Good day, and thank you for standing by. Welcome to the Stoneridge Fourth Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

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

Good morning, everyone and thank you for joining us to discuss our fourth quarter and full year 2023 results. The release and accompanying presentation was filed with the SEC and is posted on our website at stoneridge.com in the Investors section under Webcasts and Presentations.

Joining me on today's call are Jim Zizelman, our President and Chief Executive Officer; and Matt Horvath, our Chief Financial Officer. During today's call, we will be referring to certain non-GAAP financial measures.

Please see slide 2 for a more detailed description of these non-GAAP measures and in the appendix -- in the appendix for a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. In addition, I need to inform you that certain statements today may be forward-looking statements.

Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although, we believe 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-K which will be filed later this week with the Securities and Exchange Commission under the heading forward-looking statements. After Jim and Matt have finished their formal remarks, we will open up the call to questions.

And with that I will hand the call over to Jim..

Thank you, Kelly and good morning, everyone. Let me begin on page 4. I am extremely proud of our progress in 2023. We delivered on our financial commitments throughout the year driven by an unwavering focus to both execute our long-term strategy and drive continuous operational improvements.

Although, the supply chain environment continued to improve, the transportation industry continued to face many challenges throughout the year including the UAW strike, higher interest costs and the slower than expected penetration rate for electric vehicle platforms.

However, by focusing on the execution of our major program launches, continuous improvement in our manufacturing facilities and the execution of operating expense initiatives to both reduce cost and improve efficiency, we were able to navigate through these challenges.

And as a result we achieved full year sales, operating performance and adjusted EPS in line with the expectations we set forth at the beginning of the year. And we're not done yet.

Throughout this process, we've identified multiple areas for further improvement and expect our efforts to continue to drive long-term profitable revenue growth and significant earnings expansion going forward. I will discuss some of our key priorities for 2024 in further detail later in the call.

Our fourth quarter adjusted EPS of $0.12 was in line with the expectations we outlined in the third quarter call and is a $0.02 sequential improvement compared to the third quarter and Matt will provide further detail on the fourth quarter results later in the call. We continue to focus on product platforms that will drive future growth.

In 2023, we continued to build momentum with our MirrorEye programs with continued strong take rates with the DOT program in Europe and the launch of our first OEM program in North America with Kenworth.

Earlier this week, we announced our next program will be a luncheon with Volvo in Europe midyear and will be our largest program based on the current expected take rate of approximately 45%. In addition, we will also be launching with Volvo in North America in 2025.

Also earlier this month, we announced the extension of our FMCSA exemption for an additional five years, which will allow our North American fleet partners to remove their traditional mirrors on MirrorEye equipped vehicles. And finally today, we are announcing retro-fit expansions with several new fleets.

And I'll provide a more extensive mirror update MirrorEye update later in the call. In 2023, we also launched our next-generation tachograph the Smart 2 that provides incremental capabilities to conform with the most recent EU mobility package standards.

As mentioned on previous calls, both the OEM and aftermarket retrofit channel provides significant growth opportunities for Stoneridge over the next several years.

And this morning, we are updating our long-term financial targets to include our strong OEM backlog, aftermarket, and non-OE growth opportunities and substantial margin expansion through our five-year plan.

Our five-year awarded business backlog of $3.5 billion supports a five-year compound annual growth rate of almost 10% based on our midpoint targets. This results in midpoint targeted revenue of $1.45 billion, targeted midpoint EBITDA margin of 13%, and targeted midpoint EBITDA of $190 million by 2028.

Page 5 summarizes our key financial metrics for the full year 2023 compared to the prior year. We started the year with a challenging first quarter due to the lingering effects of the supply chain constraints and material cost headwinds.

In response, we focused on driving gross margin improvement and successfully negotiated customer price increases, resulting in adjustments both retroactively and related to sales going forward.

In the second half of the year, we navigated through the impact of the UAW strike which in total reduced sales by approximately $6.4 million, operating income by approximately $2.1 million, and adjusted EPS by approximately $0.05. Finally, below-the-line FX and non-cash reductions in equity earnings reduced EPS by an additional $0.05.

Excluding the impact of these items which are not expected to recur, adjusted EPS would have been above breakeven for the full year.

Despite these macroeconomic headwinds, we were still able to deliver on our financial commitments through price increases aligned with increased material costs, careful cost control, and the efficient use of engineering resources to ensure our new products launched on time.

Overall, we have made significant progress toward our long-term goals in 2023, but we also know there's so much more work that we can and will do to further enhance our performance. We achieved full year 2023 adjusted sales of $961.2 million or 14.2% growth compared to the prior year.

This growth was driven by improved customer production volumes and Stoneridge specific growth drivers including the launch and continued ramp-up of our MirrorEye OEM programs, the launch of our next-generation tachograph and despite less vehicle production than we originally expected the growth of actuation programs on electrified vehicle platforms.

Full year adjusted EBITDA margin improved by approximately 150 basis points and $18.3 million versus 2022. And Matt will provide additional detail on our segment level performance later in the call. Now, turning to Page 6.

MirrorEye continued to gain momentum in 2023 as we continued to ramp up production of our previously launched OEM program in Europe with Duff, launched our first North American OEM program with Kenworth, and continued to expand our retrofit and bus applications.

MirrorEye revenue grew by $20 million in 2023 to over $50 million and is expected to almost double in 2024 to approximately $100 million. As mentioned earlier on the call, our next MirrorEye OEM program will be launching with Volvo in Europe midyear on the Volvo FH Aero.

Based on customer communicated volumes we expect the program to have a take rate of approximately 45%.

Volvo has highlighted MirrorEye on the new FH Aero truck focusing on the system's ability to improve the aerodynamics of the truck to save energy and reduce carbon footprint as well as a significantly improved field of view in both good and poor weather conditions.

The North American portion of this award is set to launch in early 2025 on Volvo's all new VNL truck, which marched the North American OEM debut of MirrorEye's independent wing design, which separates the system from the traditional mirrors.

The Volvo MirrorEye programs in Europe and North America combined are currently estimated at over $60 million of peak annual revenue making, this again our largest OEM program to-date. These program launches mark yet another step in Stoneridge's journey to provide industry leading safety and efficiency technologies.

In North America, we are focused on the continued ramp up of the Kenworth program and the launch of the second nameplate Peterbilt, which has which is expected to occur in the middle of the year.

We continue to work with our customers and their dealership networks to reach their end customers to drive awareness of the system with the ultimate goal to drive take rate expansion. Overall, we are expecting total MirrorEye OEM revenue to at least double to approximately $65 million in 2024.

Earlier this month, we announced at FMCSA, an agency of the US federal government grant of Stoneridge a five year extension of our MirrorEye exemption which will allow our US-based fleet partners to maximize the safety and fuel economy benefits of the MirrorEye system by fully removing the traditional mirrors on MirrorEye equipped vehicles.

These benefits include enhanced real-time visibility from nearly every angle of a commercial truck, which can reduce the frequency and severity of accidents, as well as increase in the fuel savings of approximately 2% to 3%, when the traditional mirrors are removed.

This fuel savings translates to approximately 5000 pounds [ph] of CO2 reduction annually per vehicle and aligns with the sustainability goals of Stoneridge, our customers and the fleets. Furthermore, we continue to expand our retrofit applications.

Today, we are announcing three additional fleet partnerships with PS logistics, Stokes Trucking and Cargo Transporters. These fleets understand the significant safety and fuel economy benefits of MirrorEye and have committed to equipping all of their long-haul trucks with MirrorEye over time.

Together, these three fleets have approximately 4,300 long-haul vehicles on the road. In addition, we expect our MirrorEye bus applications to expand in North America and Europe in 2024, resulting in approximately $35 million of non-OE MirrorEye revenue.

Our investments in the MirrorEye platform, continues to drive year over year growth, strong take rate expectations and continued momentum across our end markets and applications.

We will continue to invest in the technologies and the adjacent product opportunities to optimize our position in the market and drive technology innovation, improve safety, efficiency and driver retention for our customers. Turning to page 7.

Our long-term strategy focused on industry megatrends and drivetrain agnostic technologies continues to drive strong long-term growth prospects.

As we have reported in the past, our backlog is the estimated cumulative awarded sales for the next five years using current IHS estimates for production volume assumptions, current foreign currency rates and current pricing.

We have had substantive growth in our commercial vehicle five-year backlog, resulting in year over year growth of approximately 5%. In addition, several next-generation OEM commercial vehicle platforms are expected to launch between 2028 and 2030.

And as a result, we are expecting incremental award activity for next-generation platforms over the next two years that will impact the back half of the backlog period, including next-generation MirrorEye systems, driver information systems and controls and connectivity modules.

We expect that these systems will become increasingly more integrated into what would be called the cockpit of the future and we are preparing for potential programs that can integrate several of our system.

Market dynamics around electric vehicle adoption rates have impacted expectations for current electric vehicle programs and are influencing business award activity on the passenger vehicle side. Most OEMs are now considering a mix of drivetrains that favor more hybrids and internal combustion engines than what was originally expected.

Our drivetrain agnostic technology portfolio will permit us to respond effectively to enhance the back half of the backlog for control devices. While we continued to add our medium term backlog for 2025 through 2027, which grew by approximately 4% relative to last year.

Our overall backlog remained relatively flat, as we continued to pursue new program awards that we expect to impact the outer years. It should also be noted that more of our business is shifting to the aftermarket end markets, which we do not include in the backlog.

We have significant opportunity in our aftermarket channels between MirrorEye retrofit and bus applications, Mirroreye platform based products, such as the trailer technologies we've discussed previously and the Smart 2 tachograph and our lack of branded products as well.

Mirroreye OEM programs are included in backlog at our current customer volume expectations and this considers volumes based on customer expectations either at the time of award or updated based on actual program take rates or expectations.

We continue to expect that MirrorEye take rates on OEM products will improve, as the product becomes more widespread and additional OEM start offering the system and OEM applications. This also represents upside to the existing backlog.

We are committed to driving long-term profitable growth and we'll provide updates on business awards as new platform designs are solidified and business is awarded. Turning to Page 8.

We remain on track to achieve the 2027 goals we outlined last year at this time and we are advancing our long-term revenue and EBITDA targets by a year aligned with our existing backlog, continued opportunities in non-OEM channels and new business opportunities.

Our long-term strategy has resulted in a growth profile that is expected to outperform the market by more than five times over the next five years. From a midpoint of $1 billion expected in 2024, we are anticipating another several years of strong growth, driving our long-term revenue target up to a midpoint of $1.45 billion by 2028.

As we continue to focus on fixed cost leverage and gross margin improvements through material cost reduction and operational improvements, we expect revenue growth to drive significant EBITDA margin expansion. Based on our 2028 revenue target, we are targeting a midpoint EBITDA margin of 13%.

This EBITDA margin expansion will be driven by our expectation of continued contribution margin of 25% to 30%, a favorable mix, primarily aligned with growth in our aftermarket products and continued leverage on our operating cost structure as we scale.

Overall, Stoneridge is well positioned to significantly outpace our weighted average end markets and drive margin expansion and earnings growth through our long-range plan. Now turning to Page 9. We remain focused as a company to achieve our goals both in 2024 and going forward. One year into the CEO role, I am proud of what we have accomplished here.

We have delivered results consistent with what we promised. And as I've stated several times on this call, my focus remains on executing on our long-term strategy to drive sustainable performance and achieve our long-term targets as well. As we look forward to this year, we have a lot to be excited about.

Our 2024 revenue is expected to grow by 4%, while our underlying end markets are expected to decline by approximately 5%. To continue this growth, we are focused on leveraging our global footprint to service our global customers and win new business.

In Control Devices, we're focused on business development aligned with industry trends including growing our core product portfolio aligned with drivetrain agnostic technologies and product applications.

In electronics, we're focused on new product development, continued momentum with our existing products and technologies and continued expansion of our products into a more substantial platforms that will drive long-term sustainable growth.

We are focused on gross margin expansion through material cost improvement and enterprise-wide operational excellence.

Both our product line and program management organizations have been centralized, streamlined and redesigned to specifically focus on pricing, built-in quality, material cost improvement and manufacturing efficiency, we are focused on reducing fuel costs through engineering changes, supply chain strategy and continued conversations with our customers for the price of material relationship still requires attention.

As a result of these focused efforts, our midpoint guidance includes 140 basis points of gross margin improvement in 2024. We are also focused on leveraging our global footprint to maximize our capabilities and output.

Specifically, we are better utilizing our existing talent by refining our global engineering structure and investing in capabilities and capacity that will allow us to both expand margins and continue the pace of development that has fueled our backlog and forward growth profile.

Similarly, we took actions last year to centralize many of our global functions and drive synergies between our business units from both a cost and efficiency perspective. We will continue to evaluate and optimize our organizational structure.

And as a result of these actions, we expect 170 basis points of operating margin improvement in 2024 and continued strong growth going forward.

We are also focused on efficient cash generation, more specifically, historical supply chain challenges coupled with strong production forecasts have driven inventory levels that are greater than what we have had historically. We are focused on reducing inventory to improve working capital and generate more cash.

In some cases, this will take some time as we burn down the extra material we bought when supply chains were more volatile or when production volumes were estimated to be greater than the current views. In other cases, we're working to manage engineering changes and work with our suppliers to more quickly reduce the existing balances.

We are targeting an improvement in inventory over 2023 that would align us with our historical averages and provide a runway for continued improvement going forward. And finally, we're focused on efficient capital deployment, while maintaining an appropriate capital structure.

This includes prioritizing our organic investment opportunities with a focus on return on engineering and investing in technology to develop new products for customers that will facilitate future growth. In 2024, we are targeting approximately $40 million of capital focused, primarily on supporting organic growth initiatives.

Each of our segments plays a critical role, in helping us achieve our long-term targets. I am committed to continuing to execute on the long-term plan that Stoneridge has in place and driving our company-wide priorities to achieve our goals.

Given our focus, we will execute at a high-level, resulting in strong margin expansion and growth that will continue to outpace our underlying end -markets.

Now turning to Page 10 and in summary, we remain focused on implementing our long-term strategy to drive sustainable profitable growth by focusing on technologies that are Drivetrain Agnostic, winning business in critical growth areas and expanding on our existing opportunities.

As evidenced by our progress made this year, this team is focused on strong execution and careful cost control, to continue to drive margin improvement. The actions we took, resulting in a successful 2023 and we look forward to continuing that momentum with top line growth above market and earnings expansion in 2024.

Now with that, I'll turn it over to Matt, to discuss our financial results and guidance in more detail.

Matt?.

Great. Thank you, Jim. Turning to Page 12, as Jim mentioned earlier on the call, we are proud of the progress we made last year. In the fourth quarter, we delivered on our previously provided EPS expectations, driving sequential improvement of $0.02 from the third quarter to $0.12 in the fourth quarter.

Adjusted sales were approximately $229.4 million, a decline of 3.3% relative to the third quarter. This was primarily due to the incremental impact of the UAW strike of approximately $5.5 million in the quarter as well as the continued softening of demand for Electric Vehicles relative to prior expectations.

Fourth quarter adjusted operating income was $6.2 million or 2.7% of adjusted sales, a decline of approximately 40 basis points versus the third quarter.

This was due in part to the incremental impact of the UAW strike of $2 million over the third quarter, as well as continued costs related to the distressed supplier we discussed during our last call of approximately $1.1 million. Adjusted EBITDA for the quarter was $15.6 million or 6.8%.

Turning to page 13, on our third quarter earnings call, we guided fourth quarter adjusted EPS to a range of $0.10 to $0.20 with an expected revenue midpoint of $238 million.

Unfavorable FX movements reduced sales by $7 million will reduce production volumes resulted in a $0.02 headwind relative to our previously-provided guidance, primarily due to the slowing growth of Electric Vehicle platforms. Fourth quarter operating performance resulted in a $0.04 headwind during the quarter versus previous expectations.

During the fourth quarter, we observed, higher we absorbed higher manufacturing costs than previously expected primarily related to elevated warranty and inventory costs on higher than normal inventory balances.

This was partially offset by continued run rate material cost improvements as well as reduced operating expenses primarily driven by engineering reimbursements and the reduction of our annual incentive compensation programs.

As we discussed previously, we incurred approximately $1.8 million of costs related to a specific distressed supplier which we expected to be relatively minimal in the fourth quarter. We expected these costs to moderate with improvement in the situation.

Unfortunately, we continued to incur incremental costs relative to the third quarter to provide additional support to the supplier. Although, we are still incurring some costs related to the situation, the costs are moderating as we navigate the first half of this year. We will pursue routes to recover these incremental costs.

However, our priority remains investing in end customer disruption. The after-tax net impact of foreign currency versus prior expectations resulted in approximately $0.03 of net benefit in the quarter.

The below-the-line favorable impact of foreign currency more than offset the unfavorable FX impact to operating income of approximately $900,000 recognized during the quarter. We remain focused on operational execution and controlling the variables within our control to drive performance.

We will continue to respond to externalities as necessary to insulate the company from macroeconomic headwinds and drive overall performance. Page 14 summarizes our key financial metrics specific to control devices Control Devices.

Control Devices, fourth quarter sales declined by approximately $15 million versus the third quarter, due to the UAW strike as well as a slower rate of penetration for Electric Vehicles.

Fourth quarter operating margin of 1.2% declined by 500 basis points compared to the third quarter, primarily due to reduced fixed cost leverage on decremental sales and incremental costs recognized in the fourth quarter related to the distressed supplier outlined previously.

In total, we estimate that the UAW strike and distressed supplier costs impacted Control Devices operating margin by approximately $3.6 million or 440 basis points in the fourth quarter. Excluding the impact of these headwinds, adjusted operating margin was relatively in line with prior quarters despite significantly lower sales control devices.

Control Devices full year sales of $345.3 million were approximately in line with 2022 generating operating income of $13.4 million or 3.9% of sales. For the full year, we estimate that the UAW strike and distressed supplier costs impacted Control Devices operating margin by approximately 120 basis points.

In addition to relatively flat end market performance, we expect a continued ramp-up of electric vehicle platforms, however, at a lower pace than previously expected, which will impact some of our recently launched actuation applications. As a result, we expect Control Devices sales to slightly decline this year relative to last year.

That said, we have identified several opportunities to reduce material costs through redesigns or supply chain strategies to help improve gross margin going forward and offset this slight decline in sales, despite the modest decline in sales that we expect for control devices in 2024 we are expecting a stable margin profile.

As discussed on previous calls, we remain focused on dry training ASIC technology to drive new business awards as the market evolves we continue to focus on operational excellence and enterprise-wide cost reduction, including material cost reduction plans to drive margin improvement going forward. Page 15, summarize our key financial metrics.

Specifically to electronics. Electronics fourth quarter sales increased by $4.4 million or 3.1% compared to the third quarter. Full year sales of $593.6 million increased by approximately 25% compared to the prior year.

Sales growth was driven primarily by higher customer production volumes, the MirrorEye launch with Kenworth in North America, the smart two tachograph launch in Europe and the continued growth of our existing MirrorEye OEM program in Europe.

We expect continued strong sales growth in 2024 driven by MirrorEye launches with Peterbilt and Volvo in Europe both midyear as Jim discussed earlier in the call. Similarly, we expect significant growth related to the two Smart as regulatory requirements force adoption both in OEM applications and in the retrofit market.

Fourth quarter adjusted operating margin of 7.5% expanded by 130 basis points compared to the third quarter primarily due to lower engineering costs due to the timing of customer reimbursements. This was partially offset by elevated warranty and inventory related costs incurred on higher than normal inventory balances.

Full year operating margin expanded by approximately 400 basis points, compared to the prior year primarily due to contribution on incremental revenue, stabilization in the supply chain and material cost improvements, including the impact of incremental pricing.

This was partially offset by incremental engineering costs related to the launch of new programs. We are proud of the progress we made this year in electronics led by our strong sales growth and cost improvement actions.

Looking forward, we expect continued margin expansion as we focus on improving our manufacturing performance and focus on quality driven processes and efficient execution of new program launches as well as the continued ramp-up of our existing programs.

Electronics remains well positioned to take advantage of significant future growth and margin expansion, as a result of a strong product portfolio a substantial and growing backlog of awarded programs, continued improvement in material cost and cost structure organizational optimization. Page 16 summarizes our key financial metrics.

Specific to Stoneridge Brazil, Stoneridge Brazil's full year sales totaled approximately $57.2 million, an increase of $4.9 million, or 9.5% relative to the prior year.

Full year adjusted operating income increased by approximately 190 basis points relative to the prior year, primarily driven by lower material costs and fixed cost leverage on incremental sales, resulting in adjusted operating margin of 7%.

We expect stable revenue and operating margin in 2024 as we continue to shift our portfolio in Brazil to more closely align with our global growth initiatives and further expand our local OEM programs to support our global customers.

Brazil has become a critical engineering center as we continue to expand our global engineering capabilities and capacity. We will continue to utilize our global footprint to cost effectively support our global business.

Turning to page 17, net debt to trailing 12-month EBITDA as calculated for compliance purposes remained relatively flat quarter to quarter resulting in a leverage ratio of approximately 3.1 times, with supply chains mostly normalized.

We are focused on improving cash performance and reducing net debt through targeted actions to reduce net working capital, and more specifically, our inventory balance.

Over the course of the last couple of years, we have procured materials when available during supply chain shortages and committed to future material purchases to ensure material availability forward.

Our response to those supply chain challenges, along with planned inventory build to support significant growth and new program launches, has resulted in an inventory balance that is higher than our historical average. We are focused on improving our inventory turns this year, to more closely align, with our historical averages.

Going forward, we see additional opportunities to streamline our operations, evolve our supply chain strategies and continue to design products to enable efficient material procurement and production, to drive inventory turns even higher.

We are focused on reducing net working capital to improve cash performance, reduce net debt and related interest expense. Based on our 2024 guidance and net working capital initiatives, we expect a compliance leverage ratio of less than 2.75 times, at the end of the first quarter of this year, and between two and 2.5 times by the end of the year.

We are focused on maximizing cash performance to drive value to shareholders. Turning to Slide 18, we are establishing guidance for our 2024 financial performance. We are guiding 2024 revenue to a midpoint of $1 billion, an increase of approximately 4% versus 2023.

This revenue growth is expected to significantly outperform our weighted average OEM end markets, which are expected to decline by approximately 5%, resulting in nine percentage points of market outperformance.

We expect strong contribution margins on our growth, and the ability to take advantage of our existing cost structure to drive operating leverage, as we grow. We are guiding gross margin to a midpoint of 22.4%, operating margin to a midpoint of 3% and EBITDA to a midpoint of $67 million or 6.7% of sales.

Our midpoint guidance implies EBITDA margin expansion of 170 basis points and approximately$90 million, relative to 2023. Based thereon, and considering an expected tax rate of approximately 33%, we are guiding to a midpoint of $0.35 of EPS for the full year.

Turning to Slide 19, we expect strong growth in 2024, driving midpoint revenue guidance to $1 billion. MirrorEye continues to be a major growth driver, as Jim discussed earlier in the call, we expect $100 million of MirrorEye revenue in 2024, an increase of $46 million versus the prior year or almost double the total sales.

Due to the incremental launches on Peterbilt in North America and Volvo in Europe both midyear, we expect incremental MirrorEye revenue to accelerate in the second half of the year. Another specific growth driver in 2024, is the expected ramp-up of our Smart 2 tachograph programs, that launched in the third quarter of last year.

This next generation Smart tachograph will be required to be on vehicles across weights and usage applications, over the next several years, with the current market primarily served by Stoneridge and only one other competitor.

This will drive both OEM growth, as well as aftermarket opportunities, as existing vehicles are also subject to the regulations. As a result, we expect Smart 2 tachograph contribute $30 million of incremental revenue in 2024.

That said, we expect the adoption of this next-generation device to ramp up in the second half of the year, as the adoption deadlines approach.

Other factors contributing to our growth in 2024, include the continued growth in our off-highway vision systems with Orlaco branded products and OEM programs launching in Brazil, as we continue to expand our OEM product offerings in South America.

Due to the second half weighting for MirrorEye and the Tachograph ramp-up, as well as improved production forecast in the second half of the year, we are expecting revenue to be more back half weighted than usual.

Overall, we expect to first half second half revenue split of approximately 48% to 52%, with a slight ramp up between the first and second quarter, relatively larger growth between the second and third quarter, aligned with our key program launches and another gradual ramp-up into the fourth quarter.

We continue to significantly -- outpace our underlying end markets, creating a runway for sustainable long-term growth. Page 20, summarizes our expectations for full year EBITDA, relative to 2023. In 2024, we are expecting EBITDA growth of approximately $19 million and EBITDA margin expansion of approximately 170 basis points.

We are expecting contribution margins aligned, with our historical average of 25% to 30%, on approximately $38 million of revenue growth, resulting in over $10 million in EBITDA growth.

We are expecting gross margin expansion, driven by material cost improvement and enterprise-wide initiatives, aimed at improving manufacturing performance including, the reduction of quality related costs.

More specifically, we continue to focus on improving the price-cost relationship of our products through redesign, reengineering and other supply chain strategies aimed at reducing overall material costs.

We are expecting a moderate increase in SG&A primarily, driven by annual inflationary labor increases and the normalization of our annual incentive cost programs, back to targeted levels in 2024, after they were reduced in 2023.

We expect to continue to invest in the engineering resources, that will drive our growth and expect to offset these investments, with continued footprint optimization resulting in approximately flat D&D expense year-on-year. Aligned with our revenue cadence for the year, we expect EBITDA to be more back-half weighted.

We expect first quarter EBITDA to slightly decline relative to the fourth quarter of 2023, primarily due to the annualization of our targeted incentive compensation programs and timing of engineering reimbursements compounded by slightly lower production in our commercial vehicle end markets.

This will result in slightly below breakeven first quarter EPS. We expect gross margin improvement in the first quarter to continue into the second quarter.

However, we are expecting some incremental engineering spend in the second quarter to ensure an efficient launch of our next two OEM MirrorEye programs as our next MirrorEye programs launch, smart tachograph adoption accelerates and production increases aligned with current third-party forecasts.

We expect a significant improvement in EBITDA from the second to third quarter and continued improvement into the fourth quarter. We will continue to leverage our above market top line growth, targeted gross margin improvements and an efficient operating cost structure to drive earnings growth. Moving to slide 21.

In summary, we expect continued strong revenue growth in 2024, continued focus on operational improvement and material cost reduction and continued optimization of our cost structure to drive earnings growth for the year.

Longer term, Stoneridge remains well-positioned to significantly outpace our underlying markets with strong contribution margins and structural cost leverage driving a targeted five-year revenue midpoint of $1.45 billion and midpoint EBITDA margin of 13%, resulting in a midpoint target of $190 million of EBITDA by 2028.

As always, driving shareholder value is at the forefront of all of Stoneridge’s strategic initiatives. With that, I will open up the call to questions..

Thank you. [Operator Instructions] And our first question is going to come from the line of Justin Long with Stephens. Your line is open. Please go ahead..

Thanks, and good morning..

Hi, Justin..

Hi, good morning. So maybe to start by just taking a step back, when I think about the 2024 guidance, it implies that you'll be growing EBITDA in excess of 30% in an environment where the weighted average end markets are down about 5%.

So can you just speak about your level of visibility and confidence that you have in this 2024 guidance, but you say the end markets end up being worse than anticipated? Can you speak to your ability to adjust and flex the business for?.

Yeah, Justin, I really appreciate the question. Our guidance this year is very much aligned with some very specific Stoneridge drivers. When you think about the launch of the MirrorEye programs in midyear, the continued adoption of Smart 2 those things are really not market dependent on any significant improvement in production forecast.

That's really a Stoneridge specific product that will drive a lot of content for us in the back half of the year. So I feel very confident in our ability to look at that as improvement for the back half and on the contribution margins that we get on that type of content, you can expect pretty strong EBITDA growth as well to follow that.

In addition, the aftermarket products generally have a higher margin than the overall business. So those products in particular can drive some pretty significant earnings expansion as well.

So when you look at the volume side, I feel pretty comfortable that we have enough Stoneridge specific drivers that we have a lot of momentum going into the back half of the year with those launches. And I'll let Jim comment on this a little bit too.

But when you look at the operational performance and what we really have set as a foundation in 2023, the continued annualization of those initiatives should drive some pretty significant improvement both starting in the first quarter. But, obviously, as revenue ramps up, it gets compounded in the second half.

So I feel really good about the runway that we're on, which drives improvement in the first half. And then it follows pretty significant revenue growth in the second half with that improvement. So I feel very confident in our ability to see the year and that kind of split..

Okay, great. And maybe to follow up on MirrorEye. So the guidance for the full year is $100 million in revenue, but it sounds like that over as we move into the second half.

So is there anything you can share in terms of the annual run rate for MirrorEye revenue as we exit 2024?.

Yeah. So you're going to see continued ramp in 2025. We've got -- we've announced the first of all the Volvo program will be launching in North America in 2025 as well as another program that we haven't given a tremendous amount of detail yet on specifically but we've got two programs in 2025.

You'll also get the annualization of the programs that we are launching mid-year this year both in North America and in Europe with Volvo. So, MirrorEye will continue to grow significantly 2024 to 2025 just based on program launches annualization.

And Justin, I would also argue that and we announced three additional fleets this morning, the more the system becomes available at the OEs, the more the fleet see the system, the more we expect adoption of the OE system and retrofit opportunities as these fleets kind of commit to full adoption over their fleet.

So, I think that you'll get not only normal annualization program launches, but you'll get some increased take rate and retrofit expansion as we continue to address that market, particularly in North America..

And that will also see some benefit from the platform technologies that really are sponsored by the base MirrorEye platform, specifically things like the review trailer camera and its connectivity into the MirrorEye system along with other technologies that will really grow from that or even more forward into the cockpit of the future that we mentioned this morning.

So, there's a lot of opportunity here for substantive growth beyond just the base platform of MirrorEye as well..

Okay. That's very helpful. And I guess the last one for me would be on the balance sheet, and specifically free cash flow. I think you mentioned a couple of times in the prepared remarks that there was an opportunity inventory levels and getting those back to historical averages.

Can you help us kind of understand the order of magnitude, in terms of the working capital opportunity in 2024, and what you're assuming for free flow generation and the guide?.

Yes Justin, it's a great question. So really an area of focus for us as we come off some of these supply chain challenges last couple of years and things have started to normalize. Our inventory balances and turns are relatively worse than what they've been historically.

Some part of that is planned obviously to support the tremendous amount of growth that we expect this year and going forward. But the normalization of supply chain will help us burn down some of that inventory and generate cash out of the working capital that's currently on the balance sheet. So, it's right now we're five turns or so.

We can expect that to improve by a turn or two in a relatively shorter-term as we burn down existing inventory that should generate $20 million to $30 million of cash. We also expect, because earnings are growing that -- we're pretty cash efficient and we should generate cash on a normal base business.

So, if you look at the implied guidance for the end of the year, it does obviously include some expectations for cash generation. [Technical Difficulty].

Please remain on the line. Your conference will resume shortly. Again, ladies and gentlemen, please stay on your line. Your conference will resume shortly. Speakers, I see you guys reckon continue..

Sorry. Sorry, I think we may need to make sure we know where we were.

did Justin's question complete or was it cut during his question?.

Hi, Jim, Matt. this is Justin.

Can you hear me okay?.

Yeah, Justin, we can hear you.

Can you hear us?.

Okay. Great. I can hear you, Matt. I think I heard your $20 million to $30 million of kind of cash generation opportunity from inventory and then it cut off shortly thereafter. So I can let you finish that up..

Yeah. And sorry for the technical difficulty there. We are -- inventory has really built as we prepare for some of the growth, particularly electronics as we look at some of the components that have long lead times there.

So if we think about a return to historical inventory averages, or we should even have improvement on that going forward, there's a couple of terms opportunity here. Some of that will be shorter term as we address some more specific issues with burn down inventory and particularly with the launch of these programs.

But some of that will take some time as we burn down existing balances. So we should expect a turn or two of inventory improvement going forward at least, which should generate, like I said, about $20 million to $30 million of working capital benefit. And then like we said, we're pretty capital efficient.

So the earnings expansion will also drive cash performance. So if you look at our EBITDA guidance and net debt levels, we do imply some cash generation and the ability to reduce that leverage profile by the end of the year..

Okay. Great. That's all I had. Thank you so much for the time..

Thanks, Justin..

Thanks, Justin..

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Gary Prestopino with Barrington Research. Your line is open. Please go ahead..

Hi. Good morning, all..

Hi, Gary..

Hi, Gary..

My questions really revolve around MirrorEye as it's starting to ramp up. You're going from, I think, $54 million of sales to $100 million of sales this year.

As these sales ramp up, how much margin -- incremental margin increase do you get on that product overall? Or is it still at a point where because you're winning new programs, that you're not getting expansion on the margin in terms of the new sales growth coming in?.

No. Great question, Gary. I appreciate the question. MirrorEye has, as we've talked about for several years, MirrorEye had a pretty significant investment to ramp up for some of the new technology and development of these programs. And you saw that in the increased D&D over the last several years.

Going forward, we have always said that MirrorEye at quoted take rates is basically at corporate average contribution margins.

The benefit there is as the take rates increase, it leverages really well on fixed costs, right? So if take rates were to significantly improve versus where they are today, you can expect an accretive margin profile on that growth, particularly on the OEM side.

Retrofit just by the nature of the programs, aftermarket margins are generally higher, not just for MirrorEye but generally across our business. And so you can expect some sort of accretive margin on those programs as well, although, the yields are a little bit less volume as we've talked about..

So given where you are, where you will be this year $100 million of sales would that be at the average margins that you guys are describing or forecasting 2024..

And I think that there's roughly right out there..

And then on a couple of other questions here. Number one, I'm on the control devices side, which is more oil related. It has the situation where during the pandemic the OEM order patterns were very erratic stuff like that has all of this really normalize.

And within the system given the fact that we've had a year to have good growth in auto production..

Yes, generally, yes, the chaos in the ordering has stopped, but what has instead come in a bit Gary is that with the, I'll say, the weaker than expected growth in electric vehicle platforms and I'm sure reading a lot about OEMs really considering how they're going to go forward with the various types of drivetrains.

Certain OEs has suggested that they were going to be electric only going forward and many of those folks have reversed that. So now we're going to go back to some hybrids and we may even be investing a bit in some of our existing internal combustion engine technologies given the likelihood that this these technologies will last a little bit longer.

So we're seeing a little bit of a change in terms of what's being requested of us in terms of what to expect in terms of what their slowdown. We're well placed for that just by the nature of the fact that we've been very careful about how we're focusing on technologies making sure that the great majority is drivetrain agnostic.

So the from a technology perspective could be applied to electrics to hybrids or to internal combustion engines depending on the particular application..

Well, yes, that's what I'm trying to understand. If your drivetrain agnostic, obviously, EVs are the you know all the rosy projections, or you can throw them out. So that baby out with the bathwater. So you're going to get a shift maybe to more hybrids and you know growth in ICE.

Does it require you to win the business on some of these other programs or do you just shift what you're doing for the various automakers two their plans for more hybrids versus electrics more ICE versus where they thought they'd be?.

I think in some cases there will be a need to win new businesses. But I think more often than not it will be extension of current business. We have in the ICE space, they'll be currently for a longer period of time.

The types of technologies are working with today and there might be some continuing continuous improvement on those technologies or products, but they'll be for the most part..

Okay. Thank you..

Thank you. And I would now like to hand the conference back to Jim Zizelman for closing remarks..

Well, thanks everyone for joining us for the call today. I know your time is really important and we do appreciate your willingness to engage us today. And we are very proud of our performance in 2023. It's consistent with the commitments we made at the start of the year.

We will continue to deliver on our commitments by focusing on our long-term strategy, our brought -- operational improvements and excellence in execution. We expect that our performance along with our unique mix of industry-changing product platforms will continue to drive strong shareholder value. Thanks again everyone..

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