Good day and thank you for standing by. Welcome to the Stoneridge third quarter 2021 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions].

I would now like to hand the conference over to Kelly Harvey, Director of Investor Relations. Please go ahead miss..

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 on our website at stoneridge.com in the Investors section under Webcasts & Presentations.

Joining me on today's call are Jon DeGaynor, our President and Chief Executive Officer and Matt Horvath, our newly appointed 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 has been 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 appendix for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. After Jon and Matt have finished their formal remarks, we will then open up the call to questions. I would ask you that you please keep your question to a single follow-up. With that, I will turn the call over to Jon..

Thanks Kelly and good morning everyone. Turning to slide three. In the third quarter, we continues to navigate through supply chain challenges. This impacted material availability, production schedules, product mix, labor availability and cost, logistics and even our tax rate.

Our third quarter sales of $182 million resulted in an adjusted gross margin of 20.2%, translating to an adjusted operating loss of $6.9 million. Adjusted EPS for the quarter was negative $0.27.

Our third quarter performance was significantly impacted by external headwinds, which in total, unfavorably impacted adjusted EPS by approximately $0.25 in the quarter. Our prior expectations, as outline on our second quarter call, called for approximately breakeven adjusted EPS performance in the quarter.

I will provide a more detailed review on the performance drivers for our third quarter results later in the call. During the quarter, we remained focused on offsetting the incremental supply chain related costs we are incurring. Total incremental costs exceed $11 million in the quarter of which we were able to offset almost $5 million or 44%.

Despite incremental costs significantly increasing relative to the second quarter, we were able to offset a large portion of our incremental costs which positions us for an improved run rate going forward.

During the quarter, we continued to make progress with our MirrorEye platform, as we are in the process of launching our first OEM program in Europe. Although we are early in the launch process, our customers' forecasts are suggesting take rates the system equal to exceeding our quarterly take rate at the time of award.

As we expected, feedback on the system from end customers has been extremely favorable which is resulting in the forecasted incremental take rates. In addition to progress with our OEM launches, we continued to initiate and expand our retrofit programs in the quarter.

Most notably, we expanded our retrofit program with Schneider to approximately 200 trucks. In addition to retrofit, we expanded or initiated with four other North American fleets.

Our fleet trials creates an awareness in a significant market for both retrofit opportunities and new vehicles as we launch our first OEM program in North America in early to mid 2022. Feedback from the fleets continues to be positive and many see it as critical technology to attract and retain drivers.

Finally, this morning we are adjusting our full year guidance based on market conditions. It should be noted that our updated guidance excludes the divested soot sensor business which has contributed $8.6 million in revenue and $0.04 of EPS year-to-date.

Primarily due to limited component availability, resulting in reduced production schedules, we are reducing our full year revenue guidance to $740 million to $750 million. We have considered both external sources such as current IHS and LMC forecasts as well as our current view of customer orders as the basis for our updated guidance.

Similarly, we are reducing our full year adjusted EPS guidance to a midpoint of negative $0.55. Matt will provide additional detail on the drivers of our updated guidance later in the call. Turning to page four.

During the quarter, we announced the appointment of Matt Horvath as Chief Financial Officer and Treasurer effective August 31, replacing Bob Krakowiak who resigned from the company to pursue other opportunities. Since joining Stoneridge five years ago, Matt has played an integral role in shaping our transformation.

During his tenure, he has been integral in developing and executing our long term strategic goals, developing and leading an award-winning Investor Relations team and has supported refining the company's product portfolio and operations through multiple divestitures.

Mat has shown tremendous leadership across the organization and his robust knowledge of the business and his financial acumen will be critical as we further advance our strategy.

Matt's deep understating of our business, his ability to advance our long term objectives and his close relationships with both our internal and external stakeholders have positioned him perfectly to be a partner with me as our next CFO.

Matt will continue to execute on our strategic objectives with a focus on long term profitable growth, a strong balance sheet and efficient and effective deployment of our available capital to drive shareholder value.

Page five summarizes our key financial metrics relative to the prior quarter's results, excluding the divested soot sensor business in all periods. During the third quarter, we experienced production declines across our OEM end markets, driving a weighted average end market decline of 7.4% relative to the second quarter.

This compares to our sales decline of 5.6% quarter-over-quarter. During the quarter, we continued to experience the unfavorable impacts of global supply chain disruptions resulting in material shortages, incremental material and logistics costs and labor volatility.

These factors contributed to adjusted gross margin and operating margin declines of 210 and 280 basis points respectively relative to the second quarter. The third quarter included net incremental supply chain related costs of approximately $6.3 million which was $2.3 million higher than the second quarter.

Total gross costs for the quarter exceeded $11 million. During the third quarter, operating expenses were favorable compared to the second quarter, primarily due to reduction of our annual incentive compensation program costs, partially offset by incremental engineering costs primarily related to new program launches.

We continue to focus on managing engineering and SG&A costs in consideration of current market conditions while ensuring that we are structured to support critical program launches and drive future growth.

During the second quarter call, we outlined our expectations for the third quarter which included revenue performance that exceeded the second quarter of $192 million and adjusted EPS that was expected to be approximately breakeven. Page six summarizes the third quarter drivers of adjusted earnings per share relative to those expectations.

As we discussed previously, we experienced a significant reduction in revenue in the quarter relative to prior expectations, primarily driven by reduced production schedules resulting from component shortages. This resulted in $0.19 of headwind for the quarter.

Supply chain related costs including incremental material, labor and logistics cost reduced third quarter performance by approximately $0.13 versus prior expectations while other variable cost inefficiencies drove $0.01 headwind.

Offsetting these negative impacts were slightly favorable product mix as well as a reduction in our incentive based compensation programs to account for our current forecast of financial performance for the year.

These offsetting benefits were approximately $0.08 in the quarter resulting in total external performance drivers negatively impacting our performance by $0.25 in the quarter relative to our prior expectations.

During the quarter, we incurred higher engineering costs related to supporting the significant number of new program launches we expect late this year and early next year including our first OEM MirrorEye programs, our first digital driver information system program and our transmission actuation programs.

These incremental engineering costs were partially offset by reduced SG&A cost as we continues to carefully monitor spending and align our cost structure with current market conditions. Turning to slide seven.

While total amount of supply chain related costs have continued to increase as we move through 2021, so has our ability to offset these incremental costs. Supply chain disruptions have become more challenging as total cost for the quarter almost doubled from the second quarter increasing to over $1 million.

It should be noted that approximately $1.2 million of that increase was related to incremental freight costs coming from more traditional shipping methods, for example ocean freight rather than the premium freight events that we have discussed in prior quarters.

While premium freight costs are typically tied specifically to a single shipment or special material related issue, these freight related expenses are simply due to increased costs to ship goods globally.

We began incurring these costs primarily this quarter and as such we have called them out specifically on the slide to provide some more comparable points to previous quarters. The actions we have taken to offset these incremental costs are becoming more effective.

Overall, we were able to offset approximately 44% of incremental supply chain related costs in the quarter. Excluding more recent costs related to traditional shipping methods, we were able to offset approximately 49% of the supply chain related costs we incurred in the third quarter compared to 35% in the second quarter and 17% in the first quarter.

Based on current market conditions, we have updated our expectations for supply chain costs, net of customer recoveries, from approximately $9.1 million to $10.3 million for the full year as of last quarter to almost double or $17.8 million to $18.8 million for the full year. To-date, we have already heard $12.5 million of net incremental costs.

Our expectations for the full year imply a range of $5.3 million to $6.3 million of net supply chain related costs in the fourth quarter. While we expect that total cost could continue to increase in the fourth quarter, we are also taking actions to offset more memorable costs.

As such, our guidance for the remainder of the year implies net supply chain related costs in the fourth quarter will be approximately similar to or favorable to the third quarter. Matt will provide additional detail on our guidance specific to supply chain related costs later in the call. Turning to slide eight.

I would like to provide a more detailed update on the incremental supply chain costs, our outlook for each cost category and some of the specific actions we are taking within each category that will drive an expanded ability to mitigate these incremental costs.

First, the most significant cost we haven't heard our spot buys and incremental freight costs. We have also made the most progress in offsetting these costs now and going forward. As a result of material shortages, we have been forced to turn to the sot buy market to continue to procure materials.

This typically means incremental cost per component as well as shorter than normal lead times on component procurement which was incurs premium freight required to obtain materials and shipping those goods to our customers. We began acquiring spot buys and incurring these premium print costs in the first quarter of this year.

In the second quarter, we began implementing more aggressive pass-through strategies by requiring our OEM customers to agree to pay for specific spot purchases or premium freight costs before we would encourage the expense.

That strategy has resulted in a significant portion of the spot purchases and premium freight costs either to be avoided up front or to be passed through to our customers directly. In addition to the spot buy and premium freight events, in the third quarter we began to see significant increases in our traditional freight costs.

These costs represent across the board incremental expenses and are less tied to individual events. During the quarter, we incurred approximately $1.2 million related to these costs. We continue to work with both our suppliers and our customers to efficiently ship goods and pass-through incremental costs.

The next category is related to material price increases from our traditional suppliers. These are suppliers that are part of our normal supply chain rather than one-off purchases from the spot market.

We began to see broad increases in general material prices in the second quarter including electronic components and commodities such as metals and resins. Because these costs are not specific to a single purchase or shipment, it takes more time to specifically allocate costs and then go back to customers to negotiate incremental pricing.

As such, while these costs represent a small portion of total cost, we were not able to offset as much of these costs within the quarter. In certain cases, we have taken actions to aggressively increase price aligned with current market conditions where we do not have long term contractual pricing with customers.

In majority of cases, we remain in negotiations with our customers related to recovery of historical cost, offsetting current costs and putting a process in place to mitigate future costs. We are continuing negotiations around pricing actions both in the short term and over the course of existing and future programs.

We expect that the benefits will be recognized in both short and long term in the forms of incremental price and/or the elimination or reduction of future contractual price downs. Finally, the last category of incremental expense is related to labor inefficiencies and over time related to production volatility.

While these cost comprise a small portion of our overall incremental cost, these are also the costs that are less likely to be recovered from our external parties and require either structural changes or reduced volatility in the production environment to offset.

We continue to evaluate and take actions to rightsize the business for current market conditions while maintaining our ability to retain our team, serve our customers and drive future profitable growth.

We continue to monitor the global supply chain and the impact on our OEM customers to ensure we respond efficiently and effectively to any disruptions. We have implemented and will continue to implement actions to offset the incremental costs we are experiencing today and expect to continue to incur in the next several quarters.

we expected these actions will have a continued positive impact on our overall financial performance going forward. As it relates to current production volume expectations slide nine aligns the most recent IHS and LMC information for our OEM end markets for the remainder of 2021 and 2022.

We experienced a significant and broad reduction in our end markets in the third quarter relative to prior expectations, driving the volume headwind I outlined previously. Similarly, although fourth quarter production was reduced relative to prior expectations, IHS and LMC are still forecasting an 8.2% growth in our weighted average end markets.

Our current customer orders suggest that the level of growth forecasted is optimistic and we have adjusted our guidance to reflect those orders. Matt will provide further details on our revenue guidance later in the call.

With the actions we continue to take related to our class structure and operating efficiency, we are positioned to take advantage of a forecasted growth in the fourth quarter and next year. Turning to page 10.

Despite the external challenges we experienced in the third quarter, we continued to build momentum in both our MirrorEye OEM and retrofit end markets with significant announcements in both.

First, we are in the process of launching our first OEM program in Europe which was originally awarded assuming a 17% take rate an peak annual revenue of approximately $13 million. Initial feedback on the system from end customers has been extremely favorable.

As a result, current customer orders suggest that take rates for the system are expected to meet or exceed the quarterly take rate. We are working with our customers and suppliers to ensure that we are able to meet the higher than expected demand.

We expect to launch our first OEM program in North America early to mid 2022 which was originally estimated to have a 10% take rate resulting in approximately $14 million of peak annual revenue. We continue to focus on expanding our fleet trials in North America to drive adoption of the system as OEM programs become available.

As a result of our continued effort to expand those fleet trials, during the quarter we expanded our initiated retrofit programs with five North American fleets that represent more than 20,000 total vehicles on the road.

We are proud to announce that we signed an agreement with the largest of those fleets and our longtime fleet partner Schneider to expand their installed truck base to 200 trucks. We believe that expanded trials will drive broad system adoption as we launch our first OEM program North America and as we continue to expand retrofit availability in 2022.

Turning to page 11. In summary, the third quarter was challenging as we continue to face the impact of global supply chain disruptions. However we took decisive actions to continue to offset incremental cost.

I wan to take a moment to recognize our hard working employees around the world that have allowed us to continue to make progress as a company and to support our customers. I want to personally thank them for their dedication to Stoneridge during this challenging. period.

We remain committed to delivering on our strategic priorities and continuously improving the business to drive strong financial performance and stable long term profitable growth as we prepare for significant growth in 2022 and beyond.

At Stoneridge, we will continue to execute on the things that we can control and respond effectively and efficiently to a challenging environment. We will maintain our focus on our long term strategy, driving continuous improvement and refining our capabilities to deliver shareholder value.

With that I will turn it over to Matt to discuss our financial results in more detail..

Thanks Jon. Turning to page 13. Sales in the third quarter excluding divested product lines were approximately $179 million which is a decrease of 5.6% compared to the prior quarter, primarily due to reduced production schedules at our OEM customers offset by the ramp up of certain program launches.

Adjusted operating loss, excluding divested product lines, were $7.4 million or negative 4.1% of sales which declined 280 basis points versus the prior quarter.

The reduction in margin performance during the third quarter is primarily due to supply chain related headwinds which negatively impacted operating margin by an incremental $2.3 million or approximately 140 basis points compared to the prior quarter.

As John discussed earlier on the call, while continued supply chain disruptions had a significant impact on our third quarter performance, we continued to take actions that mitigated a larger portion of these incremental costs and positioned us to continue to offset these cost moving forward.

I will provide additional detail on segment performance and a brief discussion of our expectations for each segments for the remainder of 2021 on the subsequent slides. As Jon discussed earlier in the call, we are updating our full year guidance based on our view of current market conditions.

Our guidance excludes the divested soot sensor business which has contributed $8.6 million in revenue and $0.04 adjusted EPS year-to-date. This morning, we are reducing our full year 2021 adjusted sales guidance to $740 million to $750 million and adjusted EPS guidance to a midpoint of negative $0.55.

I will discuss the drivers of our current guidance in more detail later on the call. Page 14 summarize our key financial metrics specific to control devices. Control devices third quarter adjusted sales excluding the divested soot sensor business were approximately $85 million which is approximately flat relative to the prior quarter.

Revenue performance was driven by supply chain related production downtime which offset incremental revenue related to program launches including new park-by-wire actuation programs. Adjusted operating income excluding the divested business was $3 million for the quarter or 3.5% of adjusted sales.

Adjusted operating margin decreased by approximately 350 basis points relative the second quarter, primarily due to material and expediting cost headwinds as a result of continued supply chain issues. This impacted the quarter by $2.8 million or 330 basis points compared to $1.3 million 160 basis points during the second quarter.

We continue to expect a challenging macroeconomic environment as global supply issues continue to impact the business. We are continuing negotiations with our suppliers and customers to offset come across as we focus on leveraging our existing cost structure to expand margin with revenue growth.

Despite these headwinds, control devices remains well positioned to take advantage of future growth and drive margin expansion. Page 15 summarizes our key financial metrics specific to electronics. Electronics third quarter sales were approximately $84 million, a decrease of 13.8% versus the second quarter.

This was primarily due to OEM production shut downs in our commercial vehicle end markets as well as traditional seasonality due to European third quarter vacations.

Adjusted operating margin decreased by approximately 420 basis points relative to the second quarter, primarily due to external factors relating to continued supply chain challenges including unfavorable fixed cost leverage as a result of lower sales and material and expediting cost headwinds.

Total incremental supply chain costs for the third quarter were $2.8 million or 330 basis points compared to $2.4 million or 250 basis points during the second quarter. In addition, we incurred incremental engineering costs to support new program launches.

We continue to expect production volatility for the remainder of 2021 as global supply chain disruptions continue to interrupt commercial vehicle OEM production schedules. We continue to work with our customers and suppliers to offset the financial impact of externalities where possible.

In the fourth quarter, we expect engineering costs to remain relatively consistent with the third quarter driven by continued support for program launches both now and in the future. Page 16 summarizes our key financial metrics specific to Stoneridge Brazil.

Excluding the favorable foreign exchange rate impact of $200,000 Stoneridge Brazil's third quarter sales increased by $1.4 million or approximately 9% relative to the second quarter of 2021, primarily due to higher demand in OEM product lines.

Adjusted operating margin remained relatively flat to the prior quarter, primarily due to higher incremental supply chain costs offset by fixed cost leverage on higher sales. Although our third quarter financial performance was strong, macroeconomic conditions in Brazil remain challenging and we expect volatility in Brazil for the remainder of 2021.

We will continue to utilize our local engineering resources to support our global electronic business and remain focused on the ramp up of local OEM business to drive growth for the segment.

Page 17 summarizing the key drivers of expected fourth quarter performance relative to the third quarter based on our updated full year adjusted earnings per share guidance. As a reminder, our guidance excludes the divested soot sensor business. As discussed previously, third quarter EPS excluding the divested product lines was negative $0.28.

As Jon discussed earlier on the call, although fourth quarter production was reduced relative to prior expectations, IHS and LMC are forecasting an 8.2% growth in related average end markets from the third the fourth quarter. However, our current customer orders suggest that this is optimistic and we have adjusted our guidance accordingly.

Based on our current view of customer production schedules and our pricing actions, we are expecting incremental revenue resulting in adjusted EPS of $0.07 to $0.17 times in the fourth quarter relative to the third.

Our full year guidance implies revenue of approximately $182 million of $192 million in the fourth quarter excluding revenue related to our divested soot sensor product line. Year-to-date revenue related to the soot sensor product lines is $8.6 million. We do not expect significant earnings related to the soot sensor business in the fourth quarter.

As discussed in the detail earlier in the call, we are expecting continued supply chain headwinds for the remainder of the year. Although we expect higher total costs relative to the third quarter, we expect that our ability to offset incremental costs will continue to progress through the end of the year.

As a result, we expect net supply chain headwind in the fourth quarter to be relatively consistent or even slightly favorable to the impact on the third quarter. We expected that more stable production conditions in the fourth quarter will result in incremental operating efficiencies of $0.02 to $0.03 relative to the third quarter.

Due primarily to the reduction incentive based compensation recorded in the third quarter and typical seasonality in our SG&A expenses, we expect that fourth quarter SG&A will result in a $0.07 to $0.09 headwind relative to the third quarter.

The majority of this increase does not reflect incremental spending but rather is a comparison to lower than expected costs in the third quarter primarily due to the reduction in the incentive compensation programs. We will continue to monitor and adjust our cost structure to reflect current market conditions.

We expect to continue our planned investments in engineering resources to support product development and future program launches in the fourth quarter resulting in engineering costs that we expect to be consistent with the third quarter. Overall, we expect operating performance to improve from the third and fourth quarter.

Due to the significant decline in production volumes and resulting change in jurisdictional mix, we expect a full year 2021 adjusted tax benefit of approximately $1 million as we continue to experience an unusual shift in the make up of our earnings and expenses.

We expect that our tax rate will return to a more normalized level as supply chains normalized going forward. As a result of these primarily external factors, we are reducing our full year adjusted EPS guidance to a midpoint of negative $0.55. Turning to page 18.

Net debt increased by $6.7 million in the third quarter resulting in net debt of $81.6 million or 2.2 times trailing 12-month adjusted EBITDA We have approximately $265 million of undrawn commitments under our U. S. revolving credit facility which results in approximately $320 million of cash on hand and undrawn commitments as of quarter end.

We will continue to carefully monitor and manage our cash position. Similar to the second quarter of 2020, if our forecast of financial performance requires a modification to our existing credit facility, we will be contented to ensure we remain in compliance with the terms and conditions of our existing credit facility.

Stoneridge remains well positioned with significant available capital. Moving to slide 19. We will continue to do everything within our power to offset the incremental cost we are experiencing primarily as a result of external factors and position ourselves to take advantage of forecasted strong production in 2022.

We remain focused on driving margin expansion through cost mitigation actions, efficient operations and careful management of our cost structure. 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 up the call to questions..

[Operator Instructions]. Our first question comes from the line of Justin Long with Stephens. Your line is open..

Thanks and good morning..

Good morning Justin..

Good morning Justin..

So I wanted to start with the supply chain cost mitigation efforts that you outlined. It looks like that that percentage increased going from the second quarter to the third quarter.

Can you help us think about how you expect that percentage to trend as we move into the first half of next year, just assuming the growth cost stay flat with where they are today?.

Justin, thanks for the question.

And I think you what you can see in the trends that we showed first quarter, second quarter, third quarter that the team has worked very hard, one, to mitigate the costs but, two, to work with our customers and our supply chain to avoid the cost but then to get recoveries in areas like getting the customers to pay for spot buys, getting the customers to pay for premium freight and then the ongoing things we talk about which is dealing with longer term inflationary activities like commodity increases, materials and resins, other electronic component increases where we are having to go back to customers and having longer term negotiations.

We have long term contracts. We are respectful of our customers on those contracts but we also have to deal with the inflationary items that are out there. So we expect this to continue and improve. It will take time. It's not immediate. But we expect those percentages to continue to increase quarter-over-quarter..

Okay. Helpful. And I just want to take a step back for a minute with my second question. You have always talked historically about the business eventually getting to a mid teens EBITDA margin over the longer term.

Did the disruptions that we have seen over the last two years with the pandemic and the supply chain issues we are seeing right now, does that change the way you think of that opportunity? I know that the timeline clearly needs to be something that you put under review and you may speak to next year.

But just from a structural perspective, can you still get to mid teen margins at some point?.

Yes. I think, Justin, the overall vision for the company remains the same. What we have said to investors, we still believe in. You have followed us for a very long time.

And so you understand that 2019, 2020 were always going to be challenging years even before the pandemic as we were launching new products and we were transforming the way in which we build stuff and what we did. COVID plus the chip crisis and the overall supply chain crisis has certainly delayed that. It's caused delay in some of our actions.

It's caused destruction of our engineering organization and our total organization to support our customers. It's because some customers to delay some of the things that they are doing because they have got to keep their plants running.

So yes, of course it's extended the timeline but we feel very confident in that transformation plan that we laid out and we laid out with our investors for a long time is still the right plan and it's why we continue to talk about driving the same long term strategy.

It's why the continuity in leadership and even the continuity in the financial leadership is so important to somebody that understands what we are trying to do and how we get to the next levels. But yes, it is going to take longer..

Understood. I will leave it there. I appreciate the time..

Thanks Justin..

Thanks Justin..

Thank you. Our next question comes from the line of Scott Stember with CL King. Your line is open..

Good morning guys and congrats Matt on the move..

Good morning Scott..

Good morning Scott..

Maybe talk about the price increases. Very helpful that you broke out the three different buckets.

But I guess the second bucket which seems the most problematic and most difficult to attain from a my price increase standpoint, it sounds like it's going to be very difficult, I guess, to receive all of the relief but you probably need at least in the near term.

Do you have any other levers that you can use on the back end, whether it's negotiating lower price get backs or higher take rates on products that you already have in the pipeline? Is there any way that you can get closer to getting everything that you need, one way or the other?.

Yes. So Scott, this is one of the things when we talk about the entire organization and I think everybody on the phone should understand that this is an entire organizational effort.

It's not just on our operations and our procurement teams and our engineering teams but it's also in on the commercial teams and the as we are trying to find ways to offset this. So of course, we also have contractions and we respect our commitments and we try to live up to our commitments.

So in those situations where long term relationships that we build what customers, we are going back and we are having honest conversations. We are being as transparent as possible with them to say, here are the inflationary things we are facing and here's the pain that we are facing.

And we are working with those customers to offset those both in price increases and recovery of spot buys but also, as you said, in some situations offset of future price down or price increases on future programs. And we have had a vast majority of our customers who have stepped up and partnered with us. There's a lot of work to do.

And our team is working very hard on that. But I can tell you that we are pulling every level possible, both with our customers and our supply base. And the supplier partner who work with us in this way versus ones who don't, we will remember that over time..

Yes. And Scott, I would add to that. If you look at the progression of the cost that we have offset, I feel very comfortable in actions we have taken on the premium price in spot buys and the amount of cost we have been able to offset relates to that bucket of costs.

Like you suggested, it's more challenging to recover the material increases through those customer negotiations in the short term but that is the opportunity to continue this progression of offsetting incremental costs as we move through this year and certainly into next year though the various things that Jon mentioned.

So I think that's what we will expect to see the greatest improvement in cost offset as we move into the next several quarters..

Got it. Very helpful.

And on the increased rollout of retrofits for MirrorEye, could you maybe talk about what's traditional retrofit versus what is Pre-Wire? Are they two separate things and which order each will come?.

So Scott, thanks for the question. We are seeing both. We are seeing expansion in both traditional retrofit where it's not through a Pre-Wire order as well as pre-wired.

And in some situations where fleets that have the opportunity to order Pre-Wire trucks, one of the things as we think about retrofit penetration is the disruptions in the supply chain and therefore the disruptions in truck production has actually limited the ability of fleets that wanted to go with MirrorEye, to get pre-wired trucks.

That's something that's relatively understated or maybe missed in this is a constraint with regards to trucks has an impact on our retrofit penetration.

And what we are seeing from fleets because of the safety benefits and as we have talked about the driver retention benefits that they are seeing more and more every day, we have fleets that are not waiting to get pre-wired trucks that are asking us to retrofit existing trucks. So it's both..

Got it. And the last question, big picture on Brazil kind of below the radar here a little bit but it remains profitable and I know the part of the whole idea of being here is to support your OEM launches.

Could you give us an indication of how those are going and profitability expectations as we go forward?.

Yes. So as you said, it's under the radar. It's one of my personal sources of pride for the transformation that that business has going through and what the team down in Brazil has led.

That is an economy that goes through, it seems like there's always a crisis there and they found a way to continue to make money and to continue to grow despite whatever crisis is happening in Brazil.

And so the numbers that you see on the slide would tell you through, they are dealing with the chip crisis as well and they are dealing with inflationary pressures and they may have found a way to continue to perform.

They are a very important portion of our OE product development from electronic standpoint, more and more aligned with the SRE business every day. And also them launching OE programs both in tachograph and in instrument cluster and in connectivity modules again for SRE products with our commercial vehicle customers.

So the transformation of that business from what it was which was an aftermarket B2C business to very much aligned with what we do, the alignment of the engineering organization to support our global engineering activities and to support our customers globally, all three of those are happening and the financial performance is coming and we expect to see as growth comes that the financial performance will continue to grow there both topline and bottomline..

Great. That's all I had. Thanks guys..

Thank you Scott..

Thank you Scott..

[Operator Instructions]. Our next question comes from Gary Prestopino with Barrington Research. Your line is open..

Hi. Good morning everyone..

Good morning Gary..

Good morning Gary..

I hear you right that you are basically looking at the IHS and LMC projections for Q4 and saying, you don't really have a lot of faith in that and you are projecting a market environment that is worse than they are projecting? And if so, what does that portend for 2022 with your thinking versus where they are?.

Yes. Thanks for the question, Gary. We have tried to be as specific as we can in the guidance that we were assuming for the remainder of the year that both includes what IHS announced forecasting more broadly and then more specifically the orders that we are seeing from customers in our production.

So as you will see, while we continue to expect to outperform the market over the long term, we have hair cut the IHS and LMC information that's included in our guidance. When we look to 2022, there are obviously strong production tailwinds that's forecasted by IHS and LMC and we would expect to take advantage of that tailwind.

I think given the volatility in the market conditions, it's just too early to say what exactly that will be. But we expect to outperform the market over the long term and we want to be very specific in our expectations for guidance for the remainder of the year given the volatility we see in the short term..

Okay.

And as you talk to your end market clients, what are they saying in terms of when they think this will turn and start reflecting a more positive environment for their production schedules?.

Gary, each of our clients have a little different point of view and our suppliers, the electronic suppliers, have a different point of view. What we see right now, I think.

I would sympathize it by saying, we see it as if you look at three sides of a trough, getting worse, leveling out or getting better, we see it at least in the leveling off and we see some indications of getting better. We don't see it getting worse.

And on the last call and in the last two calls when we talked about this, you said or we said what others are saying, they call it the bottom and we said we don't see it yet. At this point we are seeing it flat and we see some areas of improvement. Yes, there are still inflationary pressures.

The freight example that we talked about where that comes up as a surprise within the quarter but right now as we see the availability of components which will then drive production output both on commercial vehicles and passenger cars and how that drives our sales, we see that at least that's why it's not getting better. But it's too soon to call.

It's too soon to absolutely call it as just getting better but we do see certainly indications that it's going that way..

Yes. Gary, I would add to that. Even stability bad is good, right. If you look at the quarter that we outlined some things the third quarter that were a result of inefficiency related to volatility and some opportunity we sought to take advantage of stability going from the third to fourth quarter in our implied guidance.

So while we are starting to see some improvement, even stability is improvement. And I think that that's also important to think about as we go from the third to the fourth quarter..

Thank you..

Thanks Gary..

Thanks Gary..

And our next question comes from Justin Long with Stephens. Your line is open..

Thanks for taking the follow-up. Jon, I wanted to follow up on that last question and the comment you made about seeing some of slight improvement. Could you expand a little bit more on that? Where are you seeing it? Is it in light auto? Is it in commercial vehicles? Certain regions? But I would like to just get a little bit more color there..

Yes. So what I would say, Justin, the way I expanded is, it's what I am seeing from the sources of chip supply. One thing that gets lost in all of this is the amount of time that the leadership at Stoneridge is spending with our customers and with the chip suppliers managing this crisis on a daily basis.

And the difference that we are seeing today is, as the pipeline starts to refill and what do we do to stabilize and what do we do improve versus even as recently as a month or six weeks ago where we would have decommits where the suppliers would have said, we are going to send you this much per week and then they would say, oh, we can't do that.

So I am sure you have read about the stabilization of some of the things with regard to the chip supply and the issues in Malaysia and Vietnam and Thailand. Now we are seeing that pipeline start to fill.

And as Matt said, if we have stable ability to plan that allows us to plan our labor, that allows us to plan our plants and allows us to drive a lot more efficiencies and then we just don't have a crisis in the engineering organization and the overall operations organization than plan and run. That's where we are seeing it right now.

So it's going to impact both pass car and commercial vehicle. It's most acute in the conversations that I am in with the commercial vehicle side but the feedback that we are getting and where we are hearing it is more on the chip supply side..

Okay. That's helpful. And last question for me is on the timing of program launches as we get into it to 2022.

Has anything changed on that front, just given the volatility in the market? And maybe you could just help remind us of the major program launches we should be mindful of as we get into next year?.

Thanks for the question, Justin. As I said earlier, engineering organizations both within Stoneridge and within the customers have been absolutely heads down on trying to find alternatives chips and keeping lines running. So there has been some small six weeks here, eight weeks there delays in programs.

We haven't lost any programs but there have been delays in launches. That is understandable given, given the impediments to travel as well as the chip crisis. But so the program that we haven't launching in Europe right now is the first time we have a program with regard to MirrorEye.

The driver information system launch really ramped up into q2 and is in full-flown ramp up right now. That was the largest driver information system program and it was critical to Stoneridge. So that's in the midst of launch right now. The North American MirrorEye launch is a Q1, Q2 2022.

that's delayed by a few weeks and months but it's happening and it's part of our major truck launch and we are excited about that. And then we have, in control devices we have transmission actuator and park lock actuator launches both in North America and in China with critical electric and hybrid vehicle programs that I am sure you have read about.

That are happening right now and continue to roll out. So there are a ton of launches on both sides of the organization that, yes, there have been some headwinds from timing but we are really excited about where we are going with those launches..

Okay. Great. That's really helpful. Thanks again for the time today..

Thanks Justin..

Thanks Justin..

I am showing no further questions at this time. I would now like to turn the conference back to Jon DeGaynor..

Yes. Thank you and thank you all for your participation in today's call. Just to close, I want to assure you that our company is committed to continuing to drive shareholder value through strong operating results, profitable new business and 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 are confident that our actions will result in continued success for 2021 and beyond and we look forward to talking in the next quarter's call. Thanks..

This concludes today's conference call. Thank you for participating. You may now disconnect..