Stoneridge - Q2 2024

Transcript

Operator (participant)

Welcome to the Stoneridge Inc. Second Quarter 2024 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to Kelly Harvey, Director of Investor Relations. Ms. Harvey, please go ahead.

Kelly Harvey (Director of Investor Relations)

Good morning, everyone, and thank you for joining us to discuss our Second Quarter 2024 Results. The release and accompanying presentation was filed with the SEC and is posted on our website at stoneridge.com in the Investor section under Presentations and Events. Joining me on today's call are Jim Zizelman, our President and Chief Executive Officer; Matt Horvath, our Chief Financial Officer; and Troy Cooprider, our Chief Technology Officer. Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties, and actual results may differ materially.

Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-Q, which was filed yesterday 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 slide three for a more detailed description of these non-GAAP measures and the appendix for a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. After Jim, Matt, and Troy have finished their formal remarks, we will then open up the call to questions. And with that, I will hand the call over to Jim.

James Zizelman (President and CEO)

Thank you, Kelly, and good morning, everyone. Beginning on page four, our second quarter financial performance highlights our continued focus on improving the fundamentals of our business, leading to significantly improved margins in the quarter. This was primarily driven by continued material cost improvements and operating cost control as we continue to execute on the key initiatives we set at the beginning of the year. Our efforts resulted in a 250 basis point improvement in gross margin, a 210 basis point improvement in adjusted operating margin, and a 410 basis point improvement in adjusted EBITDA margin over the first quarter. Matt will provide additional detail regarding our quarterly financial performance and expectations for the remainder of the year later in the call. We remain focused on flawless execution of the program launches that will drive strong growth going forward.

We are excited to announce that during the second quarter, we began shipping our first MirrorEye OEM systems to Volvo for the launch of their FH Aero model in Europe. Similarly, our program with Peterbilt in North America launched on models 579 and 567 in July. Both customers are focusing significant marketing efforts on MirrorEye as a differentiating product in the market, and our initial customer feedback has been excellent. I will provide a more detailed update on our OEM programs also later in the call. Finally, this morning, I will provide some additional detail on the recent announcement by Volvo Bus that they have partnered with Stoneridge to provide connected services and digital solutions using our artificial intelligence Fuel Advice system in a pilot program this year.

This partnership is aligned with our continued focus on data services, software, and AI to drive advanced system capabilities and an expansion of our existing technology platforms and products. As a follow-on to that discussion, this morning, we welcome Troy Cooprider, our Chief Technology Officer, to the call to expand on our advanced development activities, including what's next for Stoneridge, utilizing our capabilities in advanced software and AI. We continue to improve the financial performance of the business through a robust focus on core operating performance and investing in the technologies and capabilities that will drive continued long-term growth. Page five summarizes our key financial metrics for the second quarter compared to the first quarter of the year. Second quarter sales of $237.1 million were approximately in line with first quarter sales when you exclude the impact of foreign currency.

Driven by continued progression on our key company initiatives, margins expanded significantly in the second quarter. A continued focus on broad operational excellence, including material cost improvement actions and reduced quality-related costs, drove the gross margin to 22.7%, a 250 basis points improvement over the first quarter. Adjusted operating profit of $5.4 million resulted in adjusted operating margin of 2.3%, which is an improvement of 210 basis points over the first quarter. This expansion was primarily due to gross margin improvement and overall lower engineering spend as we continue to focus on controlling operating costs to improve earnings performance. Finally, second quarter adjusted EBITDA of just over $16 million drove an adjusted EBITDA margin of 6.8%, which is improved sequentially by 410 basis points.

This was driven by improved operating performance I just outlined, as well as the favorable impact of non-operating foreign currency of $2.3 million. This favorable non-operating FX impact more than offsets the unfavorable impact that occurred in the first quarter of approximately $2 million, for a total quarter-over-quarter benefit of $4.3 million. Matt will provide further details on our second quarter performance later in the call. Now turning to page 6. In April, we announced that Natalia Noblet was appointed as President of Electronics, effective September first of this year. She will succeed Peter Osterberg, who, by mutual agreement, has left the company to pursue other opportunities. Natalia's appointment marks an exciting new chapter for the company. Natalia has more than 20 years of automotive and commercial vehicle experience.

Prior to Stoneridge, Natalia spent nearly two decades at WABCO, where she held progressively challenging roles across operations, sourcing and purchasing, project management, quality, Six Sigma Lean, and change management. Following WABCO's acquisition by ZF in 2020, Natalia seamlessly transitioned into various leadership positions within ZF, focusing on integration, quality assurance, and P&L ownership. In her new role as President of the Electronics Division, Natalia will be responsible for leading financial performance, product development, business strategy, and technical vision. She will also manage the division's engineering, sales, and manufacturing functions to ensure alignment with Stoneridge's business and operational strategy, drive operational excellence, and deliver long-term shareholder value. Her proven track record of leadership and innovation align with our commitment to delivering cutting-edge solutions for the mobility industry to drive long-term, profitable growth. I'm confident that under her leadership, our electronics division will continue to accelerate its drive forward.

Now, turning to page seven. As mentioned earlier on the call, our largest OEM MirrorEye program has launched with Volvo and the FH Aero model in Europe. Our system replaces the traditional mirrors on the new Volvo truck with aerodynamic wings that contribute to significant improvements in fuel efficiency on the new vehicle. Our system improves driver visibility and improves overall vehicle safety through the reduction of vehicle blind spots, software-based safety improvements, including auto panning and improved performance versus traditional mirrors in inclement weather. We are proud to support Volvo on the brand-new FH Aero with our industry-leading camera mirror technology, and look forward to launching the technology on their North American platform, the all-new VNL, early next year.

The initial feedback in the system from customers and industry experts has been exceptional, as they have praised the clarity of the image, the responsiveness, and the overall safety improvements facilitated by the system. As can be the case with new program launches, we are seeing a broad range of potential volumes for the remainder of the year. While we are very early into the launch, current orders for the year are relatively lower than our initial expectations. However, the feedback directly from Volvo has been to expect volumes in line with our original expectations, and as such, we have expanded potential volume outcomes for this year in our guidance. Overall, we continue to be very bullish on the launch of this product as we continue to see incremental orders for the system.

For example, just last week, orders increased by more than 10% for the remainder of the year. In addition, customer feedback continues to support incremental volume, including a public announcement by Volvo that they have secured one of their largest deals ever, an order of 1,500 vehicles from an Italian transportation and logistics company, all of which will be equipped with MirrorEye and delivered throughout 2024 and 2025. Given the strength of the customer feedback, we expect run rate customer take rates to at least reach the levels initially expected at approximately 45%. And we'll continue to provide updates on this progress as the year continues. In addition, our MirrorEye program with Peterbilt in North America on models 579 and 567, launched in July, with their marketing focused on the system's core features, including maximizing driver visibility and safety.

We continue to work with all of our customers to reach their end customers to drive awareness of the system, with the ultimate goal to drive take rate expansion. This morning, I'm also excited to provide an update on a partnership that was recently announced between Volvo Bus and Stoneridge, related to our connected services and digital solutions. Stoneridge's data and artificial Fuel Advice solution will be available to Volvo Bus customers in selected markets in a pilot program starting this year. This technology uses artificial intelligence to provide predictive insights to fleets about their drivers, planned routes, and fleet performance, allowing for more efficient and intelligent decision-making. Our innovative collaboration with Volvo Bus enables them to support their customers' transformation into connected and sustainable people transport solutions. Expanding on our existing products and technology platforms with advanced capabilities, applications, and data services is core to our long-term strategy.

To expand more on some of the exciting advanced development activities that will continue to propel our long-term growth, I'd like to welcome Troy Cooprider, our Chief Technology Officer, to the call. Troy?

Troy Cooprider (CTO)

Thank you, Jim. We have developed and commercialized several advanced products, including our MirrorEye system, our off-highway vision systems, our connectivity devices, and our soon-to-launch connected trailer products that have secured us valuable technology real estate in and around the vehicle. Going forward, we will utilize this real estate to bring advanced technology to our customers that will help differentiate their vehicles, improve vehicle safety and efficiency, and provide opportunities for long-term, profitable growth for the company. A significant portion of our advanced development roadmap has been and continues to be related to artificial intelligence-based software in various applications. Driving that development over the last several years is a significant team of engineers directly focused on AI technology and product-related development, which has resulted in 25 patents and patent applications....

Recently, we deployed a software improvement to MirrorEye, which incorporates a predictive algorithm to enable automated reverse panning, keeping the trailer of a semi-truck in view during multi-angle reverse movements. This ensures safe backing and a full field of view for the driver using algorithms to predict the path of the trailer, depending on the speed and movement of the tractor. Incorporating this feature into the existing MirrorEye system ensures full field of view and predictive vision capabilities, whether the vehicle is moving forward or backward. As you can see on the images you see on Slide 8, we are also incorporating object detection capabilities within our MirrorEye platform to alert the driver to improve overall driver behavior and enhance safety. Another good example of AI-based algorithms deployment is on our off-highway vision systems, particularly in the construction and mining space.

Here, too, we have incorporated detection capabilities, differentiating objects and pedestrians in heavy equipment environments to improve situational awareness and site safety. Both of these examples, along with the Fuel Advice data service solution and our partnership with Volvo Bus, are currently in the market and being utilized by our customers to improve overall vehicle and driver performance. By continuing to rotate our global engineering footprint to take advantage into a more cost-effective structure, we have generated the ability to continue to invest in advanced software and AI-based capabilities without increasing overall engineering spend. As we continue to invest in these capabilities, we've generated a robust technology roadmap that will both enhance and expand on our existing products and bring new products and technologies to the market.

For example, as we continue to expand the cameras and perception sensors we have positioned around the vehicle, in connection with the connectivity devices on vehicles, we will be able to identify and communicate triggering events to enable data recording based on driver or vehicle behavior. This will create a data and video log of any incidents or abnormal operations to ensure fleets are equipped with the right data to avoid unnecessary liability, train drivers, and improve fleet efficiency and cost. While many of our MirrorEye-equipped vehicles already have continuous video recording capabilities, these advancements will allow for targeted video recording, requiring less data and more efficient data transmission. Similarly, as we continue to focus on and expand our activities in connected trailers, there are several applications that can utilize both our existing hardware and our advanced software capabilities to dramatically improve vehicle safety and efficiency.

In addition to the backup camera and other connected camera applications launching shortly on our connected trailer program, we're using advanced algorithms and AI to create forward and reverse predictive paths, curb detection and warning systems, soft shoulder detection, and hitching and docking solutions. These advancements, along with our existing vision and safety and connectivity solutions, will create an integrated safety system for both the tractor and trailer. We continue to invest in advanced technologies that will build on our existing capabilities and technologies to drive continued growth opportunities for our company. With that, I will turn it over to Matt for additional discussion on our financial performance in the quarter and forward expectations.

Matthew Horvath (CFO)

Thanks, Troy. Turning to page 10, sales in the second quarter were $237.1 million, which was relatively in line with the prior quarter. Adjusted operating income was $5.4 million or 2.3% of sales, which resulted in a 210 basis point improvement in adjusted operating margin and a $5 million improvement in operating profit relative to the first quarter of this year on similar sales. Adjusted EPS was $0.17 in the second quarter, a $0.39 improvement versus the first quarter. As Jim mentioned earlier on the call, our second quarter performance was driven by our continued focus on improving the fundamentals of our business, leading to significantly improved margins. Our continued focus on material cost improvement actions, reduced quality-related costs, and control of our operating expenses significantly benefited our performance in the quarter.

The below-the-line impact of foreign currency favorably impacted the second quarter results by $2.3 million. This was driven primarily by overall favorable FX rates, as well as the capitalization of certain intercompany loans in the second quarter, taking advantage of those rates to offset the headwinds we saw in the first quarter and reduce the potential for future volatility. Finally, on similar sales, EBITDA improved by $9.5 million from quarter to quarter, with EBITDA margin improvement of 410 basis points. Page 11 summarizes our key financial metrics specific to control devices. Control devices' second quarter sales of $80.9 million increased by approximately $2.9 million, or 3.7% versus the first quarter, primarily driven by higher sales in the North American passenger vehicle end market, as well as higher China commercial vehicle sales.

Sales into electric vehicle platforms also moderately improved relative to the first quarter. Second quarter operating margin of 4.6% increased by 180 basis points compared to the first quarter of 2024, primarily due to benefits recognized from completed negotiations related to price and low volume claims, improved operational execution, and continued operating cost control. As discussed on previous calls, we remain focused on drivetrain agnostic technologies 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 continue to drive margin improvement going forward. Page 12 summarizes our key financial metrics specific to electronics. Excluding the unfavorable impact of foreign currency, electronics' second quarter sales of just under $156 million were approximately in line with the first quarter of the year.

Lower sales in the European commercial vehicle end market, primarily as a result of continued macroeconomic pressure, were offset by higher sales in the European off-highway and North American commercial vehicle end markets. Second quarter adjusted operating margin expanded by approximately 310 basis points compared to the first quarter, primarily due to material cost improvements, lower quality-related costs, and lower engineering expenses, due in part to higher customer reimbursements during the quarter. On relatively flat sales, we generated an incremental $4.6 million of operating income in the quarter. Building upon the operational excellence initiatives we are already executing, we expect to further benefit from recent actions taken to improve our engineering organization through the rebalancing of our footprint to improve our capacity and our capabilities, as well as reduce our total costs.

Electronics remains 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, continued improvement in material costs, and organizational optimization. Page 13 summarizes our key financial metrics specific to Stoneridge Brazil. Excluding the unfavorable impact of foreign currency of approximately $600,000, Stoneridge Brazil's second quarter sales improved by 2% versus the first quarter. Again, excluding the unfavorable impact of foreign currency of approximately $200,000 on operating income, second quarter operating profit was in line with the first quarter of the year. 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 align our global engineering capabilities and footprint.

We will continue to utilize our global footprint to cost effectively support our global business. Turning to slide 14, we are updating our full year 2024 guidance to reflect updated foreign currency rates, updated OEM production volumes, and current expectations for non-OEM and customer demand-based products, including aftermarket and option selectable products. Unfavorable foreign currency is expected to impact our guidance by approximately $12 million. That said, we do not expect the impact of foreign currency on sales to impact earnings materially, as costs in local currency also declined to generally offset the revenue decline. Based on current forecasts, we expect a reduction in OEM production volumes related to lower production volumes for commercial vehicle programs in both Europe and North America, driven primarily by continued macroeconomic pressures, as well as reduced demand in North America passenger vehicle programs.

The forecasted reduction in OEM volumes is expected to reduce full-year revenue by approximately $18 million. In addition, we are seeing increased pressure and some timing delays on non-OEM and customer demand-based products, including the timing of adoption for certain MirrorEye retrofit applications, the market adoption of the Smart 2 tachograph, and increased headwinds in our off-highway end markets. Finally, as Jim mentioned previously, while current orders for the Volvo MirrorEye system are less than initially expected, communication from Volvo has suggested volumes relatively in line with our original expectations for the full year. The high end of our guidance assumes a nominal impact based on these factors, while the midpoint considers approximately $15 million of revenue headwinds from non-OEM and customer demand-based products. We continue to put actions in place to influence the revenue that we have some control over for the remainder of the year.

For example, we continue to see significant opportunity in the Smart 2 tachograph aftermarket and are working closely with our distributors to maximize market penetration. As a result, we are expecting midpoint revenue of approximately $955 million for the full year, with a range of $940 million-$970 million, based on the potential for volatility in our non-OEM and customer demand-based products for the remainder of the year. As has been the case historically, we are expecting reduced revenue in the third quarter relative to the second quarter due to summer shutdowns and seasonality in production. We are expecting fourth quarter revenue to continue to improve according to normal seasonality, with the potential for outperformance based on continued OEM MirrorEye acceleration and tachograph aftermarket sales.

As a result of the reduced revenue, we would typically expect decremental margins aligned with our historical rates of approximately 25%-30%. Excluding the impact of foreign currency, as I discussed earlier, the $33 million total reduction between OEM and non-OEM products at the midpoint would result in EBITDA reduction of approximately $9 million for the year. However, similar to our outperformance in the second quarter, we are expecting continued core performance initiatives to improve our earnings as the year continues, and to limit the impact of reduced revenue expectations. We expect these activities will improve earnings by approximately $3 million for the remainder of the year, resulting in a decremental contribution margin of approximately 18%, excluding the impact of foreign currency, and only 13%, including the impact of FX.

We continue to significantly outpace our underlying end markets, creating a runway for sustainable long-term growth. Similarly, we continue to improve the fundamental performance of the business, resulting in some mitigation of the expected revenue decline this year, and more importantly, continuing to build a foundation for strong incremental earnings as we grow next year and beyond. Page 15 outlines our full year guidance we outlined on the prior page. As we have discussed throughout the call, our base performance is improving as we continue to execute on the key priorities we outlined for the year. As a result, despite reduced revenue expectations, we are increasing our gross margin midpoint guidance by 50 basis points to reflect our expectations of continued improvements in material costs and manufacturing performance.

Aligned with current market conditions, we are reducing our adjusted operating margin and adjusted EBITDA margin expectations to reflect reduced leverage on lower sales. Finally, we are reducing our midpoint adjusted EPS guidance for the full year by $0.12 to a midpoint of $0.23, to reflect reduced fixed cost leverage on reduced sales and an updated tax expense expectation of $5 million-$6 million based on our current expectation of earnings by jurisdiction. We continue to focus on improving the variables that are in our control and acting swiftly to mitigate factors that may be outside of our control, including continued macroeconomic pressures in our end markets and currency volatility. Our second quarter results and our expectations of improved gross margin for the remainder of the year are proof that our actions are improving our run rate as we progress toward our long-term targets.

With that, I will turn it back over to Jim for some closing comments.

James Zizelman (President and CEO)

Thank you, Matt. In closing, turning to page 16, our second quarter performance shows continued improvement across each of our 2024 key priorities. First, we are focused on driving continued growth and market outperformance. Our full-year midpoint revenue guidance implies 3.6 percentage points of outperformance compared to our weighted average underlying end markets, which are expected to decline by 4.3%. This outperformance is driven primarily by Stoneridge specific growth drivers, including new programs, incremental content, and expansion of our existing opportunities. Second, we are focused on gross margin expansion through material cost improvement and enterprise-wide operational excellence.

Based on our strong performance to date and our expectations of continued strong performance for the remainder of the year, we have increased our gross margin midpoint guidance by 50 basis points, increasing our margin expansion target to 190 basis points over 2023. Third, we are focused on leveraging our global footprint to maximize our capabilities and output. Again, based on our strong performance to date, we have improved adjusted EBITDA margin by 160 basis points in the first half of this year compared to the same period last year. Fourth, we are focused on efficient cash generation through effective inventory management. Through our focused efforts on reducing inventory to improve working capital and generate more cash, we've reduced our inventory balance by $9 million since the beginning of the year.

We remain focused on inventory reduction and cash performance to reduce overall net debt and interest expense. Finally, we are 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, such as the AI-based advanced development projects that Troy outlined earlier in the call. As evidenced by our progress made so far this year, this team is focused on executing against our priorities to drive strong growth and continued margin improvement and an improved balance sheet. We will continue to execute across these initiatives and expect to continue to see the benefits in our financial performance. Stoneridge remains well positioned to outpace our underlying end markets and drive significant earnings expansion going forward.

As always, driving shareholder value is at the forefront of all of Stoneridge's strategic initiatives. With that, I'll open the call for questions.

Operator (participant)

At this time, we will conduct the question-and-answer session. If you would like to ask a question, please press star one on your phone now, and you'll be placed into the queue in the order received. Once again, to ask a question, press star one on your phone now. Our first question will come from Daniel Imbro with Stephens.

Collin Nieman (Equity Research Associate)

Hey, guys, this is Collin Nieman on for Daniel Imbro. Thanks for taking my question.

James Zizelman (President and CEO)

Hey, Colin. Good morning. How are you doing?

Collin Nieman (Equity Research Associate)

Very well. Wanted to ask about some of the cost improvements. You guys had made material cost improvements and the operating cost controls drove sequential improvement in EBITDA margin in the quarter. How can we think about that progression through the second half, and how much opportunity remains on the cost side? If you can help frame that up.

Matthew Horvath (CFO)

Yeah, appreciate the question, Colin. Obviously, this has been a key focus for us this year. You know, we have made significant progress not only on material costs, but really across all of our operational excellence-type priorities, right? So you saw material costs significantly improve in the quarter. Quality-related costs have also come down, which is supporting an improved gross margin. You also saw that in the guidance, although we had some revenue headwind, we're offsetting quite a substantial portion of that, about a third of that potential headwind on the bottom line with continued improvement. So we think that there's quite a bit left to do here, particularly on the material cost side, as we you know, continue down a pipeline of material cost improvement plans.

We'll continue to control operating costs and flex as necessary based on market conditions. We're really making improvements across the P&L. You saw that come through in, you know, pretty good outperformance in the quarter, and we expect that will continue certainly throughout the remainder of the year as we get set up for a good 2025.

Collin Nieman (Equity Research Associate)

Yeah, that makes sense. And then moving on, I wanted to ask one on the MirrorEye take rates right now versus expectations earlier in the year. It sounds like the Europe program that maybe started out with take rates lower, but then you guys noted a couple really positive data points here recently. So curious to get your thoughts on that and how you continue to think about how that will progress through the year.

James Zizelman (President and CEO)

Hey, Colin, thanks for the question. You know, we are actually, you know, quite excited about where take rates are for the MirrorEye program, especially the new launching programs. You know, with Volvo, as we had indicated, here a few moments ago, you know, it's so early in the launch.... So it's hard to gauge that exactly. But, you know, with commentary that we're getting back and the feedback from customers being so positive, you know, we really do feel that we'll, we'll hit the target or even go beyond the target at this point. So we're very, very, very excited and, and bullish on where that goes.

Of course, as you know, we have, you know, some other launches coming up as well, you know, including, you know, at the beginning of next year, two more launches here in North America. You know, that will, of course, increase the amount of a MirrorEye product that goes out into the market, and we're bullish on those take rates as well.

Collin Nieman (Equity Research Associate)

Mm-hmm. That's helpful. And then I'll do one more quick one here. Any color you can give on what your customers are saying on the OEM side for their demand outlook through the remainder of 2024 and maybe into early 2025 as well?

Matthew Horvath (CFO)

Yeah, I mean, obviously, you saw we had a little bit of a reduction in the guidance based on the forecasted production. I still think there's some volatility here in the second half. You're seeing that as we brought guidance down a little bit related to the OEM production. You know, 2025, it's probably too early to tell yet. You know, obviously, the market's moving with interest rates and the overall macroeconomic conditions are big influences on some of our end markets. So, you know, we do see obviously a tremendous amount of self-help as we go into 2025, like Jim mentioned, so we expect, you know, to continue to outperform our underlying end markets. But you did see a little bit of a reduction here in the back half.

Collin Nieman (Equity Research Associate)

Okay, I'll leave it there. Thanks a lot, guys.

Matthew Horvath (CFO)

Thanks, Colin. Appreciate the questions.

James Zizelman (President and CEO)

Yeah, thank you.

Operator (participant)

Our next question will come from Gary Prestopino with Barrington Research.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Hey, good morning, all. Can we-

Matthew Horvath (CFO)

Hey, Gary.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Can we turn to slide 14? I wanna try and parse this out as exactly what is transpiring here in terms of the reduced guidance between the various business segments that you have. I mean, the $12 million decline due to FX, I mean, that's self-explanatory. But-

Matthew Horvath (CFO)

Yeah

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

... the $18 million from OEM production volumes, is that mainly in the control devices segment or electronics, or where is that spread around? I guess what I'm really trying to get at is the MirrorEye projections that you gave for this year, which called for about $100 million of revenue between new wins and retrofit. How has that. How is that gonna look now, given what's transpired in the market?

Matthew Horvath (CFO)

Yeah. Thanks, Gary. So that, the couple of buckets that you see there on slide 14, FX, like you said, is pretty self-explanatory. The $18 million is really, think about it as, effectively IHS or our view on OEM production for the remainder of the year, okay? So that would not include anything related necessarily to MirrorEye take rates, for example, or any other kind of non-OE product.

James Zizelman (President and CEO)

Where the market's going.

Matthew Horvath (CFO)

Yeah, that next bucket there, that $15 million, incorporates any volume volatility that we might see on the newly launched program, as Jim outlined in the remarks. But also, you know, anything else that's non-OE, so off-highway end markets, aftermarket end markets, kind of that whole bucket of non-OE, which is obviously a pretty growing portion of our overall business. So you can think of kind of the left side of that as more kind of macroeconomic, the FX and the OEM production volumes, more formulaic, and the right side is more non-OE and specific customer demand related or option selectable products.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

But is that $15 million decline that includes MirrorEye or doesn't? That's what I'm trying to get at.

Matthew Horvath (CFO)

It does include.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Non-OE-

Matthew Horvath (CFO)

... potential volatility in MirrorEye. Yes, that's right.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Okay. Okay. So, so those numbers that you had started at the beginning of the year at, with about $100 million of revenue from MirrorEye, that is not gonna be attainable, in, in your opinion?

Matthew Horvath (CFO)

Well, what we've said, Gary, is we're still early in the launch on the MirrorEye program.

James Zizelman (President and CEO)

Right.

Matthew Horvath (CFO)

That kind of $0-$30 million range of the guidance is the potential impact for not only MirrorEye, but really everything else non-OE. So Smart 2 tachograph aftermarket, for example, the off-highway business. We're still early in the launch and that volatility is incorporated in that range. But I think it's too early to say how materially different it would be from the $100 million number that we put out early in the year. There is certainly some pressure on that, like Jim said, with some volatility in that launch early on, but we're still too early to extrapolate that over really even the remainder of the year at this point.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Okay. Obviously, your, your new guidance is based on what you're seeing now-

Matthew Horvath (CFO)

Yeah

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

... in terms of demand on your end, end user, end market. So do you feel that given what's going on in the market right now, the low end of adjusted EBITDA would be attainable, or is there other wild cards out there that could make that lower end not be attainable?

Matthew Horvath (CFO)

You know, obviously, Gary, we go through a pretty robust process to evaluate guidance and try to give a, you know, transparent view of where the business is going for the remainder of the year. So we are—we do have a little bit of a broader range than we typically give at this point in the year, given, frankly, how much of the business has some... we can influence, really, for the remainder of the year. So, you know, there are things we can do to move revenue in some of those non-OE products, more so than we have in prior years, which is why that range is broad. As we see it now, Gary, you know, this range is attainable. We wouldn't put our guidance that we don't see as attainable.

We're really pushing hard on some of the things that we can control to outperform.

Yeah, where we are. You know, there is a lot more influence over the back half of the year than we typically have, whether it's you know, the aftermarket and Smart 2 and market penetration there, some of the off-highway markets where we're not traditional OE, that's a little more of an aftermarket business. Even on the MirrorEye take rate piece and how we work with customers and their customers, the dealers, to push take rate and improve visibility of the product. I think all those things are opportunities for us as the year goes on. So we certainly see the guidance as attainable.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Okay, so I also want to talk about this, this Volvo Bus pilot, for data and AI-based Fuel Advice systems. Is, is this the first pilot that you have out there, for this, this product?

James Zizelman (President and CEO)

Yeah, it is the first pilot, Gary, yes.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Okay. So,

James Zizelman (President and CEO)

It's already going. We're already getting some results from it as well, so it's not something that is, you know, an academic thought, right? This is a product that's truly being piloted with real customers, with real drivers.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Yes. So, Volvo Bus is the first customer that has this. That's what I'm trying to get at. Or do you have a bunch of other pilots out there?

James Zizelman (President and CEO)

That Volvo Bus is the first customer, and there is consideration for others as we go forward, yes.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Okay. So if you look at this product with AI-based Fuel Advice system, just very simply explain how this really would work in terms of does it look at... I mean, does it take into account everything, weather, wind, routes? How does it? How does this thing work?

James Zizelman (President and CEO)

Yeah. We're gonna have Troy talk to that. He's, you know, obviously the technical expert here, and I think he can offer a lot of background to help us understand.

Troy Cooprider (CTO)

Hi, Gary.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Hi.

Troy Cooprider (CTO)

So from an attribute standpoint of what we use in the AI algorithm, we're really looking at the driver behavior and how the driver behaves with respect to the slope of the road, the overall weight of the bus, and the average speed. And we're helping the fleet managers, the bus managers, understand how the best drivers work in those situations versus some of their challenged drivers, so that they can coach the behavioral impact to make better drivers better and some of their underperforming drivers more towards average or better. So it's really on the behavioral side and using multiple attributes in and around the bus.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Okay. I really-

James Zizelman (President and CEO)

So, Gary, think about how-

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Yeah, go ahead.

James Zizelman (President and CEO)

I was just gonna add, you know, just think about how someone might even drive a car, right? You know, some people, you know, take away from a traffic light, you know, very quickly. We all know that's a very, you know, energy-consuming kind of event. Some people may not slow down for curves, you know, and, you know, wear brakes down, et cetera. So it really looks at a lot of those attributes of driver based performance, all the things that we all do every day and, you know, turns you into a much less aggressive driver. Someone that, you know, really is trying to maximize fuel economy, you know, on the, on the, on the vehicle that's being driven.

You know, early results, you know, we won't be quantitative today, but early results are very impressive for the amount of fuel economy improvement that is brought from the technology, including from the very best drivers that are already driving, you know, reasonably well and reasonable relative to conserving fuel. Even those drivers have a marked improvement in performance with this technology. So it's very interesting to bus services.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

I know this is a pilot, but, does the revenue model contemplate some kind of a SaaS software?

James Zizelman (President and CEO)

Yeah, yeah, Gary, that's the go-to-market. That's right.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Okay. So then in terms of... And I want to keep just, because this is interesting to me. In terms of this product, can you incorporate that into MirrorEye, and also, you know, along with the advanced software and AI that you're developing for MirrorEye as well, or you have developed?

James Zizelman (President and CEO)

Well, I mean, per se, you know, I'm not sure that there'd be a, you know, a very significant improvement in additional fuel economy improvement that would come from that, from MirrorEye. However, it could—the, the base technology, the base idea of it could be. So, you know, with recording, for example, we can see how drivers execute, lane changes and, and some other things relative to looking backward with the, with the side view mirrors. And, yeah, there, there could be some guidance given to the driver, maybe more so for safety performance, you know, acceptable driving technique on the road, those kinds of things. So yes, in concept, it could be applied.

We've already begun to apply AI to MirrorEye with, you know, path lanes and so forth, trailer projection for where the trailer will go and those kinds of things. This would be an addendum to that, that would add yet another layer of potential improved safety with this type of technology.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Right. And then-

James Zizelman (President and CEO)

Make sense?

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

We look at... Yeah, that makes sense. And then if we look at slide eight, where you're talking about what you've got on AI for MirrorEye at this point, I mean, it says, "Developing, deploying, developing." I mean, this is very early in the game here for what you've got going out in AI, I would assume, right?

James Zizelman (President and CEO)

Well, you know, AI is already embedded in the MirrorEye as we speak today, right? Depends on which model and so forth, but it's already embedded. And yeah, it's the, it's the more rudimentary stuff. It's the path lanes that you saw when you saw the truck. But there's more to come. I mean, what you see in the slide itself and, you know, what you see there in terms of alerting the driver and so forth, you know, these are right at the doorstep of being broadly utilized. So yeah, it's already in, and there's a lot more to come, and it's soon.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

Well, it makes the application more sticky as it, as it goes on.

James Zizelman (President and CEO)

Yeah, for sure. For sure.

Gary Prestopino (Managing Director and Senior Equity Research Analyst)

All right. Thank you.

James Zizelman (President and CEO)

Thanks, Gary. Gary, appreciate all the questions.

Operator (participant)

This concludes our question and answer session. I will now turn the conference back to Mr. Zizelman for closing remarks.

James Zizelman (President and CEO)

Well, thank you, everyone, for joining us for the call. Look, I know your time is super important, and we truly appreciate your willingness to engage us once again today. You know, in the second quarter, we continued to make progress towards the key initiatives we outlined for 2024. As discussed earlier in the call, we are delivering on our key priorities, including a keen focus on the development of critical advanced technologies, and expect our efforts to continue to drive long-term, profitable revenue growth and significant earnings expansion going forward. We will continue to deliver on our commitments by focusing on our long-term strategy, broad 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, everybody.

Operator (participant)

This concludes today's conference call. Thank you for attending.