Stoneridge, Inc.
Q4 2020 Earnings Call Transcript

Published: 28 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Stoneridge Fourth Quarter 2020 Conference Call. I would now like to turn the conference over to your host, Mr. Matt Horvath, Executive Director of Investor Relations and Corporate Strategy. Thank you. Please go ahead.

[Matt Horvath:]

Great. Thank you, Stacy. Good morning, everyone, and thank you for joining us to discuss our fourth quarter and full-year 2020 results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted on our website at www.stoneridge.com in the Investors section under webcasts and 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.

[Jon DeGaynor:]

Thanks, Matt, and good morning, everyone. I'd like to start by reflecting on the global health crisis we encountered over the last year. We have and will continue to put the health and safety of our employees and their families at the forefront of every decision we make. I recognize that the situation continues to be challenging for many, and I want to thank our employees for their continued dedication to Stoneridge during this period. I'm really proud of our accomplishments this past year and our ability to adapt and respond to this crisis, both from a business perspective, but also as a team and a member of the global business community. Before we discuss our earnings materials, as you may have seen, yesterday we announced that Frank Sklarsky has joined Stoneridge's Board of Directors. Frank's impressive background includes being one of - being CEO of several large multinational companies, including ConAgra, Eastman Kodak, Tyco and most recently, PPG. Frank was also a member of Harman's International Board of Directors. Additionally, Frank has a significant amount of transportation experience as part of Chrysler for over 20 years. I'd like to take a minute to welcome Frank to the Board, and I look forward to working with him as we continue to transform Stoneridge. Let me begin on Page 3. In 2020, we effectively navigated through the challenges brought on by the global pandemic. We adapted our business to current market conditions and managed our cost structure efficiently throughout the year. We focused our efforts on continuous improvement throughout our manufacturing facilities, resulting in strong margin performance as global volumes recovered. Our 2020 adjusted sales of $648 million resulted in an adjusted gross margin of 24.4%, translating to an adjusted operating margin of $2.1 million or 0.3% of sales. Adjusted EPS for the year was negative $0.03. While managing through the crisis, we continued to transform our portfolio and footprint, positioning the company for long-term profitable growth.

[Bob Krakowiak:]

Thank you, John. Turning to Slide 15. Sales in the fourth quarter were approximately $190 million, an increase of 7.9% relative to the third quarter. Adjusted operating income was $7 million or 3.7% of sales. More specifically, Control Devices sales was approximately $100 million, which was a decrease of 0.5% compared to the third quarter, resulting in adjusted operating income of $12.6 million or 12.6% of sales. Electronics sales of $84 million increased by 19.5% compared to the third quarter, resulting in adjusted operating income of $4.3 million or 5.2% of sales. Stoneridge Brazil sales of $13.3 million, an increase of 3.4% compared to the third quarter, resulted in adjusted operating income of $100,000 or 1.1% of sales. This morning, we are providing guidance for our 2021 financial performance. First, it is important to note that our 2021 guidance includes our current expectations of the potential impact of the global supply chain disruptions that John discussed earlier. I would also note that this is an evolving situation, and our guidance is based on current market conditions and expectations. We are guiding 2021 revenue to a midpoint of $780 million, implying an increase of approximately $132 million or 20% versus our 2020 revenue, including the discontinued soot sensor product lines. Our guidance assumes that the soot sensor product line will contribute approximately $13 million in revenue in 2021 and a few pennies of adjusted EPS. As discussed previously, we expect continued gross margin improvement in 2021 through a continued focus on material cost reductions and operational improvements, partially offset by the impact of continued supply chain disruptions. In addition, we are expecting operating margin to increase compared to 2020 due to fixed cost leverage on incremental revenue, partially offset by incremental investments in engineering resources and the normalization of certain costs, primarily related to our wage and benefit programs relative to 2020. We are guiding adjusted gross margin to a midpoint of 26.25%, adjusted operating income to a midpoint of approximately 3.9%, and adjusted EBITDA margin to a midpoint of 8.4%. Finally, we are guiding to a midpoint effective tax rate of 25%, which is up slightly from prior years due to our current expectations of the geographical makeup of our expected earnings. As a result, we are guiding to a midpoint adjusted earnings per share of $0.68 for 2021. I will provide additional color on the drivers of expected sales and adjusted earnings per share performance later in the call. Page 16 summarizes our key financial metrics specific to Control Devices. Control Devices fourth quarter sales were $100 million, an increase of 7.3% compared to Q4 2019 adjusted sales. Fourth quarter sales slightly decreased versus the third quarter. The slight decrease in sales versus the third quarter was primarily driven by typical fourth quarter seasonality, offset by continued strong production demand at customer facilities in North America, particularly on light truck, SUV and CUV platforms. Fourth quarter adjusted operating income increased by 190 basis points versus fourth quarter 2019, which resulted in adjusted operating income of $12.6 million for the quarter or 12.6% of sales. This results in incremental adjusted contribution margin of approximately 38% on increased sales for that segment. Adjusted operating margin decreased by 60 basis points compared to the third quarter, driven by slightly reduced sales as well as lower gross margin as a result of increased expediting costs associated with the significant ramp-up in sales in the second half of the year. As discussed earlier in the call, we continue to transform our manufacturing footprint and product portfolio to align with future growth opportunities. During 2020, we completed the exit of the Canton facility, and as John discussed previously, we are in the process of evaluating strategic alternatives for the building, which could include a divestiture. During the second quarter of 2020, we announced our intention to exit the soot sensor product line. This was a result of our review of the product line's expected financial performance, the current market outlook for diesel passenger vehicles and our strategic decision to focus and align our resources with the greatest opportunities for the company. In 2020, we ramped up and launched new programs in our powertrain actuation product lines in North America and Asia. Our existing Park-by-Wire programs continued to ramp-up in 2020 and will expand into additional platforms in 2022. We will launch a Shift-by-Wire program in China in the first half of 2021, with expected peak annual revenue of approximately $14 million with the second Shift-by-Wire program in China scheduled for launch in 2022. As we look to 2021, we expect Control Devices sales and operating margin to improve relative to 2020 through continued operational improvements in the manufacturing process, driving manufacturing efficiencies. However, we also expect global supply chain disruptions to provide a margin headwind, particularly in the first half of this year. Page 17 summarizes our key financial metrics specific to Electronics. Electronics fourth quarter sales were $84 million, which was an increase of 19.5% compared to the third quarter and 4.5% compared to the fourth quarter of 2019, primarily driven by continued strong commercial vehicle production volumes in both North America and Europe. In addition to the fixed cost leverage benefit of incremental sales on overhead during the quarter, material costs continued to decline as we focused on reducing electronic component costs for the segment. A favorable product mix during the quarter also contributed to improved margin. Fourth quarter SG&A costs as a percentage of sales decreased versus the third quarter of 2020 as a result of increased revenue and several onetime COVID-related reductions offsetting the reinstatement of certain wage and benefit programs. Fourth quarter SG&A costs as a percentage of sales decreased versus the fourth quarter of 2019 due to SG&A cost structure actions taken in the second quarter of 2020, a decrease in travel and other discretionary spending due to COVID, as well as other onetime COVID-related cost reductions. We incurred additional D&D costs in the fourth quarter as a result of our continued investment in advanced engineering and preparations for program launches in 2021. This resulted in an adjusted operating income of $4.3 million or 5.2% of sales, an increase of 320 basis points relative to the third quarter and an increase of 390 basis points relative to the fourth quarter of 2019. Looking forward, we expect Electronics to drive substantial growth in 2021, driven by an increase in commercial vehicle production forecasts in Europe and North America as well as the launch of a large global instrument cluster platform, the continued rollout of our MirrorEye retrofit and pre-wire applications, and the launch of our first 2 OEM MirrorEye systems. As discussed earlier during the call, we expect additional engineering costs in 2021 as we continue to focus on advanced development engineering and continue to ramp up support for the large programs that will launch during this year. Page 18 summarizes our key financial metrics specific to Stoneridge Brazil. Stoneridge Brazil fourth quarter sales totaled approximately $13 million, an increase of $0.5 million or 3.4% relative to the third quarter as a result of local end markets continuing to recover from the global pandemic. Fourth quarter sales decreased $3.7 million or 22% compared to Q4 2019, primarily due to the unfavorable impact of foreign exchange. Fourth quarter adjusted operating income decreased by approximately 3.9% or $0.5 million relative to the third quarter. This was primarily driven by an increase in direct material costs due to the impact of foreign currency on material purchases and global supply chain disruptions, partially offset by fixed cost leverage and overhead, resulting in an adjusted operating margin of 1.1%. Fourth quarter adjusted operating margin decreased by 100 basis points compared to the fourth quarter of 2019, primarily due to decreased leverage on operating expenses due to lower revenue, partially offset by higher adjusted gross margin as a result of cost reduction actions focused on reducing overhead costs to align with current market conditions. Despite continued macroeconomic challenges in Brazil, we expect revenue and operating margin to remain approximately flat in 2021 based on current market conditions. We remain focused on utilizing local engineering resources to support our global Electronics business and the ramp-up of local OEM business to offset challenging macroeconomic conditions. Turning to Page 19. Net debt decreased by $13.5 million in the fourth quarter, resulting in net debt of $70 million or 1.8x trailing 12-month adjusted EBITDA. At the end of 2020, we had a cash balance of $74 million and $262 million of undrawn commitments, resulting in over $336 million of liquidity. Our ability demands and continued ramp-up in production volume during the second half of the year drove strong operating performance resulting in cash generation of over $26.5 million in the second half of the year. As a result of strong cash performance, we were able to reduce the balance on our credit facility an additional $8 million during the fourth quarter. We will continue to take necessary actions to right-size our cost structure, effectively manage our cash position, and ensure a strong balance sheet based on evolving market conditions. Stoneridge remains well positioned with relatively low leverage and significant available capital. Turning to Page 20. We expect that several program launches and the forecasted recovery across our global end markets will contribute to strong top line growth in 2021. As we have discussed previously, the announced exit of our soot sensor product line will create a $20 million revenue headwind in 2021 relative to 2020. Our guidance includes approximately $13 million related to our soot sensor product lines with very little EPS contribution. We expect this to be offset by favorable currency rates. However, we expect overall unfavorable currency impacts on EPS as I will discuss on the following slide. Consistent with historical price downs, we expect annual price downs of 1% to 2% in 2021. Finally, we expect market outperformance driven by the annualization of our recently launched Park-by-Wire programs as well as the launch of a large global driver information system program, our first 2 MirrorEye OEM launches, and the continued ramp-up of our MirrorEye retrofit and pre-wire programs. As a result, we are expecting $770 million to $790 million of revenue in 2021. I would also note that our guidance assumes a relatively insignificant expected annual impact on revenue related to global supply chain disruptions based on current IHS and LMC forecasts. We will continue to monitor the situation and update our guidance as necessary should market conditions change. Due to the launch of several large programs in the second half of the year, a slight shift in passenger car volume from the first half to the second half as a result of current supply chain disruptions and the continued ramp-up of our MirrorEye retrofit program, we are expecting a first half, second half revenue split of approximately 49% first half, 51% second half, slightly different than our typical seasonality. Similarly, we are expecting that the first quarter will be our lowest revenue quarter of the year with our current estimate around $180 million, primarily due to the timing of production disruptions. Page 21 summarizes our full-year adjusted earnings per share guidance for the year. Our midpoint guidance of $780 million implies incremental revenue of $132 million relative to 2020. Although we have targeted contribution margins on incremental revenue of 25% to 30% historically, we are expecting the high end of that range in 2021, due in part to continuous improvement initiatives in our facilities, to improve operating efficiency. As John outlined previously, we expect incremental D&D during the year to create a $0.16 headwind to EPS. As I discussed previously, while we expect the favorable impact of foreign currency rates on revenue, due to our cost structure and geographical makeup of our expenses, we expect forecasted foreign currency rates to negatively impact 2021 adjusted EPS by approximately $0.06. In addition, although we don't expect a significant impact on annual revenue related to the global supply chain disruptions, we do expect incremental material and logistics costs in the first half of the year, resulting in an EPS headwind of approximately $0.07. Finally, due to the expected makeup of our earnings, we are guiding our 2021 tax rate to a midpoint of 25%, which results in a $0.03 headwind relative to our recent historical tax rate guidance of 22.5%. These factors are expected to adversely impact 2021 adjusted earnings per share by approximately $0.16, resulting in our 2021 midpoint adjusted EPS guidance of $0.68. Similar to revenue performance, we are expecting stronger margin and EPS performance in the second half of the year, driven in part by the expectations of revenue ramp-up in the second half and also the reduction of material and logistics-related costs due to the global supply chain disruption. Due to the expected revenue performance in the first quarter as well as the expectation that a significant portion of our incremental material and logistics costs will be incurred during the first quarter, we are expecting breakeven adjusted EPS performance in the first quarter. We expect that this will be followed by contribution margin performance at the high end of the targeted range and a relative reduction in material and logistics costs. Based on our guidance, this would imply a split of approximately 1/3 of our guided adjusted EPS performance in the first half of the year and two-third in the second half. Turning to Page 22. We continue to maintain a strong 5-year backlog at the end of 2020, even with the global pandemic creating delays in customer decisions for new programs. Based on communications with our customers, delayed program decisions are expected to be awarded in 2021. And as such, we expect strong business awards this year. Excluding the discontinued soot sensor product line, the favorable impacts of foreign currency and the estimated 5% impact of changes in production forecasts by IHS and LMC, our backlog remained consistent in 2020 at approximately $3 billion and 5.4x our 2020 OEM sales. It is also important to note, again, that our backlog assumes only awarded programs at customer assumed take rates were applicable, constant currency, and IHS or LMC production volume forecasts. As we have outlined several times in past calls and during the discussion of our long-term targets on this call, incremental MirrorEye penetration rates could have a significant positive impact on our backlog. As the industry continues to migrate to more electrification in vehicles, it is important to understand that a significant portion of our backlog is either drivetrain agnostic or focused on hybrid or fully electric applications. We estimate that 85% of our 2025 sales will be drivetrain agnostic. Overall, we have a strong platform for growth, a robust backlog aligned with industry megatrends, and a clear path to sustainable and significant growth over the next 5 years. We remain focused on positioning the business for long-term profitable growth through a portfolio focused on industry megatrends and effective management of the variables that we can control. We expect this to result in strong incremental contribution margins as we recognize the growth supported by our strong backlog. We are well positioned to dramatically increase our earnings power with our expected growth over the next several years. To better understand the impact of our portfolio rotation and the adverse impact of certain external factors, Slide 23 adjusts our guidance to reflect our expectations for the base business performance in 2021. To help quantify expected contribution margins as we move forward, we have normalized 2021 to exclude the impact of certain external factors including currency headwinds and the adverse impact of the global supply chain issues we have previously discussed. Additionally, we have removed the revenue and earnings related to our discontinued soot sensor business to better reflect the expected contribution of our go-forward portfolio and structure. Excluding these factors, our 2021 guidance implies approximately 30% contribution margins on incremental revenue, which is at the high end of our historically targeted range despite the incremental investment in engineering that John outlined previously. We remain focused on the factors within our control and positioning the business for sustainable long-term profitable growth. The business awards over the last several years have positioned us to significantly outperform the market with a robust 5-year backlog. While the cost structure and footprint actions we have taken have positioned us to take advantage of that growth through strong contribution margins on incremental revenue, this has put us in a position to be able to invest the engineering resources we believe necessary to outperform the long-term targets we outlined today. Moving to Slide 24. In closing, I want to reiterate, we are pleased with how the company navigated through the global pandemic as we continued to make progress on our transformational initiatives and strategic priorities to drive long-term profitable and sustainable growth. Stoneridge is committed to driving shareholder value and that focus remains at the forefront of all of our strategic initiatives. With that, I will open the call to questions.

[Operator:]

Our first question comes from Scott Stember from CL King.

[Scott Stember:]

Good morning guys and thank you for taking my questions.

[Jon DeGaynor:]

Good morning Scott.

[Scott Stember:]

Given the commentary about I guess sales in the quarter, I guess effectively breakeven results in the first quarter, can you maybe dig into that a little bit deeper? It seems like the supply chain is going to have obviously a meaningful impact. Can you maybe just give us a little bit more color on that, talk about incrementals and things like that?

[Bob Krakowiak:]

Sure. I'd be happy to, Scott. Thank you so much for the question. So it's really being driven by - we talked about that we're expecting about $2.5 million of incremental costs right now based upon the current IHS and LMC forecasts and the forecasted disruptions. A good portion of that, about two-third of that is going to be - our view on that is that we'll incur about two-third of that in the first quarter. And then in addition to that, we're seeing - we are seeing some pressure on revenue relative to the fourth quarter. And I talked about in my comments that we see sales of about $180 million for the quarter right now based upon our current outlook. So if you look at our contribution margins on that decremental revenue, plus the incremental - plus the incremental supply chain costs and some of the currency headwinds that we're seeing, that's basically how you get to - that's how you walk your way to the breakeven for Q1.

[Scott Stember:]

Okay. Got it. And with regards to MirrorEye, it seems like a lot of good support on the ground level here. But can you just maybe frame out, within your guidance for this year, what kind of run rate we should be looking for in contribution by the end of the year? And maybe within your 2025 guidance, just maybe that $1.1 billion, rough number what that includes?

[Jon DeGaynor:]

Yes, Scott, thanks for your question. So as we said, our OEM programs launch later this year. So in our 2021 guidance, our OEM revenue expectation is actually quite low, around $5 million, and our retrofit revenue is somewhere between $5 million and $10 million. So when we talk about the additional penetration and additional fleets deepening and expanding their take rates, we expect that to be - to continue to hear more of that over the year. But our guidance in 2021 has a very limited OEM level for MirrorEye.

[Bob Krakowiak:]

And Scott, that's primarily due to the timing of the launch. Obviously, it's late in the year.

[Scott Stember:]

Okay. And just last question and I'll jump back in the queue, about the footprint going to lower cost areas. I know you guys have been working on that, but it seems as if it's - that those efforts are accelerating. Are we talking building facilities in other places? Are we talking outsourcing a little bit more? Just can you break that out for us a little bit?

[Jon DeGaynor:]

Yes, Scott, we're talking about partnering rather than adding bricks and mortar. You are correct that it is accelerating. It's part of when we talk about continuing to invest in advanced technology and continuing to invest in our team. We made a significant number of organizational changes within 2020 that allowed us to, really positioned us to accelerate this transformation. And the actions are not only accelerating, but they're ongoing and they're happening right now in 2021.

[Operator:]

Your next question comes from Justin Long.

[Justin Long:]

I wanted to start with a question on D&D. This year there is going to be a pretty significant kind of pickup in spending there. It seems fairly unique. You gave the guidance beyond 2021 that D&D would grow less than 5%, and revenue is going to be growing at 10% plus, so some nice leverage there. Can you just talk a little bit more about why there is such a significant step-up in D&D this year? And what gives you confidence in D&D growing at a rate that's less than 5% beyond 2021?

[Jon DeGaynor:]

So Justin, thanks for the question. There's a series of aspects to it. The first one is the magnitude of the number of launches that we're working on both in the Control Devices and on the Electronics side of the business, which means you have to have those resources, and there's a peak load of resources that are managed there. The second is, as we look at transitioning our capabilities, there is an overlap in capabilities. You can't make step function changes in the organization. So there's a period of overlap where, as we're changing our footprint mix, there's an overlap in the engineering cost structure. And the third piece is the importance of speed and continue to make our investments in what's next and how do we expand the MirrorEye platform. As an example, our connectivity platform and other of these advanced platforms, we see right now is the time to make those investments to continue to move forward and take advantage of the position that we have in the marketplace. So we've worked as an organization to be as optimal as possible, but we believe this is the prudent spend of capital or prudent spend of resources in this year.

[Justin Long:]

Okay. That's helpful perspective. And then I wanted to follow-up with a couple of quick questions on the longer-term guidance. So you gave the 2023 revenue guide. Is it fair to say that the market outgrowth between now and then is already secured in the backlog? Just curious if you could comment on the level of visibility you have?

[Bob Krakowiak:]

Yes. Justin, hi, it's Bob. I'm happy to comment on that. As you're aware, Justin, we generally win programs 2 to 3 years in advance of production. So when you look at that revenue number, I think it's really important to talk about the way that we do it. We basically take the IHS and the LMC projections. So they are third-party projections, they're not internal projections for Stoneridge. And we take it - and we get that information by platform by region and we build it up at a very granular level. So that number that we have, that midterm guidance number that we talked about today, it is - the vast majority of that, 80% of our backlog - I mean, 80% of our total revenue is OEM based, and that backlog is all booked business. So we're more conservative than a lot of other companies when we talk about our backlog because we only talk about booked business in our backlog. A number of our competitors and a number of people in the industry, if they have over 80% confidence that they're going to win a program or if they're on an existing program, they include that in their backlog. We do not. So we've got line of sight to that - to the numbers that we provided, to the $1.1 billion and the $925 million. And the $925 million, the lion's share of that is already in the bag for us.

[Justin Long:]

Okay. That's great. And then on the 2025 revenue target, I wanted to clarify that the MirrorEye contribution only includes the $76 million of peak revenue from the OE contracts you've won. Is that correct?

[Jon DeGaynor:]

That is correct, Justin. Yes.

[Justin Long:]

Okay. So anything incremental in terms of –

[Jon DeGaynor:]

And Justin, there is some retrofit in there as well.

[Justin Long:]

Can you comment on the significance of that retrofit revenue?

[Jon DeGaynor:]

It's not - I would say it's not - it's a modest amount.

[Operator:]

I'm showing no further questions at this time. I would now like to turn the conference back to Jon DeGaynor for closing comments.

[Jon DeGaynor:]

Yes, thank you, and 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 our strong operating results, through our wins of profitable new business, and our focused deployment of our available resources. This management team will respond efficiently and effectively to manage and control the variables that we can impact and continue to drive strong financial performance. We're confident that our actions will result in continued success in 2021 and beyond and we look forward to talking to you in the next quarter. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.