should even have improvement on that going forward, there's a couple of terms opportunity here. Some of that will be shorter term as we address some more specific issues with burn down inventory and particularly with the launch of these programs. But some of that will take some time as we burn down existing balances. So we should expect a turn or two of inventory improvement going forward at least, which should generate, like I said, about $20 million to $30 million of working capital benefit. And then like we said, we're pretty capital efficient. So the earnings expansion will also drive cash performance. So if you look at our EBITDA guidance and net debt levels, we do imply some cash generation and the ability to reduce that leverage profile by the end of the year.

Okay. Great. That's all I had. Thank you so much for the time.

Thanks, Justin.

Thanks, Justin.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Gary Prestopino with Barrington Research. Your line is open. Please go ahead.

Hi. Good morning, all.

Hi, Gary.

Hi, Gary.

My questions really revolve around MirrorEye as it's starting to ramp up. You're going from, I think, $54 million of sales to $100 million of sales this year. As these sales ramp up, how much margin -- incremental margin increase do you get on that product overall? Or is it still at a point where because you're winning new programs, that you're not getting expansion on the margin in terms of the new sales growth coming in?

No. Great question, Gary. I appreciate the question. MirrorEye has, as we've talked about for several years, MirrorEye had a pretty significant investment to ramp up for some of the new technology and development of these programs. And you saw that in the increased D&D over the last several years. Going forward, we have always said that MirrorEye at quoted take rates is basically at corporate average contribution margins. The benefit there is as the take rates increase, it leverages really well on fixed costs, right? So if take rates were to significantly improve versus where they are today, you can expect an accretive margin profile on that growth, particularly on the OEM side. Retrofit just by the nature of the programs, aftermarket margins are generally higher, not just for MirrorEye but generally across our business. And so you can expect some sort of accretive margin on those programs as well, although, the yields are a little bit less volume as we've talked about.

So given where you are, where you will be this year $100 million of sales would that be at the average margins that you guys are describing or forecasting 2024.

And I think that there's roughly right out there.

And then on a couple of other questions here. Number one, I'm on the control devices side, which is more oil related. It has the situation where during the pandemic the OEM order patterns were very erratic stuff like that has all of this really normalize. And within the system given the fact that we've had a year to have good growth in auto production.

Yes, generally, yes, the chaos in the ordering has stopped, but what has instead come in a bit Gary is that with the, I'll say, the weaker than expected growth in electric vehicle platforms and I'm sure reading a lot about OEMs really considering how they're going to go forward with the various types of drivetrains. Certain OEs has suggested that they were going to be electric only going forward and many of those folks have reversed that. So now we're going to go back to some hybrids and we may even be investing a bit in some of our existing internal combustion engine technologies given the likelihood that this these technologies will last a little bit longer. So we're seeing a little bit of a change in terms of what's being requested of us in terms of what to expect in terms of what their slowdown. We're well placed for that just by the nature of the fact that we've been very careful about how we're focusing on technologies making sure that the great majority is drivetrain agnostic. So the from a technology perspective could be applied to electrics to hybrids or to internal combustion engines depending on the particular application.

Well, yes, that's what I'm trying to understand. If your drivetrain agnostic, obviously, EVs are the you know all the rosy projections, or you can throw them out. So that baby out with the bathwater. So you're going to get a shift maybe to more hybrids and you know growth in ICE. Does it require you to win the business on some of these other programs or do you just shift what you're doing for the various automakers two their plans for more hybrids versus electrics more ICE versus where they thought they'd be?

I think in some cases there will be a need to win new businesses. But I think more often than not it will be extension of current business. We have in the ICE space, they'll be currently for a longer period of time. The types of technologies are working with today and there might be some continuing continuous improvement on those technologies or products, but they'll be for the most part.

Okay. Thank you.

Thank you. And I would now like to hand the conference back to Jim Zizelman for closing remarks.

Well, thanks everyone for joining us for the call today. I know your time is really important and we do appreciate your willingness to engage us today. And we are very proud of our performance in 2023. It's consistent with the commitments we made at the start of the year. We will continue to deliver on our commitments by focusing on our long-term strategy, our brought -- operational improvements and excellence in execution. We expect that our performance along with our unique mix of industry-changing product platforms will continue to drive strong shareholder value. Thanks again everyone.

This concludes today's conference call. Thank you for your participation. You may now disconnect.