Stoneridge, Inc. (NYSE:SRI) Q3 2023 Earnings Call Transcript

Stoneridge, Inc. (NYSE:SRI) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Good day, and thank you for standing by. Welcome to the conference call of Stoneridge. 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 first speaker today, Kelly Harvey, Director of Investor Relations.

Kelly Harvey: Good morning, everyone, and thank you for joining us to discuss our third quarter results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted to our Web site 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. Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties, and actual results may differ materially.

Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-Q, which was filed with the Securities and Exchange Commission under the heading Forward-Looking Statements. During today’s call, we will also be referring to certain non-GAAP financial measures. Please see the index for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. After Jim and Matt have finished their formal remarks, we will then open up the call to questions. With that, I will turn the call over to Jim.

Jim Zizelman: Thanks, Kelly, and good morning, everyone. Let me begin on page three. During the third quarter, we continued to build on our second quarter progression to drive significant sequential margin and earnings improvement. Third quarter adjusted EPS of $0.10 is an increase of $0.15 versus the second quarter, while EBITDA margin improved by 260 basis points, or approximately $5 million. We continue to focus on gross margin improvements through production efficiency, material cost reduction, and excellence in execution. Despite volatility in our end markets, we continue to deliver on our commitments driven by an unwavering focus to both execute on our long-term strategy and drive continuous operational excellence. Our third quarter performance, which builds on improved results last quarter, continues to establish a good foundation to drive operating performance as we continue to grow the company.

Given the strength of the foundation, even in the face of market-based revenue headwinds, our full-year 2023, exclusive of the impact of the UAW strike, is expected to be directly in line with our original guidance. We are refining our guidance, still keeping it within our original range, but reducing the adjusted EPS midpoint by $0.05, which is equal to the estimated impact of the UAW strike. Our updated full-year midpoint guidance implies fourth quarter revenue of approximately $238 million, and adjusted EPS of $0.15 or a $0.05 improvement relative to the third quarter. We will continue to build on the foundation of the last couple of quarters to drive strong performance to finish the year, and provide a good runway heading into 2024. This morning, we are providing our preliminary revenue expectation of over 5% growth in 2024.

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Q&A Session

This significantly outpaces our underlying end markets which are expected to contract by 1.5%. Matt will provide additional detail on our full-year guidance and our expectations for 2024 later in the call. As we continue to drive margin performance, we are also focused on executing on the program launches that will continue to drive growth for the company. During the third quarter, we launched the Smart 2 tachograph program in the European commercial vehicle market. This next-generation smart tachograph was designed to meet the EU Mobility Package standards, and provides us with significant revenue opportunities in both the OEM and the aftermarket applications over the next several years. I will discuss this program launch and our expectations for final contributions in more detail later in the call.

Finally, today, we are also announcing our participation in the Department of Energy’s SuperTruck 2 innovation program with the largest North American commercial OEMs, including Navistar, Daimler Truck North America, Peterbilt, and Volvo Trucks. We are thrilled to partner with these OEMs on this program as the camera mirror system supplier to not only increase fuel efficiency and the meet the Super Truck program goals but also provide significant safety benefit to the drivers. I’ll provide additional details on our involvement in this program as well later in the call. Now moving to page four; page four summarizes our key financial metrics for the third quarter relative to the prior quarter in more detail. For comparison purposes, we have excluded the favorable impact of the $3.3 million of non-recurring retroactive pricing that was recognized in the second quarter that was applicable to prior periods.

Third quarter adjusted sales of $237.2 declined by approximately 8% relative to the second quarter of 2023 due in part to variation in seasonal production and an unfavorable foreign currency translation impact of $1.3 million. Additionally, we are seeing slower than expected ramp-ups in certain electrified vehicle platforms as well as reduced demand in our on- and off-highway commercial end markets. Third quarter adjusted gross margin of 22.1% was approximately in line with the second quarter of 2023, primarily due to material cost improvements and improved freight costs, offset by reduced fixed cost leverage on decremental revenue versus the second quarter. Adjusted operating margin improved by approximately 200 basis points to $7.3 million, primarily due to a significant step-down in engineering costs.

As we outlined last quarter, we expect this reduction to continue through the end of the year as program launch cost decline and due to the timing of customer engineering reimbursements as we close the year. We continue to deliver on our commitments driven by our focus to both execute on a long-term strategy under our continuous operational excellence. Throughout 2023, we continue to take actions to optimize our organizational structure, reduce discretionary spending, and improve operating leverage. As a result, we expect continued operating margin expansion as revenue continues to grow, and finally, adjusted EBITDA margin of 7.2% improved by approximately 380 basis points over the prior quarter. And going forward, we will significantly outperform our underlying end markets as we continue to launch new programs and recognize the benefit of ramp up of recently launched programs.

Additionally, we expect to further build on our margin momentum and drive significant earnings growth. Now turning to page five; the UAW strike begun on September 15 with incremental strike targets announced through mid-October. Over the last week, the UAW announced tentative agreements with Ford, Stellantis, and GM, which will bring the strikes to an end once the agreements are ratified by the union members. UAW began the strike targeted Ford, GM, and Stellantis plants in the middle of September. And in September given the specific plant on strike and the lag in production downtime we saw between the strike and order reduction from the OEs, the final impact on the third quarter was relatively small. That said, the impact of the fourth quarter will be more substantial as additional strikes continued into October.