Good day, and thank you for standing by. Welcome to the Stoneridge Fourth Quarter 2021 Conference Call. [Operator Instructions] I would now like to turn the conference over to your host Jon Sandison, Director of FP&A. Please go ahead..

Good morning, everyone. And thank you for joining us to discuss our fourth quarter and full year 2021 results. The release and accompanying presentation was filed with the SEC yesterday evening and is posted on our website at www.stoneridge.com in the Investors section under Webcasts & Presentations.

Joining me on today's call are Jon DeGaynor, 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 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 keep your question to a single follow-up. With that, I will turn the call over to Jon..

Thank you, Jon. Good morning, everyone. Let me begin on Page 3. In 2021, we navigated the direct and indirect challenges created by the global pandemic, including global supply chain-related issues.

We focus on being responsive to fluctuating production schedules, managing our cost structure and implementing price and cost recovery actions to drive stronger margin performance as volumes recover.

As a result of our continued focus on supply chain management and our ability to both recover historical costs and pass-through current costs, we were able to offset approximately 78% of the gross supply chain-related costs incurred in the quarter. I want to thank the Stoneridge team for facing and overcoming the challenges in 2021.

In the fourth quarter, the production environment continued to stabilize, driving adjusted sales of $185 million, representing a sequential improvement relative to the third quarter and providing a strong indication of continued top line improvement as we progress into 2022.

Similarly, fourth quarter gross margin of 22.7% and EBITDA margin of 1.3% represented sequential growth for the third quarter. Based on our current view of market conditions and macroeconomic factors, we believe that the third quarter of 2021 will be the trough for Stoneridge from an EBITDA outperformance perspective.

Our 2021 adjusted sales of $750.5 million resulted in an adjusted gross margin of 22.4%, translating to an adjusted operating loss of $12.2 million or negative 1.6% of sales. Adjusted EPS for the year was a loss of $0.59.

Most importantly, despite the external challenges in 2021, we stayed focused on our strategy and continue to invest in the resources necessary to develop and launch the technologies and product platforms that will drive future growth for Stoneridge.

Our strategic focus and alignment with industry megatrends will continue to pay off in 2022 and beyond. This morning, we are providing midterm revenue guidance of approximately $880 million in 2022, which represents approximately 2x market growth, driven by significant program launches and the continued ramp-up of programs launched in 2021.

We expect the continued material challenges in 2022 will put pressure on margins, particularly in the first half of the year. It's important to note that approximately $21 million of our sales growth is related to price recovery to offset the material cost increases we incurred in 2021 or are expecting in 2022.

Similarly, we are in negotiations with our customers to adjust contractual annual price downs to reflect current macroeconomic conditions.

We are guiding to a midpoint adjusted gross margin of 22% and adjusted operating margin of 1.25%, resulting in an EPS midpoint loss of $0.03 and an EBITDA margin midpoint of 5.5% or 230 basis points better than 2021. We are expecting $43 million to $54 million of EBITDA in 2022.

Matt will provide additional detail on the specific components of our sales and adjusted EPS guidance later in the call. This morning, we are also updating our long-term financial targets based on strong backlog, our expectations of significant top line outperformance relative to the market and substantial margin expansion throughout our 5-year plan.

Our backlog grew by 13% in 2022, primarily due to new program awards and the expansion of the existing programs. This supports a 5-year compound annual growth rate of more than 9%, resulting in over $1.25 billion of revenue in 2026.

We continue to expect contribution margins of 25% to 30% on incremental revenue and have specific initiatives focused on margin recovery relative to material prices, continuous improvement in our manufacturing facilities and leverage on our existing cost structure as we grow. As a result, we are targeting an EBITDA margin of 14% in 2026.

Page 4 summarizes our key financial metrics quarterly for 2021 and for the full year compared to 2020. It goes without saying, the continued impact of global pandemic provided a challenging backdrop for the industry and for Stoneridge.

Despite this, we effectively managed the impact to our financial performance and showed strong progression from the trough in the third quarter to an improved performance in the fourth quarter. While adjusted sales only increased by $3 million, gross profit improved by $5.3 million, with gross margin expanding by 260 basis points.

As the year progressed, we offset incrementally more supply chain-related costs. However, we still incurred almost $17 million of those costs in 2021 versus 2020. We estimate supply chain-related costs negatively impacted our gross margin by 230 basis points in 2021. Turning to Slide 5.

Gross supply chain-related costs continued to increase in the fourth quarter. However, we were able to effectively offset a large portion of these incremental costs, resulting in net cost of just over $5 million. Supply chain disruptions and material cost pressure increased in the fourth quarter.

We expect continued material cost challenges and are negotiations with our customers to offset and recover a portion of both the forecasted continued rise in material costs as well as historical costs.

During the quarter, we offset more than $18 million of supply chain-related costs or approximately 78% of our total exposure, primarily related to spot buy pass-through and other customer recoveries.

We're able to better manage our net supply chain-related costs in the fourth quarter, resulting in a favorable impact of approximately $0.02 relative to our prior guidance. Turning to Page 6.

We continue to take significant steps with our MirrorEye platform, particularly in the OEM commercial vehicle end markets, including continued expansion into adjacent markets with significant penetration in the bus market. In late 2021, we launched the first OEM MirrorEye program with DAF on our new XG platform.

With a flagship and award wining DAP XG+ platform features both our MirrorEye and CornerEye systems as well as our fully configurable digital instrument cluster.

The XG has been recognized as an industry leader for its innovative technologies, and we are proud to support DAF as they make MirrorEye, the industry's best camera mirror system available on an OEM platform for the first time. The responsible market for this system is quite strong.

Based on current customer forecast, we are expecting the take rate from MirrorEye to be at least 35% on the new vehicles as DAF transitions to full production on the new XG platform over the course of 2022. This take rate is currently limited by supply chain constraints.

Despite these constraints, this is more than double the originally quoted take rate and provides a meaningful upside to our expectations for this and other European MirrorEye OEM programs.

Similarly, while our first launch in North America is not expected until the middle of 2022, the initial market reaction from prelaunch activities and our continued retrofit expansion suggests that we should see strong take rates for the North American OEM system as well.

That said, consistent with our historical cadence, we will continue to utilize customer forecast and take rates in our backlog calculations, while noting that incremental take rates represent upside to the base case scenario. Additionally, this morning, we are announcing partnerships to make MirrorEye available on several OEM bus platforms.

First, we are announcing a partnership with Iveco that will make MirrorEye available as an option on their new Urbanway bus platform.

Similarly, we are announcing a partnership with Marco Polo to introduce MirrorEye as an option on the new G8 bus and our partnership with Quantron to make MirrorEye standard on the new platform, the Cizaris, a fully electric city bus starting in production in 2022.

In North America, we continue to expand our retrofit programs driven by growth with existing customers as well as partnerships with new customers. We believe that the ramp-up of MirrorEye systems in both the OEM and retrofit market has hit an inflection point.

Our continued expansion with industry-leading fleets and OEMs as well as the strong initial market reaction to the first OEM production system are all strong indicators of future performance for the product. Our investment in the MirrorEye platform is beginning to pay off and contribute meaningfully to the financial performance of the company.

Turning to Page 7. Our backlog of awarded business has grown significantly over the last year. Our top line profile remains strong with opportunity to grow as MirrorEye continues to expand. Our 5-year backlog at the end of 2021 grew by 13% over the same time last year.

This strong growth was driven primarily by continued new program ramp-up and expansion of our powertrain actuation programs, MirrorEye and digital driver information system programs as well as the new program awards related to our Smart 2 tachograph.

As a reminder, our backlog includes only awarded programs over a 5-year period at forecasted third-party volumes and quoted take rates. As we've outlined several times, incremental MirrorEye penetration rates could have a significant positive impact on our backlog. Our current 5-year backlog of almost $3.4 billion represents a 5.8x of 2021 OEM sales.

Turning to Page 8. We are updating our long-term revenue target to reflect current market conditions and updated expectations for the next several years based on our strong backlog. From a midpoint of $880 million expected in 2022, we are anticipating another year of strong growth in 2023.

Based on current production forecast, we are expecting approximately $1 billion of revenue in 2023 and over $1.25 billion of revenue in 2026, which implies a compound annual growth rate of over 9% through 2026. This represents approximately 4x market growth over that same period.

Our long-term revenue targets include OEM MirrorEye programs and customer quota take rates and a modest amount of annual retrofit systems through 2026. As I discussed previously, we believe that we are at an inflection point in the potential for MirrorEye.

Incremental take rates could drive revenue up to $1.45 billion in 2026 based on full penetration of the system for the currently awarded OEM programs. While we don't expect that MirrorEye will be standard equipment on every platform by 2026, we do expect that take rates will continue to improve as more customers see the benefit of the technology.

Our long-term strategy has resulted in a growth profile that far exceeds the market and positions us for consistent strong growth over our 5-year plan. Turning to Page 9. We are also updating our long-term EBITDA margin target to reflect our improved long-term revenue target as well as current market conditions.

As a result of our expectations of strong top line growth and the continued margin expansion strategies we have in place, we are targeting a 14% EBITDA margin or approximately $175 million of EBITDA based on $1.25 billion of revenue by 2026.

Before we talk about the drivers of our expected EBITDA margin expansion, it's important to understand the impact that the current macroeconomic conditions have had on our long-term EBITDA margin targets. As I outlined previously, this year, we experienced almost $17 million of incremental supply chain-related costs.

We have contractual price downs in most of our OEM contracts, which in most years, we aim to at least offset every year with deflationary and material buys and productivity in our facilities.

Overall, we estimate that the impact of unmitigated price downs and incremental material costs over the last 2 years have created an estimated $40 million headwind to our prior EBITDA margin targets or 320 basis points on revenue of $1.25 billion by 2026.

The midpoint of our 2022 guidance implies a 5.5% EBITDA margin for 2022 on midpoint revenue guidance of $880 million.

Based on our 2026 target of $1.25 billion as well as our expectation of continued contribution margin of 25% to 30%, we expect that incremental revenue and continued leverage on our existing fixed cost structure will drive EBITDA margins to over 12.5% by 2026.

While nothing has structurally changed in our long-term margin expansion strategy, the opportunity to expand margin up to and beyond our 14% long-term target depends on our ability to implement pricing and material cost recovery strategies.

Finally, we expect that outperformance of our revenue target, particularly related to MirrorEye OEM and retrofit expansion, could lead to incremental margin expansion aligned with our strong contribution margins.

Despite the challenges of the last 2 years and continued short-term challenges in 2022, we remain committed to our long-term strategy and expect revenue growth that will significantly outpace our underlying markets and resulting EBITDA margin expansion to drive substantial value creation going forward. Turning to Page 10.

In summary, despite the variety of challenges we faced in 2021, I'm proud of the Stoneridge team. We were able to continue to execute on our long-term growth strategy and set the stage for a successful 2022 and beyond.

We remain focused on protecting our margin through cost and price recovery actions, while supporting our customers as they launch and ramp up vehicles and platforms with our systems.

Looking beyond 2022, supported by continued backlog growth of 13% this year, we are targeting $1.25 billion in revenue by 2026, suggesting 4x market growth over the next 5 years.

We expect that this level of growth, combined with our continuous improvement initiatives and specific strategic priorities will drive EBITDA margin expansion to our long-term target of 14% by 2026.

Hereon in particular, provides a path to outperform these targets based on continued expansion of our retrofit programs and strong take rate for our OEM programs. At Stoneridge, we will continue to capitalize on market opportunities and execute our strategies to deliver shareholder value through long-term profitable growth.

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

Thanks, Jon. Turning to Slide 12. Adjusted sales in the fourth quarter were approximately $184.7 million, an increase of 1.7% relative to the third quarter. Adjusted operating income was negative $7 million or negative 3.8% of sales.

More specifically, Control Devices' adjusted sales were approximately $78.6 million, which was a decrease of approximately 7.4% compared to the third quarter, resulting in adjusted operating income of $4.1 million or 5.2% of sales.

Electronics adjusted sales of $96.5 million increased by 15% compared to the third quarter, resulting in adjusted operating income of negative $4.7 million or negative 4.9% of sales. Stoneridge Brazil sales of $14 million decreased 15.1% compared to the third quarter, resulting in adjusted operating income of $300,000 or 2.5% of sales.

This morning, we are establishing guidance for our 2022 financial performance. We are guiding 2022 adjusted sales to a midpoint of $880 million, implying an increase of approximately 17% versus our 2021 revenue.

It is important to note that our 2022 guidance includes our view on current market conditions, including the potential impact of continued global supply chain disruptions and current production forecasts, both of which have been volatile over the second half of 2021. We are expecting continued material cost challenges, particularly early in the year.

Our revenue guidance includes price increases to offset incremental material costs and adjustments to our contractual annual price downs to reflect current macroeconomic conditions. Despite continued pressure on gross margin, we are expecting to leverage our existing cost structure to drive margin expansion on substantial growth.

We are guiding adjusted gross margin to a midpoint of 22%, adjusted operating margin to a midpoint of 1.25% and adjusted EBITDA to a midpoint of $48.5 million or 5.5%.

Given the continued expectation for unusual mix of earnings in 2022 rather than guiding to an effective tax rate, we are guiding to a midpoint tax expense of approximately $3.5 million. This is based on our current expectations of earnings and utilization of tax credits based on the geographic mix of those earnings.

As a result, we are guiding to a midpoint adjusted earnings per share of negative $0.03 for 2022. I will provide additional color on the drivers of expected sales and adjusted earnings per share performance later in the call. Turning to Page 13.

On our third quarter earnings call, we guided our fourth quarter EPS to a midpoint of negative $0.16 with an expected revenue midpoint of $188 million.

As a result of continued production volatility, particularly with our North American passenger car customers, adjusted revenue in the fourth quarter was $180 million, resulting in a $0.04 headwind relative to our previously provided guidance. Additionally, foreign currency impacted our quarterly results unfavorably by $0.02.

During the quarter, our ability to recover historical supply chain-related costs and offset current costs outperformed our expectations, driving a $0.02 improvement relative to our previously provided guidance.

Similarly, despite continued volatility in North America, we were able to improve our manufacturing-related costs by $0.04 relative to prior guidance. Our ability to neutralize and recover supply chain-related costs and drive improvement in our facilities, approximately offset the volume and currency-related headwinds in the quarter.

We expected to receive a significant engineering recovery for work previously completed for one of our OEM customers, which was not received within the quarter. This resulted in a $0.09 headwind relative to prior expectations.

We expect to receive the customer-funded engineering reimbursement in 2022, and that reimbursement has been included in our guidance that I will discuss later in the call. Our fourth quarter performance, particularly related to net supply chain recoveries and manufacturing performance provides a solid foundation for continued improvement in 2022.

Page 14 summarizes our key financial metrics specific to Control Devices. Control Devices' full year adjusted sales were approximately $344.4 million, an increase of 1.5% compared to 2020. The increase in sales was due to incremental revenue from new programs, partially offset by supply chain-related downtime and volatile OEM production schedules.

Full year adjusted operating income decreased by approximately $5.2 million versus 2020, which resulted in $23.9 million for the year or 6.9% of sales. Operating income was significantly impacted by supply chain-related costs, which reduced full year operating income by an estimated $6.9 million.

Excluding the impact of supply chain-related costs, we estimate that Control Devices operating margin would have been 8.9% relative to 8.6% in the prior year on similar revenue.

Similar to portfolio actions taken in prior years, in the first quarter of 2021, we divested the soot sensor business to better align our resources with future growth opportunities, particularly related to electrified powertrain actuation.

In 2021, we launched several key programs such as the Park-by-Wire program featured in several electrified vehicle platforms. These programs launched on critical platforms for our customers, including the Ford Mach-E platform, which is expected to significantly increase production through 2023 based on strong market demand.

Stoneridge's content on the Mach-E platform is only the start of our capitalization on the market shift towards electrified vehicles. We will continue to invest in the development of programs and product platforms that are targeted to electrified applications and drivetrain architectures.

We expect to launch this product and additional platforms in 2022, which will drive future growth for this segment. In 2022, we expect Control Devices sales and operating margin to improve relative to 2021 as we take advantage of incremental volume. Page 15 summarizes our key financial metrics, specific to Electronics.

Electronics full year sales were approximately $366.5 million, which was an increase of approximately 30% compared to the prior year, primarily driven by the continued ramp-up of several key program launches, including large programs related to our digital driver information systems.

We expect continued strong growth in 2022 as we ramp up our MirrorEye OEM and retrofit programs and expect strong production by our commercial vehicle customers. Operating margins were significantly negatively impacted by incremental costs related to supply chain disruptions, material cost increases and production volatility.

We estimate that these costs impacted profitability by $11.9 million in 2021 and created a 340 basis point headwind for the segment's margin. In addition to supply chain-related costs, Electronics margin was negatively impacted by the required engineering spend to support our current and future product launches.

Looking forward, we will continue to invest to develop and innovate around our current product platforms such as MirrorEye, a program that is already seeing very promising take rates and expansion in several markets.

As supply chain headwinds persist, we are confident that our Electronics division will execute to overcome these disruptions in order to meet the significant incremental demand we expect from our customers in 2022.

As a result, we expect that Electronics margin will expand in 2022 and are expecting above breakeven operating income for the segment this year.

Electronics is well positioned to take advantage of significant future growth and margin expansion as a result of a strong product portfolio, a substantial backlog of awarded programs, a focus on a more efficient long-term cost structure and continued expansion of our opportunities related to the MirrorEye platform.

Page 16 summarizes our key financial metrics, specific to Stoneridge Brazil. Stoneridge Brazil's full year sales totaled approximately $56.8 million, an increase of $9.1 million or 19.1% relative to the prior year despite a revenue headwind of approximately $3 million related to unfavorable FX movements.

Full year adjusted operating income increased by approximately 290 basis points or $1.8 million relative to the prior year despite a $200,000 headwind related to currency rates. This was primarily driven by lower SG&A costs and fixed cost leverage on higher sales, resulting in an adjusted operating margin of 9.1%.

Despite continued macroeconomic challenges in Brazil, we expect revenue and operating margin to remain stable in 2022 due to the continued ramp-up of OEM launches and growth in the track and trace business to offset reductions in demand for aftermarket products in the region.

We remain focused on utilizing local engineering resources to support our global electronics business as we continue to focus on a more cost-efficient global engineering footprint. Turning to Page 17. Net debt increased by $2.1 million in the fourth quarter, resulting in net debt of $83.7 million or 3.5x trailing 12-month adjusted EBITDA.

As we have discussed previously, we expect significant improvement in our overall financial performance in 2022 as we continue to offset a substantial portion of our supply chain-related costs by working closely with our customers and suppliers.

That said, we expect continued headwinds in the first half of 2022, resulting in relatively lower trailing 12-month EBITDA. As a result, we worked with our bank group to amend our existing credit facility and provide the company with the financial flexibility needed to continue investing in the business to drive and support future growth.

The amendment, which extends through the first quarter of 2023, raised our net debt leverage ratio to 4x in the fourth quarter of 2021, waives our leverage ratio for the first 3 quarters of 2022 and modifies the fourth quarter of 2022 to include a 4.75x leverage ratio.

The amendment concludes after the first quarter of 2023, returning to a 3.5x leverage ratio requirement. We believe that this amendment gives the company ample liquidity and flexibility to operate within a broad range of potential macroeconomic conditions.

As we move into 2022, we remain focused on efficient cash management to help return our leverage ratios to more normalized rates. We expect rapid improvement in our financial ratios as we move into the second half of 2022.

We expect that our net debt-to-EBITDA ratio will return to a more normalized level by the end of the year as we are targeting a leverage ratio under 2x. Similarly, due in part to volatility in our supply chain and production schedules for our customers, our net working capital levels increased significantly in 2021.

We are focused on reducing inventory as production normalizes and ensuring efficient working capital performance to drive cash generation in 2022. Through 2022, we will continue to strengthen our balance sheet, helping to provide a steady foundation that will allow us to capitalize on our long-term opportunities. Turning to Page 18.

We expect strong growth in 2022, driving midpoint revenue guidance to $880 million or 17% growth versus 2021. Based on current IHS forecast, we are expecting market production to drive approximately $60 million of growth year-over-year. Additionally, we are expecting more than 2x market growth, driven by our product portfolio.

Our specific growth opportunities include the continued ramp-up of our digital instrument cluster programs and our previously launched actuation programs, as well as the start of production for our first OEM MirrorEye program and continued expansion of our retrofit opportunities.

Similar to our reporting of adjusted results in the fourth quarter, the impact of spot purchases passed-through to customers is excluded from our guidance.

Finally, we are expecting incremental revenue based on our ability to recognize price increases from our customers to offset incremental material-related costs during the year, as well as a portion of our contractual annual price downs. We are targeting to offset approximately 80% of forecasted incremental material cost and contractual price downs.

We are expecting first quarter revenue of approximately $195 million to $200 million, followed by second quarter revenue of approximately $215 million as production continues to stabilize and ramp-up through the first half of the year. Despite continued volatility, we are expecting extremely strong revenue growth in 2022.

Page 19 summarizes our expectations for full year adjusted earnings per share in 2022 relative to 2021. We are expecting strong contribution margin on roughly $108 million of net non-price revenue growth in 2022, resulting in just over $1 of incremental adjusted EPS.

As I outlined previously, we are targeting to offset approximately 80% of incremental material cost and contractual price downs, resulting in a net headwind of approximately $0.18 in 2022.

Similar to the fourth quarter, we expect to continue to drive improved performance in our manufacturing facilities and estimate the impact of operational improvement to be approximately $0.10.

This includes the beneficial impact of continued stability in production schedules and reduced overtime, as well as continuous improvement activities primarily related to better leveraging our fixed overhead. Partially offsetting the incremental EPS is the normalization of our annual incentive programs and wage and benefit increases in 2022.

At targeted performance for our incentive compensation programs and inflationary wage adjustments, we expect this to create a $0.34 headwind.

As outlined previously, we are expecting reimbursement for historical engineering expenses in 2022 that were previously expected in the fourth quarter of 2021, as well as continued focus on a more cost-efficient engineering footprint to result in a $0.20 benefit relative to last year.

Additionally, our guidance includes a reduction in equity earnings in 2022, primarily due to the divestiture of our stake in the MSIL joint venture in late 2021 as well as incremental interest expense based on current debt levels.

Finally, as outlined previously, our guidance includes a total tax expense of between $2.5 million and $4.5 million, creating an incremental $0.13 headwind for the year at the midpoint relative to our adjusted tax expense in 2021.

As a result, we are expecting adjusted EPS of between negative $0.15 and positive $0.10 in 2022 or midpoint adjusted EPS guidance of negative $0.03. Similar to our expectations of revenue growth over the course of the year, we expect that adjusted EPS will follow a similar cadence.

Despite our expectation of strong incremental contribution margin and increased revenue in Q1, we expect a $0.05 to $0.07 decline in Q1 adjusted EPS relative to Q4 2021.

This is primarily driven by incremental wage and incentive compensation and our expectation that incremental material costs will be more heavily weighted to the first quarter before we expect price recovery actions to reduce the net impact of these costs in the second quarter and even more substantially in the second half.

We expect second quarter adjusted EPS to improve but remain below breakeven with a significant improvement in performance from the second to third quarter and sustained performance throughout the second half as our expectations of price recoveries, reduced material costs and incremental volume support strong margin expansion.

We expect that our run rate performance by the end of 2022 will provide a solid foundation for significantly improved financial performance in 2023, as we expect approximately $1 billion of revenue, continued contribution margin at the high-end of our target range and the ability to leverage our existing cost structure to drive margin expansion.

Moving to Slide 20. We have continued to execute on our long-term strategic plan focused on long-term profitable growth. We remain well-positioned to significantly outgrow our underlying markets and achieve our 2026 revenue target of $1.25 billion.

Our contribution margin on incremental revenue and our ability to leverage our existing fixed cost structure, provide a strong foundation as we target a 14% EBITDA margin by 2026. As always, driving shareholder value is at the forefront of all Stoneridge's strategic initiatives. With that, I will open up the call to questions..

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

So maybe to start with the supply chain. Obviously, a lot of moving pieces.

But when you just kind of step back and look at things from a high level, could you comment on the sequential progression of the supply chain as we've kind of moved from the fourth quarter into the first quarter? And maybe what's baked into the guidance for 2022 for that sequential progression on a quarterly basis?.

Yes. Thanks for the question, Justin. There's obviously a lot of moving pieces to the supply chain dynamics and how that impacts the financial performance. We do expect that we're going to incur incremental material costs moving from 2020 to 2021 -- I'm sorry -- from '21 to '22.

That said, we do expect to be able to offset a significant portion of those costs, like we said, about 80%, and that's what's been included in the guidance. So sequentially, we are seeing incremental -- certainly incremental costs and a little bit of incremental net headwind as well as we move into 2022..

Okay. And the cadence that you gave on the guidance was really helpful, but there's a lot of noise below the line that's impacting EPS. Is there any way you could share kind of what you're expecting in terms of the cadence of EBITDA and EBITDA margins through the year? Because to your point, I think we're going to exit this rate at a much higher rate.

And I just wanted to get a sense for what you're expecting in the guide..

Yes. So Justin, we expect, obviously, a similar cadence for EBITDA. There is a little bit of noise below the line, particularly as you look at comping year-over-year.

You got to remember the equity interest in MSIL will come out as a comp, and we'll have a little bit of incremental interest expense as well when you look at the year-over-year net debt profile certainly in the beginning of the year.

EBITDA will follow a similar pattern, though, where we expect stabilization and improvement from Q1 to Q2 with a pretty significant ramp-up and a fairly stabilized number as we head into the second half of the year. So you can expect that EBITDA will follow a fairly similar pattern to the adjusted EPS cadence that I outlined..

Okay. And just last one quickly on MirrorEye.

Anything you can share on the contribution from a revenue perspective that's getting baked into the 2022 guide?.

So Justin, well, we talked about good news with regard to take rates and continued expansion. What we have put in our guidance is we've put at this point, the contractual take rates because it's early days with -- what we gave you on the feedback from the OEM program is early days. So what's in our guidance is the contractual take rates.

So we expect to see that trend positively over the next couple of months. But what we put in the guidance is the contractual side.

As we've also talked about, we've got -- continue to see expansion from a retrofit perspective, we have a couple of thousand systems that are in there from a guidance standpoint on the retrofit side, and we see opportunities to expand that as well.

So when we talk about being at an inflection point, if we put together the guidance, we wanted to be sort of middle of the road with regard to the guidance, but we see opportunities when we talk about the inflection point from MirrorEye..

Okay. Great..

And your next question comes from the line of Scott Stember from CL King..

Just looking at the different segments and relating it to '22 guidance, the Electronics segment, it looks like that will probably be one of the reasons why you're still -- I guess, the midpoint of earnings is around breakeven-ish.

And you've talked in the past about, I guess, upgrading some base technologies that seems to have been sped up by some of the OEMs.

And I'm just trying to get a sense of how -- what's holding that back? And when would you expect the Electronics segment to really turn to material profitability? Are we talking 2023? I know you're not guiding that far out, but just trying to get a sense of whether in '22, at least the run rate in the back half of the year should be materially positive..

Yes. So Scott, it's a really good question. I think it's important to understand that when you talk about material cost headwinds, most of those flow through Electronics, right? It's not balanced between the 2 divisions.

Secondly, when we talk about the investing in resources to launch new programs, much of that is also flows through Electronics with all the engineering that's being done to launch the MirrorEye platform, the Smart 2 Tachograph. And historically, over the last 18 months to launch the digital driver information systems.

So when we talk about the inflection point from MirrorEye and we talk about the ramp-up of those programs, what you see is we've been spending the engineering resources in advance of the ramp-up of the revenues, and that division has -- or that segment has seen the far and away, the greatest impact from a material cost inflation perspective.

So while none of us are thrilled with showing the charts that we talked about with regard to Electronics, what we see is and is what we've talked about in each of these quarterly reviews, we have to continue to invest because it's the division that's driving the outsized growth.

And while both sides are going really well, it's the one that's driving outsized growth. And on both sides, we need to invest -- continue to invest in the engineering resources to get us to that $1.25 billion and beyond..

Yes. And I would add to that, Scott. While we may not be thrilled with the current year financial performance, if we look at the chart, I will say we are thrilled with the ROIC that, that generates in the future. We've talked about a lot the fact that we really focus on ROIC and the way that we think about investing in resources.

When you look at that backlog growth and you look at the long-term revenue growth profile of the company, there's a lot of expansion coming from the Electronics activity that we've invested in over the last several years.

We're starting to see some of that MirrorEye investment pay off even earlier with take rates that are improved and really strong performance in the retrofit market. So as we talked about in the past, the investment will always precede the ROIC, and we're starting to see the benefit of our RIC as we ramp-up this inflection point for Electronics.

I think to your point, it's also important to remember that the run rate coming out of next year as we see some of these material costs start to subside and the ability to offset them and have a reduced net impact, that will impact Electronics more so than certainly than the other segments because that's where the most of the headwind is coming particularly in the beginning of the year..

Got it. And just to be clear, when you guys talk about 80% recovery of -- covering of, I guess, overall supply chain-related costs, I know you guys have talked about 2 different buckets, I guess, more stuff that's related to spot buys and expedited freight and then the other part is inflationary.

Are you talking about everything all together?.

Yes. Great question, Scott. So this is a really important part of our guidance. The recovery of spot buys that are passed through to customers are included in our actual sales but not in our adjusted sales. So the guidance assumes that we will continue to pass-through a significant portion of those spot buys as necessary as we move through the year.

So the headwind that we're talking about and frankly, the offset that we're talking about in the guidance is more related to more durable material costs and inflationary increases and offsets rather than the spot buy activity that we expect to continue to pass-through substantially to our end customer..

Got it. And then just last question on MirrorEye. The -- I guess, you're expanding your partnerships on the bus side over in Europe. Maybe just give us a timeline of when that will start materializing and hitting the P&L. Is that similar to normal OE type of business? Or is this more like of a retrofit kind of thing where it happens right away..

Yes. It's OE programs, but it doesn't have the same sort of development cycle as we do with the commercial vehicle OEs. So there's $10 million worth of revenue in -- roughly in 2022 for this. We've talked about MirrorEye as a platform for a long time, Scott. And what we said is we needed to get through the development.

We need to make sure that we launch the first programs right and then we could expand on it. Here is an example of where we're living up to that commitment of doing the expansion.

So the synergies between our retrofit activities, the commercial vehicle OEM programs and the bus programs, we continue to drive those synergies and there'll be additional end markets where we can see expansion. But the bus program has, like I said, about $10 million worth of revenue in 2022..

[Operator Instructions] We have our next question coming from the line of Gary Prestopino from Barrington Research..

Just want to understand some of these guidance buckets here. Your 2022 sales guidance, the $71 million specific growth to Stoneridge would really pertain to the program launches that you highlight in bullet point 2.

Is that correct?.

Yes, that's right, Gary.

What we try to do is break apart what you see just on pretty strong production in our end markets, but also the fact that we expect to outperform that by almost the same amount or by actually a little bit more due to exactly like what you said, ramp-up of programs that we launched last year and new program launches this year..

Okay. And then the IHS production forecast of $61 million, obviously, kind of a leading question here. This IHS production forecast was developed before this war shot off in Ukraine.

Have you taken into account in any of your projections here, the possibility -- I guess, the strong possibility of some IHS production forecast declines because we're already here and that the supply chain, particularly with the European manufacturers is really starting to turn negative here just because of what's going on in Europe..

Yes. So Gary, the answer is no. We haven't taken that into account yet because it's our -- the basis for this guidance is based on January 2022 HIS..

Okay..

But let me qualify a couple of things. One, it's important to remember the split between commercial vehicle and passenger car within Stoneridge. Secondly is remember that we have very little European passenger car exposure.

So our -- when you start talking about the impact in Europe, particularly with vehicle sales, you're talking about -- in 2021, European pass car was 1.3% of our sales..

Okay..

So commercial vehicle is a bigger portion in Europe. But from a European standpoint, it's quite European pass car very, very small. So we watch it closely. We're watching the impact from a supply chain standpoint, but we are -- at this point, we don't have a huge exposure to the European pass car production..

Okay. And then you talked about the -- what you're doing for the -- I guess, it's the Mustang Mach-E. Is that correct? You talked about the actuation side..

Yes. That’s right..

Could you maybe just give us some other specific models where your -- maybe your actuation programs are also going to be driving growth on electrified platforms for this year?.

So obviously, we can't talk about stuff that hasn't yet been launched, Gary..

Okay..

So we're on the Mach-E, which is in production, we're on the Chevy Bolt, which is in production. What you can imagine is platforms with customers, there's commonality, but we can't talk about the other -- the other vehicles that we would be on until they are launched..

Okay. All right. But suffice to say, you are on other platforms that are going to launch in 2022..

Yes, that's right..

We're -- I mean the Control Devices team has done a fantastic job, developing the right products for the future state. We've talked about it with regard to getting ourselves being modded-force-agnostic and rotating out of things that are solely exposed to internal combustion engines. That's why we got out of it.

It's why we had the other portfolio changes that we've made in the engineering team and the commercial and strategy team within Control Devices has done a fantastic job of getting us positioned to grow with EV and hybrid powertrains. I'm really proud of what they're doing..

Okay. And then just lastly, on Slide 9, where you go through your long-term EBITDA target.

Is that 14% number that you're looking for? Is that if everything goes right in your long-term plan? Or you feel very strongly about the 12.5% baseline?.

So no, Gary. It is not if everything goes perfectly. What we wanted to do is give you an idea of how much -- first of all, how incremental the amount of revenue growth that we're expecting can be on the EBITDA margin expansion, given our expectation of strong -- continued strong contribution margins.

So in my mind, that's just the floor for what we should expect going forward based on that really strong revenue growth. The material cost recovery, improved manufacturing efficiency and a more cost-efficient overall structure is what allows us to get to our target.

And I think what you -- when you think about what Jon said, getting to and increasing over our target is really based on our ability to, first of all, get back on the curve when you think about the relationship between material costs and contractual annual price downs as we move forward.

It's a really important thing to remember that in a normal year, we expect -- first of all, we have contractual annual price downs, and we expect to at least offset those price downs through supply chain strategy and productivity in our facilities.

Over -- obviously, in 2022, as we outlined in the guidance and certainly last year, not only weren't we able to get -- to mitigate those contractual low price down, we had significant incremental material related costs. So you've got a pretty substantial net headwind when you think about long-term margin targets.

Our ability to negotiate those longer term relationships is what helps us get back to or exceed that long-term target.

So it's not -- if everything goes perfect, it's a reasonable target based on the way that we see both our current revenue opportunity and the contribution margin associated with that, as well as some very specific strategic plans to expand our margin..

And I am showing no further questions at this time. I would now like to turn it back to Mr. Jon DeGaynor for further comments. Please go ahead..

Thank you, and thank you, everybody, for your participation in today's call. In closing, I just want to reassure you that our company is committed to driving shareholder value through strong operating results, profitable new business and focused deployment of our available resources.

Our management team will respond efficiently and effectively to manage and control the variables that we can impact and continue to drive strong financial performance. We're confident that our actions will result in continued success for 2022 and beyond..

And this concludes today's conference call. Thank you all for participating. You may now disconnect..