Good day, and welcome to the Stoneridge, Inc. Fourth Quarter 2024 Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please stay on the line and your specialist by pressing the star key followed by zero. Withdraw your question. Please note this event is being recorded. I would now like to turn the conference over to 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 2024 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 Presentations and Events. Joining me on today's call are Jim Zizelman, 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 two of the presentation for a more detailed description of these non-GAAP financial measures and the appendix for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. In addition, 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 on page three of the presentation and in our 10-K, which will be filed with the Securities and Exchange Commission under the heading forward-looking statements. After Jim and Matt have finished their formal remarks, we will then open up the call to questions. And with that, I will hand the call over to Jim.

Thank you, and good morning, everyone. Let me begin on page four. In 2024, Stoneridge's specific growth drivers, our continued focus on the execution of our major program launches, continuous improvement in our manufacturing facilities, and structural cost control enabled us to navigate through a very challenging macroeconomic environment. Driven primarily by our key growth products, including MirrorEye and our next-generation Tachograph, the Smart 2, we were able to outperform our weighted average end markets by 490 basis points. As our growth products continue to mature and our end markets continue to improve, we remain focused on improving our ability to drive earnings growth and cash performance through improved material and structural costs and improvements in working capital, particularly in inventory. In 2024, we were able to reduce our overall material costs by 120 basis points and improved direct labor by 30 basis points, which is effectively a 7% improvement year over year. Additionally, our focus on cash performance resulted in approximately $24 million, an increase of $56 million versus the prior year. While we are proud of our achievements in 2024, we recognize there is still opportunity for significant improvement, especially in quality. Additionally, we are focused on overall cost structure as evidenced by our recent actions to delayer certain corporate functions, which reduced costs and is improving operational efficiency. Finally, in 2024, we initiated a project in our largest manufacturing facility in Juarez, Mexico, to streamline our operations, reduce manufacturing costs, improve material flow, and reduce our structural overhead. While we began to see the benefits of this project in 2024, we expect to annualize these savings and add to them as we complete the project this year. Quality-related costs, material cost improvement, and structural cost reductions remain our key priorities for 2025. Page five summarizes our key…

Thanks, Jim. Turning to page nine, fourth quarter sales were $218.9 million. As expected, sales were significantly impacted by continued pressure across all of our major end markets. However, revenue from Stoneridge-specific growth drivers helped to offset end market declines. More specifically, in the quarter, we saw growth in MirrorEye revenue, particularly from the newly launched Volvo program, which grew $3.1 million over the third quarter, and the largest quarter yet for Smart 2 Tachograph revenue of over $17 million. Fourth quarter adjusted EBITDA was $6 million or 2.7% of sales. Elevated warranty and other quality-related costs significantly impacted the quarter versus our prior expectations. However, improved manufacturing performance partially offset these headwinds, for a net impact of $3.1 million. More specifically, these quality and inventory-related costs related to specific incidents and products which have been contained through supplier management, manufacturing process improvements, and modifications to hardware or integrated software. Finally, fourth quarter engineering expenses were $2.1 million higher than previously expected, primarily due to design-related tooling changes resulting from a change in supplier, as well as delayed timing of customer reimbursements. We expect to be able to offset a portion of these costs in 2025 once we meet the required engineering or program hurdles and recognize the customer funding. Page ten summarizes our key financial metrics specific to control devices. Control Devices full year sales of $296.3 million declined by approximately 14% versus the prior year, primarily due to lower production volumes for our largest North American passenger vehicle customer. According to the latest IHS production data, the domestic three-year-over-year production declines of 4.3% or approximately three times the North American end market decline of 1.5%. Full year adjusted operating income of $6.6 million or 2.2% of sales declined by 170 basis points compared to the prior year, primarily…

If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, our first question comes from Daniel Imbro with Stephens. Please go ahead.

Hey, good morning, guys. Thanks for taking our questions.

Hey, Daniel. Good morning, Daniel.

Maybe if we could start on the fourth quarter a little bit on the cost side. I guess, Matt, the engineering and quality costs were the surprises versus the guidance that you set in late October. I guess, can you just unpack maybe how those unfolded? Did those costs accelerate quickly and very late in the quarter? Really, the heart of the question is trying to figure out your visibility that these will not recur and how comfortable you feel with 2025 guidance, just given how maybe surprising these costs had been in recent quarters as we think about the outlook here.

Yeah, sure. Good question, Daniel. I mean, on the engineering side, you know, there's a lot of those customer reimbursements are the result of meeting certain hurdles in the program development or kind of in the development of the software that we're building. And those things can be a little bit variable. Obviously, we're very close to those hurdles, which is why we expected them in the fourth quarter and why it kind of timed into 2025. So, generally, we've got pretty good visibility there. You know, at the end of the year, we've got relatively more reimbursement than we expect just in the fourth quarter, which is historically similar. So the fourth quarter always has a little bit more variability there. Also, you know, if you think about it, we're launching some very significant programs in 2025. So combined with kind of the seasonality of the expected reimbursements and the magnitude of that potential reimbursement because of the launches, it creates a little bit more volatility, particularly this fourth quarter, even than most. Like we said, though, we expect that that's kind of retimed in 2025. So it kind of gives you some idea of how close we are to those hurdles for the quarter. On the quality-related side, Daniel, as you heard in the prepared remarks, we are extremely focused on improving quality, and that includes really an in-depth review of all the processes that historically even have gone into building these programs and products. And as we review those processes and dig into that, we find some areas that need some improvement. So, you know, I would look at that as a sign of continuous improvement. You know, we're trying to close those items out faster than we have in the past and get through some of…

Nope. That's really encouraging. Maybe following up on that revenue outlook. If I look on slide fifteen, so the revenue growth next year seems like it's MirrorEye, but I guess, can you unpack a little bit what's Smart 2 Tachograph expected to do? The growth there isn't clear from that side. Have we plateaued a little bit there? Or what's your growth expectation for that product?

Yeah. So, Daniel, good question. So if you remember, there's really two pieces of Smart 2. One is the aftermarket, which has these kind of rolling on requirements every year as this regulation rolls out to different, you know, weighted vehicles and the way the vehicle operates. And then you've got the OEM opportunity, which is generally pretty stable as new trucks are manufactured. So we had this ramp-up last year as kind of the first tranche of that aftermarket business hit. You know, there's still opportunity to expand our market share in that space. But generally speaking, the guidance expects fairly stable revenue contribution from Smart 2 as we head into 2025.

Great. And then last one follow-up for me. Inventory working capital has been good, guys, on the cash flow side. I guess that's expected to continue in 2025, but revenue's down. So that makes sense. I guess when we roll forward to 2026, how do we feel about the ability for inventory to continue improving, or will there need to be an inventory build and maybe a use of working capital to support that top-line growth when we return to top-line growth?

Yeah. No. I don't expect, you know, appreciate the comments on the improvement in 2024 and 2025 here, but still not where we want to be. I mean, if you look, historically, we've been double-digit turns in some of our facilities. You know, if you look at the guidance, that's not what we're expecting to be by the end of this year. So there is still plenty of improvement opportunity in inventory. With significant growth, you might get a little bit of inventory build if a normal state. But versus where we are now, we still think that there's an opportunity to reduce inventory as we head into that growth. So I would not expect a significant, certainly not a significant build in working capital going into 2026. If anything, we may moderate the improvement with the growth opportunity that we've got going forward there. But, you know, I think it's clear that the focus on cash performance and cash flow profile has resulted in some significant improvement. I would expect that to continue in 2025 here on the working capital side. And then build a good foundation as we go into 2026 to make sure that that remains stable.

Great. Appreciate the color.

Thanks, Daniel.

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

Thank you, everyone, for joining the call again today. I know your time is very important. And as always, we truly appreciate your willingness to engage with us in each and every one of these calls. We have built a strong foundation that allows us to drive significant earnings expansions as we grow here in the future. We'll continue to deliver on our commitments by focusing on long-term strategy, quality improvements, material manufacturing cost reductions, and, you know, several other company initiatives. We expect that our performance, along with our unique mix of industry-changing product platforms, will continue to drive strong shareholder value. Thanks again, everybody.

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