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

Looking forward, we are focused on strong margin performance in 2024, driven primarily by a continued focus on manufacturing performance and material cost improvement actions. We will continue to react to changes in our end markets as needed to drive sustained profitable growth. Page 13 summarizes our key financial metrics, specific to electronics. For comparison purposes, we have excluded the favorable impact of nonrecurring retroactive pricing recognized in the second quarter related to prior periods. Electronics third quarter sales were approximately $142.4 million, a decrease of 11.3% versus the prior quarter due in part to expected production seasonality as well as reduced demand in our commercial vehicle and off-highway markets. That said, we continue to expect significant growth in our Electronics segment next year as we capitalize on recently launched and to-be-launched products over the next 12 months.

Adjusted operating margin increased by approximately 270 basis points relative to the second quarter. This significant margin expansion was primarily due to a step down in D&D costs compared to the second quarter as elevated D&D spend for program launches declined as expected. We continue to focus on discretionary cost control driving reduced SG&A expenses as well. We are expecting revenue growth in Electronics segment in the fourth quarter due to the ramp-up of new and recently launched programs, including the SMART2 tachograph program highlighted earlier on the call. Similarly, we are expecting continued margin expansion in the fourth quarter, primarily driven by the continued reduction of net engineering costs as a result of the timing of customer reimbursements and the continued focus on optimizing base engineering expense globally.

Looking forward, in 2024, although our commercial vehicle end markets are expected to decline, we expect strong revenue growth. Our growth will be driven by the continued ramp-up and expansion of recently launched programs, including MirrorEye in North America and the SMART2 tachograph as well as additional program launches, including our next OEM MirrorEye program in the first-half of next year. We expect a strong top-line growth as well as our continued focus on material cost improvement actions and structural cost optimizations will drive strong margin performance next year. Page 14 summarizes our key financial metrics, specific to Stoneridge Brazil. Stoneridge Brazil’s third quarter sales declined by $700,000 relative to the prior quarter.

Revenue was primarily impacted by lower OEM signals, offset by higher sales in our aftermarket products. Despite continued macroeconomic challenges in Brazil, we expect revenue and operating margin to remain relatively stable for the remainder of this year and 2024. Brazil has become a critical engineering center as we continue to expand our global engineering capabilities and capacity. We will continue to utilize our global footprint to cost-effectively support our global business. Page 15 summarizes our expectations for full-year adjusted EPS. As discussed earlier on the call, third quarter adjusted EPS performance of $0.10 exceeded our prior expectations by approximately $0.08. Our updated guidance reduces our revenue expectations by $20 million from the high end of our previously provided range as we discussed last quarter.

This includes a couple of million dollars of impact in the third quarter and $7 million worth of impact from the UAW strike. The remainder, which is expected to impact the fourth quarter is primarily related to reduced demand for certain electrified vehicle platforms and reduced demand in our overall on and off-highway commercial vehicle markets earlier than previously expected. In total, we expect fourth quarter production volume reductions to reduce adjusted EPS by $0.07 relative to our prior expectations, excluding the UAW strike impact, which I will discuss separately. We are also expecting incremental tax expense in the fourth quarter versus prior expectations, primarily due to the geographic mix of our pre-tax earnings. In summary, excluding the estimated impact of the UAW strike, our updated full-year adjusted EPS midpoint is in line with our prior midpoint guidance of breakeven adjusted EPS for the year.