Stoneridge, Inc. (NYSE:SRI) Q1 2024 Earnings Call Transcript

Stoneridge, Inc. (NYSE:SRI) Q1 2024 Earnings Call Transcript May 4, 2024

Stoneridge, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Stoneridge First Quarter 2024 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. 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.

Kelly Harvey: Good morning, everyone, and thank you for joining us to discuss our first quarter 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, 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 the appendix for a reconciliation of these non-GAAP financial 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 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 was filed with the Securities and Exchange Commission yesterday 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 it over to Jim.

James Zizelman: Thank you, and good morning, everyone. Beginning on Page 3. Our first quarter financial performance was driven by continued strong topline growth in Electronics and progression across each of our key priorities for 2024. Our efforts to reduce material costs and improve our operating efficiency contributed to a 170 basis point improvement in gross margin, a 160 basis point improvement in operating margin and a 120 basis point improvement to EBITDA margin over the first quarter of last year. Additionally, we remain focused on cash performance and improvement in our leverage ratio. During the quarter, we generated $9.1 million of operating cash, an improvement of $18.3 million compared to the first quarter of last year.

This is due in part to our continued efforts to reduce our inventory balance, which declined by $7.9 million. As a result, our leverage ratio improved by approximately a quarter of a turn relative to the end of 2023. Despite the significant momentum we have and the fundamentals of the business, we must continue to focus on mitigating some of the historical execution issues that resulted in $2 million of incremental warranty-related costs this quarter. Through recent actions taken to centralize and redesign product line and program management organizations, as well as our global engineering organization, we are specifically focused on improving built-in quality, reducing material costs and improving manufacturing efficiency to drive profitability.

There is no question. We are seeing the positive impact of these structural changes and expect the momentum from these changes to drive improved profitability as we continue to grow. In fact, as a result of the improvement, we expect due to these changes, despite some of the challenges in the first quarter, we are maintaining our full-year 2024 guidance. Matt will provide further detail on our first quarter performance and our full-year guidance later in the call. While we continue to improve our existing programs, we remain focused on flawless execution of the program launches that will drive strong growth going forward. Our next MirrorEye OEM programs launched with Volvo in Europe and with Peterbilt in North America later this year, followed by two additional programs in North America in the first quarter of next year.

Last week, Peterbilt announced the introduction of its new Digital Vision System-Mirrors as an option on both the Model 579 and Model 567 trucks, which helped improve driver safety and improve fuel economy by up to 1.5%. We will continue to work with all of our OEM customers, their dealer networks and the fleets to drive MirrorEye adoption. We are seeing good momentum across our MirrorEye end markets and applications and expect continued growth as we launch new OEM programs, increased take rates for existing OEM programs and continue to expand our fleet activities with both new and existing customers. Furthermore, we expect our next-generation tachograph, the Smart 2 to provide significant growth in both OEM and aftermarket applications over the next several years based on the requirements of the EU Mobility Package standard.

I will provide more details of these regulation requirements and our expectations for our Smart 2 tachograph program later in the call. Page 4 summarizes our key financial metrics for the first quarter of this year compared to the first quarter of 2023. First quarter sales growth of 3% was driven by strong topline growth in our Electronics segment due in part to the ramp-up of the recently launched Smart 2 tachograph program in Europe. This was offset by lower sales in the North American passenger vehicle end market, primarily due to the slowing demand for electric vehicles as well as some end-of-life programs which we expected. Our growth of 3% compares to an approximately flat weighted average end market over the same time. We expect to continue to outperform our underlying end markets driven by new launches and the continued ramp-up of recently launched programs.

Driven by continued progression on key company initiatives, margins continued to expand in the first quarter compared to last year. Material cost improvement actions and our focus on manufacturing efficiency contributed to the 170 basis point improvement in gross margin over the first quarter of last year. We will continue to implement material cost improvement opportunities to further enhance the impact of actions already taken. Operating margin improved by 160 basis points over the first quarter of last year due to our continued focus on a lean, efficient operating structure, including the centralization of certain functions to create more streamlined processes and reduced operating costs. Earlier this week, we continue to take action to improve our engineering organization by rebalancing our footprint to improve our capacity and our capabilities and reduce our total costs.

Finally, EBITDA margin improved by 120 basis points compared to the first quarter of last year. This was despite non-operating foreign currency and equity interest expenses that unfavorably impacted the current quarter by approximately $2.3 million. Excluding the incremental warranty and non-operating expenses in the quarter, EBITDA would have been approximately $10.9 million or 4.6% of revenue. And Matt will provide additional details on our segment level performance later in the call. Turning to Page 5. This morning, I would like to provide an update on our Smart 2 tachograph program that continues to ramp up in Europe on both OEM and aftermarket applications. As discussed on prior calls, the Smart 2 tachograph is our next-generation tachograph that provides incremental capabilities to conform with the EU Mobility Package standards.

The mobility package is a collection of European laws and regulations for the transport sector and then contains new rules to improve social conditions for drivers, increased road safety and provide equal access to European markets. As such, the regulation requires the adoption of the second-generation tachograph, Smart 2, on various vehicle types over the next several years. Beginning in mid-August of last year, the second-generation smart tachograph was required to be on all newly registered vehicles over 3.5 tons, which comprises our existing OEM market. In addition, before the end of 2024, all international transport vehicles with existing analog or 1B digital tachographs are required to retrofit their vehicles to this new technology, which is the basis for what drives our aftermarket opportunity this year.

As a result of these requirements, the incremental content on next-generation product and our current estimates of addressable market, we are estimating Smart 2 tachograph revenue to be approximately $60 million in 2024 for both OEM and aftermarket applications. As this product is based on both OEM orders and aftermarket customer adoption, the timing of the revenue contribution is more variable than what is typical for purely OEM programs. As a result, we saw a slower ramp-up in aftermarket sales in the first quarter as end users hoped for a pushout of the regulatory requirements or are simply delaying adoption until closer to the deadline. Recently, the European Commission, which governs the adoption of the mobility package reiterated the existing deadlines and requirements.

As such, we are expecting an uptick in aftermarket sales going forward as the addressable market this year has not changed and the regulations remain as previously communicated. This should provide both revenue growth and accretive margin benefit for the remainder of the year as our aftermarket channel continues to ramp up. Looking beyond 2024, there are incremental regulations requiring adoption on additional vehicles in Europe, which is expected to drive continued growth for the next few years. These incremental requirements come online in 2025 and 2026 and expand the requirements to more vehicles, including vehicles equipped with first-generation tachographs and smaller vehicles between 2.5 and 3.5 tons that are involved in international transport.

Overall, the mobility package and the new Smart 2 tachograph legislation represent a significant step forward for the transportation industry in Europe. By increasing road safety, improving working conditions and ensuring fair competition, the EU is creating a more sustainable and efficient transport sector for the future, and Stoneridge is very excited to be part of it. Based on the regulatory requirements and the competitive landscape for this product, we expect significant growth over the next several years with at least a 30% market share and $100 million in peak annual revenue. This program is yet another example of our strong portfolio of technologies and vehicle systems aligned with global industry megatrends. As part of our long-term strategy, we remain focused on vehicle intelligence and connectivity as we expand our content per vehicle to drive continued long-term growth.

Turning to Page 6. I’d like to take this opportunity to mention that I’m extremely proud that we recently released our inaugural Sustainability Report, detailing our latest efforts and our ongoing commitment to environmental, social and governance initiatives. Our commitment to sustainability and social responsibility is a core component of our business strategy. This begins with our well-positioned technology-forward product portfolio aligned with improving vehicle safety and efficiency as well as reducing greenhouse gas emissions. At Stoneridge, we strive for continual improvements in our operations that deliver a lasting impact on the environment and our society, benefiting our employees, our customers and the communities that we serve. Through our continued efforts, we have made meaningful progress towards our sustainability goals, including reducing our Scope 1 and Scope 2 greenhouse gas emissions by 18.6%, reducing our absolute water withdrawal by 5.8%, creating a safe workspace environment and minimizing our environmental footprint in our manufacturing facilities over time.

Our Sustainability Report marks a significant step in Stoneridge’s sustainability journey and reflects our dedication to transparency, accountability and continuous improvement. I would like to express my gratitude to the Stoneridge team for their efforts and contributions in this space and on publishing such a meaningful report. I encourage all of you to visit our sustainability website if you have not done so already. Turning to Page 7. We remain committed to the 2024 goals I outlined on our fourth quarter call. First, we are focused on driving continued growth and market outperformance. As discussed earlier on the call, we are maintaining our 2024 revenue guidance midpoint of $1 billion, which is expected to outperform our weighted average underlying end markets by 8 percentage points.

As discussed earlier on the call, we outperformed our weighted average OEM end markets in the first quarter and expect this to continue driven primarily by Stoneridge specific growth drivers, including new programs, incremental content and the expansion of our existing opportunities. Second, we are focused on gross margin expansion through material cost improvement in an enterprise-wide operational excellence. We remain keenly focused on these initiatives as we achieved gross margin expansion of 170 basis points over the first quarter of 2023. As we continue to focus on quality-related costs and recognize the run rate benefits of these material costs and operational actions, we expect continued gross margin expansion. Third, we are focused on leveraging our global footprint to maximize our capabilities and output.

Based on the actions taken last year to centralize many of our global functions and drive synergies between our business units from both a cost and efficiency perspective, we achieved 160 basis points of operating margin expansion in the first quarter, resulting in a 120 basis point improvement in EBITDA margin compared to the prior year. We continue to evaluate and optimize our organizational structure as shown by our recent actions taken in our engineering organization to rebalance our global footprint. Fourth, we are focused on efficient cash generation through effective inventory management. Through our focused efforts on reducing inventory to improve working capital and generate more cash, we reduced our inventory balance by $7.9 million, which translates to approximately an 8% improvement in inventory turns during the quarter.

We remain focused on inventory reduction and cash performance. Finally, we are focused on efficient capital deployment, while maintaining an appropriate capital structure. This includes prioritizing our organic investment opportunities with a focus on return on engineering and investing in technology to develop new products for customers that will facilitate future growth. In 2024, we are targeting approximately $40 million of capital focused primarily on supporting organic growth initiatives. We remain on track to meet both our organic growth and capital expenditure targets for 2024. As evidenced by our progress made so far this year, this team is focused on executing against our priorities to drive strong growth, continued margin improvement and an improved balance sheet.

We continue to see the benefits of the actions we took in 2023, and we’ll continue to take actions aligned with our key priorities to drive performance. With that, I’ll turn it over to Matt to discuss our financial results in more detail. Matt?

Matthew Horvath: Thank you, Jim. Turning to Page 9. Sales in the first quarter were $239.2 million, an increase of 3% relative to the first quarter of 2023. Adjusted operating income was $300,000, which resulted in a 160 basis point improvement in operating margin relative to the first quarter of last year. As Jim discussed earlier in the call, we are maintaining our full-year 2024 guidance. Our full-year sales guidance midpoint of $1 billion is expected to outpace our weighted average OEM end markets by over 8 percentage points. We expect to outperform our end markets driven by the continued ramp-up of recently launched programs, including both the OEM and aftermarket applications of MirrorEye and the Smart 2 tachograph. We expect an improvement in our material costs for the remainder of the year will offset the incremental warranty costs we incurred in the first quarter.

As such, we are maintaining our full-year gross margin expectations with a gross margin midpoint of 22.4%, which implies a 140 basis point expansion versus the prior year. Based on our efforts to drive a more efficient global operating structure, we expect that operating performance will remain within our previously provided range, but improved slightly relative to our prior expectations. As such, we are maintaining our full-year operating margin expectations with an operating margin midpoint of 3%, which implies a 130 basis point expansion versus last year. Similarly, we expect slightly improved operating performance to offset the non-operating foreign currency and equity interest expenses incurred in the first quarter. As a result, we are also maintaining our expectations for full-year EBITDA and EPS.

Our expectation of approximately $67 million of EBITDA at the midpoint of our guidance range results in a 170 basis point improvement and 39% growth in EBITDA over 2023. We expect the revenue and EBITDA cadence for the year to be relatively consistent with previous expectations. However, we now expect the second quarter performance will be slightly better than previously expected to approximately breakeven EPS. Due to expanding MirrorEye sales in the second half of the year, primarily driven by new program launches and the continued ramp-up of the Smart 2 tachograph, we continue to expect revenue to be back half weighted. We expect slight growth from the first to the second quarter and relatively larger growth between the second and third quarter, aligned with these key program launches.

Aligned with our revenue cadence for the year, we expect EBITDA to be more back half weighted as well. Based on the actions we have taken to improve our cost structure and our operating performance, we expect to continue to significantly outperform our underlying end markets and drive continued earnings expansion as the year progresses. Turning to Page 10. During the quarter, we were impacted by two warranty issues that accounted for approximately $2 million of incremental costs. Although, these issues are historical in nature, and we expect they have been contained through either reengineering or resourcing material, these incremental costs highlight the importance of our focus on execution to drive operational excellence and built-in quality going forward.

We have taken actions that we expect to improve the operating structure and processes that have led to these issues historically, which resulted in the incremental warranty costs during the quarter. The quarter was also unfavorably impacted by approximately $2 million related to the non-operating impact that foreign currency had on intercompany balances and approximately $300,000 related to our minority interest in Autotech Ventures. Excluding the incremental warranty and non-operating expenses in the quarter, EBITDA would have been approximately $10.9 million or 4.6% of revenue. The first quarter was also impacted by unfavorable sales volume and product mix, primarily related to the reduced demand for electric vehicles compared to prior expectations and the retiming of Smart 2 tachograph aftermarket sales, as Jim discussed previously.

However, these headwinds were generally offset by material cost improvement actions completed in the first quarter, primarily related to supplier negotiations and pricing and reduced operating expenses as a result of the actions taken in 2023 to centralize functions and reduce costs. In addition, EPS was impacted by slightly higher tax expense during the quarter, primarily due to our geographical mix of earnings. Despite the headwinds we faced in the first quarter, we continued to improve the foundation of the business and take actions that will drive run rate performance improvement going forward, helping us achieve our previously provided guidance. Page 11 summarizes our key financial metrics specific to Control Devices. Control Devices first quarter sales declined by approximately $8.7 million versus the first quarter of 2023, primarily related to the expected wind down of end-of-life programs and slower demand for electric vehicle platforms.

This was slightly offset by higher sales in China. First quarter operating margin of 2.8% increased by 120 basis points compared to the first quarter of 2023, primarily as a result of favorable product mix and improvements in material and logistics costs. We continue to expect relatively flat end market performance and slow growth in actuation programs due to the continued slow ramp-up of electric vehicle platforms. As a result, we continue to expect Control Devices full-year sales to slightly decline this year relative to 2023. That said, and as demonstrated in the first quarter, we have identified several opportunities to reduce material costs through redesigns or supply chain strategies to help improve gross margin going forward and offset the slight decline in sales, resulting in a stable margin profile.

Finally, as discussed on previous earnings calls, we remain focused on drivetrain agnostic technologies to drive new business awards as the market continues to evolve. We continue to focus on operational excellence and enterprise-wide cost reduction, including material cost reduction plans to drive margin improvement going forward. Page 12 summarizes our key financial metrics specific to Electronics. Electronics first quarter sales increased by $15.6 million or 11.1% compared to the first quarter of 2023. Sales growth was driven primarily by higher sales in both the European and North American commercial vehicle end markets, due in part to the ramp-up of the Smart 2 tachograph programs in Europe. We expect continued strong sales growth in 2024, driven by new program launches and the ramp-up of recently launched programs.

Our next MirrorEye OEM programs launched with Volvo in Europe and with Peterbilt in North America later this year. Similarly, we expect significant growth related to the Smart 2 tachograph as regulatory requirements force adoption, both in OEM applications as well as in the aftermarket. First quarter operating margin expanded by approximately 330 basis points compared to the first quarter of the prior year, primarily due to contribution on incremental revenue and material cost improvement, partially offset by higher overhead costs. More specifically, $1.5 million of the $2 million of total incremental warranty-related costs impacted Electronics during the quarter. Looking forward, we expect continued margin expansion as we focus on improving our manufacturing performance and focus on quality-driven processes and efficient execution of new program launches as well as the continued ramp-up of existing programs.

Electronics remains well positioned to take advantage of significant future growth and margin expansion as a result of a strong product portfolio, a substantial and growing backlog of awarded programs, continued improvement in material cost and cost structure and organizational optimization. Page 13 summarizes our key financial metrics, specific to Stoneridge Brazil. Stoneridge Brazil’s first quarter sales totaled approximately $12.2 million, a decrease of $2 million relative to the first quarter of last year. This decrease was primarily as a result of two onetime revenue opportunities in the local OEM market totaling approximately $2.1 million in 2023 that were not expected to recur this year. First quarter operating profit declined by approximately $1.1 million relative to the first quarter of 2023, primarily driven by reduced fixed cost leverage on decreased sales.

This decrease was partially offset by lower material costs as a result of favorable sales mix. We expect relatively stable revenue and operating margin in 2024 as we continue to shift our portfolio in Brazil to more closely align with our global growth initiatives and further expand our local OEM programs to support our global customers. Brazil has become a critical engineering center as we continue to align our global engineering capabilities and footprint. We will continue to utilize our global footprint to cost-effectively support our global business. Turning to Page 14. Net debt to trailing 12-month EBITDA, as calculated for compliance purposes, improved by quarter of a turn, resulting in a leverage ratio of approximately 2.86x. During the quarter, we generated $9.1 million of operating cash, an improvement of $18.3 million compared to the first quarter of last year.

This is due in part to our continued efforts to reduce our inventory balance, which declined by $7.9 million in the quarter. We are focused on reducing net working capital to improve cash performance and reduce net debt and related interest expense. Based on our 2024 guidance and net working capital initiatives, we expect a compliance leverage ratio between 2x and 2.5x by the end of the year as both our earnings and inventory balance are expected to continue to improve. We are focused on maximizing cash performance to drive value to shareholders. Moving to Slide 15. In summary, our first quarter performance was driven by strong topline growth and progression across each of our key priorities for 2024. Our strategy sets us up for strong short-term and long-term performance through Stoneridge-specific growth drivers, including new programs, incremental content and expansion of our existing opportunities.

We will continue to focus on enterprise-wide cost improvement and operational execution to drive strong contribution margin and focus on inventory reduction to improve our cash position and continue to reduce our leverage profile. Stoneridge remains well positioned to outpace our underlying end market growth and drive significant earnings expansion going forward. As always, driving shareholder value is at the forefront of all of Stoneridge’s strategic initiatives. With that, I will open up the call for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Justin Long with Stephens. Please go ahead.

Justin Long: Thanks. Good morning.

James Zizelman: Good morning.

Justin Long: So maybe to start, Matt, you gave some color on 2Q expectations for revenue and EPS. But I was wondering if you could provide a little bit more color around the EBITDA cadence. You mentioned it being more back half weighted. But as we move into the second quarter, would you expect EBITDA to improve relative to the $11 million number you talked about in the first quarter, if you exclude some of the non-operational items and maybe you could just talk about your visibility to that forecast as well.

Matthew Horvath: Yes. Thanks for the question, Justin. So yes, we would expect it to improve from there. As we had said in the first quarter – on our prior call, we had previously expected kind of relatively flat performance between the first and second quarter. We now expect that to be improved. Even off of the adjusted number that you mentioned, really due to the base operating performance improvement that we expect not only in the second quarter but also for the remainder of the year. So yes, we would expect the second quarter to be improved. And then if you look forward, we would expect continued improvement. Certainly, as we launch the incremental programs, particularly the large MirrorEye programs in the back half of the year, particularly as the tachograph aftermarket continues to ramp up, that’s generally at a pretty accretive margin on the aftermarket sales.

So we have good visibility to improvement because of its fundamental base improvement in the business that we’ve already seen in the first quarter. And that would only be duplicative on the incremental revenue that we expect in the second half. So we do expect improvement in the second quarter, and we would expect that to continue on pretty strongly in the second half with the launch of those programs.

James Zizelman: And Matt, I’d add to that. When you think about all the work that we’ve been doing to drive excellence in execution and drive efficiencies within Stoneridge. And we’ve talked very specifically about some of those actions even today. Those things clearly had an impact on the first quarter. A lot of the performance that you are seeing are reflective in the numbers that we’re seeing here relative to gross margin expansion and cash generation, et cetera. That stuff also becomes duplicative, right? As you start taking that into the second, third and fourth quarter and beyond, right, those things actually will begin to add more and more to the financial performance of Stoneridge. So I am very, very confident that we’re going to have the right pathway here going forward.

Justin Long: That’s really helpful. And maybe to follow-up on some of the things you just mentioned, Jim, it sounds like first quarter was a messy quarter, lots of puts and takes, but there was some improvement in the underlying kind of operational performance that’s maybe a little hard to see just looking at the headlines. So as we think about the full-year guidance, two things you mentioned were material cost tailwinds and pricing tailwinds. Is there a way to kind of quantify how meaningful those tailwinds could be or speak in a little bit more detail about some of the operational improvements and what that could translate to in terms of the bottom line?

Matthew Horvath: Yes. So Justin, first on just kind of the quantification of that. We always talk about contribution margin as a good way to understand how much operational performance we’re getting out of the business, right? Our typical contribution margin is 25% to 30% on incremental revenue. If you look at the first quarter, quarter-over-quarter, even including those incremental warranty issues, we had 50% contribution margin on $7 million of revenue growth, right? Excluding those warrant issues, we were like 80% contribution margin quarter-over-quarter. So that is an indication that the business is significantly improving at a fundamental level. And that’s really driven by, like we said, those material cost improvements.

Again, if you exclude that warranty issue, which we wouldn’t expect to recur forward, gross margin would have been over 21% in the first quarter, okay? So fundamentally, material costs and the actions that we’ve taken on the operating side to centralize functions, get more out of the resources that we have, but also reduce cost at the same time, you’re seeing that benefit quarter-over-quarter certainly, and we would expect that to carry forward. When you add the revenue growth to that, that contribution margin can get really accretive to the earnings power of the business in the second half of the year.

Justin Long: Okay. Got it. And I guess the last one for me is on two of the big revenue drivers this year. You’ve got the Smart 2 tachograph and you’ve got MirrorEye. I guess on Smart 2, any color you can give us on the revenue cadence or ramp you’re now expecting within the guidance? And then I’m just curious if there’s been any change to your forecast for MirrorEye. I think you’ve talked about that being $100 million of revenue this year, but I just wanted to confirm that, that was still your expectation?

Matthew Horvath: Yes, Justin. So I’ll take the easy one of those two first. MirrorEye, yes, no change in expectation for the remainder of the year. We’re seeing good progress with the OEs as we march towards those launches, particularly the very large launch with Volvo in the second half of the year…

James Zizelman: And on track on those launches.

Matthew Horvath: Yes. That’s right. And then – yes, so no change in the expectation for MirrorEye. The tachograph business, there’s kind of two responses here. One, we haven’t seen any change in the addressable market. And like Jim laid out in the prepared remarks, the market is timed such that this year has the first step in that adoption cycle. So within the year, we don’t see any expectation of change relative to our prior expectations. Obviously, we talked about the first quarter being a little lighter from an aftermarket perspective, because just the law of the numbers, because the market hasn’t changed and the first quarter was a little lighter, we obviously expect the second quarter and forward to be more than previously expected.

And again, that aftermarket product generally has an accretive margin relative to overall margins. So it’s also a little bit harder to time out that aftermarket adoption. Relative to an OEM program where you’ve got production volume and forecast, even if they fluctuate a little bit, there’s a pretty structured cadence around that volume. The aftermarket – we have some ability to do things on the pricing side, with our distributors, their customers, et cetera, to push or pull adoption. But ultimately, there’s a little bit more volatility and there will always be a little more volatility in the aftermarket. So in the short-term quarter-to-quarter, it’s a little bit more volatile. But for the year, nothing has changed, which just means the second half of the year will be even stronger than we expected previously.

Justin Long: Okay. Got it. Thanks for the time.

Matthew Horvath: Thanks, Justin.

James Zizelman: Thanks, Justin.

Operator: [Operator Instructions] Our next question comes from Gary Prestopino with Barrington Research. Please go ahead.