All right, I think we're going to go ahead and get started. My name is Brady Lierz, so I'm an associate on the Transportation Research Team here at Stephens. Happy to be joined by the Stoneridge team, Jim, Matt, thanks for joining us.
Our pleasure.
Thanks, Brady.
Maybe we can start at a high level for those in the room or on the webcast that are new to the story. Can you just give us a brief overview of SRI's different segments, some examples of the products, and maybe some main customers in those segments, just so we can get an understanding of how Stoneridge fits in the transportation equipment ecosystem?
Absolutely will. So, I'll start, and maybe Matt will touch in here and there as necessary. So first off, overarchingly, Stoneridge is a company that produces primarily electrical and electronic products and systems. We do operate according to megatrends, so things like safety, for example, electrification. These are the kinds of things that drive the overarching view of the company.
We have a lot of products that have been developed that are in launch at the moment, a lot of vision and safety products especially. And these products really help drive the top line of the company for sure. And the products that we have that are launching now, these are very much content-ad type products. So, it's not a new driver's seat replaced by a different driver or replacing an old driver's seat. It's content-ad functionality-ad that really does drive a good, strong value proposition for the company.
We operate in three different segments. The first is Control D evices, and this is more of a powertrain-based segment, and over the last several years in that segment, we took the time to make sure that, first off, we were focused on what was happening in the powertrain space, meaning it's not just going to be ICE only. It's going to be that with hybrids and electric.
We ensured that the work that we were doing in engineering was such that the technologies that we were developing were agnostic to the propulsion system or to the drivetrain type, still allowing, though, for particular applications to be appropriate for whatever vehicle powertrain system was out there, and the product areas in Control D evices are actuators. So, think about electric shift-by-wire systems or actuators for axle connect or disconnect, valves.
Think about emissions control systems and the valve control sensors, temperature sensors primarily in our case, both high and low temperature sensors, as well as various connectors as well. That's the general mix of products that we have in Control D evices . For Control D evices , it's primarily in the passenger car space. There isn't a lot of commercial vehicle business there, although a little bit in the sensing space.
And for the most part, our customers are based in North America for that segment, and typically the Big T hree, the Detroit Three. Now, there's also some business in China that we serve, a lot of the China locals, a passenger car business with various similar products that we have in North America as well.
On the Electronics side, it's a division that makes up maybe 50% or more of our revenue, whereas controlled devices are more like 35% or 40%. And on the Electronics side, we serve primarily the commercial vehicle market and areas where we are active, driver information systems. Think electronic instrumentation clusters, vision and safety systems, our MirrorEye and connected trailer, and so forth. I think those are well described by that.
Connectivity systems, things that talk to the outside world, delivering data from the vehicle as necessary. And then we have a pretty good business in the control electronics space. Control electronics is an important part of the business. Today, the products themselves are maybe a bit smaller, like body control modules, cabin control modules.
But think about the co nsolidation of electronics that will come in the future on commercial vehicles, much like what has happened in automotive. You'll see a lot more combination of those controllers really growing into larger domain controllers. And we're actively working in that space from an advanced engineering perspective. Now, a key product obviously coming out of electronics is our MirrorEye system. And for those who are not aware, MirrorEye system is a camera mirror system.
So it is meant to replace conventional rearview mirrors. And this is specifically on commercial vehicles. And these are sophisticated camera mirror systems. It's not just a camera on a stalk. This is a system that offers some AI overlays where you can see elements in the image, like distance behind the trailer or whether or not there's a pedestrian or a car next to you.
Also provides some added functionality where it will actually predict the location of the trailer depending on the speed and the steering angle in the cab. And you get real-time correction of that. If the driver were to correct and turn the steering wheel, you get correction, and that projected image, of course, changes accordingly. So it's a very interesting system.
We'll talk probably a bit later here about where we've marketed that and which customers have come on board. But again, it's a very capable, very sophisticated system. And it's really one of the foundational products for the growth of Stoneridge in the next few years as well. Another product in the Elecronic side is the Smart 2 Tachograph. And the Smart 2 Tachograph is a compliance device that we sell in Europe.
And this is a system that allows for government agencies in the EU to understand how far have trucks traveled, how long have they been operating, how long has a driver been operating the truck. It also can communicate to the outside world, especially at international checkpoints, to make sure it's clear that there's some information around where that truck is within the EU. And that's a product that's very interesting to us as well because it's a new technology that was required by regulation in the European Union.
Starting in August or so of 2023, all new vehicles that were produced at 3.5 tons or higher that had international border crossings were required to be built with this tachograph in place. All pre-existing vehicles that had older versions of tachograph are on a schedule for retrofit. It comes in two different rounds.
The first round of retrofit is currently in process. That should finish by the end of this year. There's a whole second round of a whole different class of vehicles that get retrofitted by August of 2025. And then, interestingly, the European Union has added a whole class of vehicles requiring this tachograph. So it used to be 3.5 tons and higher with international border crossings. It's now, in August of 2026, it will be 2.5 tons and higher. So all those trucks between 2.5 and 3.5 tons are added.
So there's opportunity here significantly in the aftermarket, certainly in the short to midterm as you go through those two rounds of retrofit. And you've got one additional entire class of vehicles that will be added, all driving excellent top-line opportunity for us. So who are the customers in this space?
PACCAR is a clear and significant customer for us across many of those products. For the record, the PACCAR brands are Kenworth, Peterbilt in North America, and DAF in Europe. Volvo is a big customer for us. We just launched the Volvo MirrorEye program in Europe. Volvo and their various brands of trucks and so forth are also served by Stoneridge. Daimler Truck is another big customer for us at the moment. We just announced in our recent earnings call that they too are launching with MirrorEye come mid-2025. Another big launch for us.
TRATON is a big customer for us as well. For the North American audience here, TRATON has the International Navistar brand, but in Europe, they have MAN and Scania and VW trucks as well. It's a big broad brand.
And then the third segment is Stoneridge Brazil. And historically, Stoneridge Brazil has been an aftermarket type segment, focused a lot on aftermarket radios and infotainment systems, aftermarket alarm systems. We have been systematically moving away from that and serving more so our global customers in Brazil, primarily in the electronic space. So we can really think of the Brazilian segment really more so as an extension now of electronics.
And more and more so, and now about 50% or so, Matt, of their business is in the OE space, again, serving our global customers there. We also utilize Brazil sometimes, actually quite a bit, as a key technical center for us. There's great technical skill there. We're located in and around a university, and we're able to actually execute a lot of technical tasks and innovation and development there in Brazil very cost-effectively.
And these are people that are within your four walls so that you can really keep tabs on any innovation that you have coming. So hopefully that gives a good overview. Matt, do you want to add anything to that?
No, I mean, the only thing I would maybe add is that historically, like you said, Brazil has been much more focused on the local market for some other products. We have really kind of accelerated the transformation of Brazil to be a support of our global business, utilizing both the engineering resources, the fact that a lot of our global customers sell with significant volume in South America. So Brazil has become a really important part of our overall kind of global footprint, not only from an engineering perspective, but from a customer service perspective as well.
Jim, since you became CEO early last year, there's obviously been a lot of noise in just the broader transport backdrop. But I think one of the major focal points at Stoneridge has been the path to better margins of profitability. As we sit here today, could you just kind of run through some of the top opportunities from an operations perspective for margin improvement?
Sure. So maybe I'll start with working on the top line. I mean, obviously, if we expand our top line, there's a lot of dilution of fixed costs that can really help us, and that would certainly drive margins. And from a top-line perspective, there's a number of things, and I touched on a few of those in the upfront description there. So we just launched Volvo North America, sorry, Volvo Europe in August of 2024. That was launched on a brand new truck model with Volvo in Europe. It's called the FH Aero. And that truck, it was a launching truck, so it was a little bit of a slow launch.
And as we get into 2025, obviously, that will be fully launched, and we'll have a full year opportunity for that launch product. The interesting thing there is that that product is now standard equipment.
Our MirrorEye system is now standard equipment on that FH Aero truck, so we talk about take rates a lot on MirrorEye. And for that truck, it's 100%. It will be 100% and optional on their other long-haul trucks, so that kind of thing is certainly important to us.
Also, DAF in Europe, again, a PACCAR brand, announced that starting in 2025, they too will make the MirrorEye system standard equipment on several of their long-haul models and fully optional, as was always, on the remainder of their models, so we expect, on average, an overall rise in take rate with DAF as well, given that move from fully optional to standard equipment on some vehicles, and so we're being very, very careful about these launches to make sure that we're doing the right thing and really being attentive to the customer.
Any issues come up during a launch, we're right on top of it. So those are things that have launched and are, we think, improving. But we have other launches coming as well. Volvo North America will launch mid-year 2025. So we'll get a partial year of Volvo here in North America. And we've got DTNA, so Daimler Truck North America.
That brand is Freightliner, and that will launch also mid-year 2025. And I think folks certainly in this room and in this industry recognize that Freightliner is a dominant player in the long-haul Class A truck space, and I think approaching a 60% market share with their Cascadia truck. So we're looking very much forward to that launch as well.
And it's all hands on deck at Stoneridge to make sure that these things go absolutely flawlessly and we are on top of anything that comes up as we move toward these launches. So that's, I think, a key part of the top line. But we've also been focused quite a bit on some other things below that top line that will drive margins. One is material cost improvement. And I think, Brady, you've heard probably during COVID when we really went after price increases because of costs coming to us from our suppliers. That really did help provide a base for us to move forward.
But at this point, we're really doubling down on efforts to reduce material costs. So what can we do from a supplier perspective? What can we do from a negotiation perspective?
Importantly, what can we do inside the four walls of Stoneridge to simplify designs, drive things from a design perspective to a place where the materials themselves are just, there's less of them or they're less costly so that we can drive the base cost down of the materials? So those are very significant efforts that we have ongoing right now.
Again, even some special help from the outside to help drive in that space to ensure that we're getting absolutely as much as we can there without sacrificing any performance or quality. And then cost of poor quality is always something that every company looks at, and good companies really drive that to an absolute minimum. There's various categories of cost of poor quality. And so we are absolutely focused on that as well. We're in our plants driving operational excellence in the plants.
We're driving operational excellence actually across all of the functions. So one of the things that we're doing is we're forcing, as we should be, compliance with our vetted processes to build in quality to avoid issues downstream. If you get that stuff during development, when you're working with purchasing or working in your engineering groups or whatever function you have, to make sure that you are vetting the product along the way at regular increments to ensure that there are no quality issues brought forward. It really does go forward and minimize scrap. It minimizes problems in the field.
Upfront, it builds in the quality that you need. In the meantime, you've got some warranty. You've got some scrap issues. So we are all over those as well in a remedial sense to drive those down as much as possible given the designs that are in play.
So that element of cost of poor quality is one of the key priorities of Stoneridge. It's just a few that we put out there in front of our full employee group, and that is one of the key ones that we have a great focus on. And then I would say that there's opportunity for us to expand a little bit in our aftermarket segment. We have a segment of our business, not really a segment, but it's an element of our electronics business that is more off-road. So agricultural, industrial, construction. And there's a lot of vision products associated with that part of the industry.
And so we're working very heavily with those folks as well to ensure that they are being considered properly and that we're really assessing what needs they have and we're bringing the right vision solutions to them, whether it be analog cameras, digital cameras, or even smart cameras that have some of those AI features that are discussed so openly on MirrorEye, but not so commonly on things like cameras for forklift trucks or front loaders or something like that. So we've got a key focus there as well. Okay. I don't know, Matt, anything to add on that one?
That's good. Yeah.
Okay.
Maybe we could just talk about the macro. Obviously, recently, it's been challenging. What are your customers telling you today in regards to 2025? Has that changed meaningfully from three to six months ago? And just kind of what's their message to you?
Well, certainly in quarter three and probably in quarter four as well, what we're seeing because of the macro is some pretty reduced volumes. That's a fact. It's true in commercial vehicles, especially in Europe. It's certainly true in passenger cars as well. Certain passenger car customers, again, we're North America-based there, are worse than others, some markedly worse. That's a fact. As we go into 2025, it looks like there won't be a lot of recovery there. I mean, there may be something, but I think a lot of that depends on maybe the implementation of some things in the new administration.
Politically, it depends probably on interest rates. Certainly, where do incentives go? If you look at some of the folks that provide future-looking volumes, you might get a pickup at the second half of the year, but that's looking still pretty flat, unfortunately.
But we just have to make sure that as we go through this process, that all the things I talked about, below top-line growth, just a few minutes ago, that we have an absolute key focus on that to ensure that that doesn't really create too much of a problem for us. Commercial vehicle space, we expect a pickup perhaps in the second half, maybe even some pre-buy because of some of the emission standards coming in, and then certainly after that, we do expect to see a lot of uptick.
But importantly, remember the products that we bring in the commercial vehicle space. These are content-ad products, and we're launching on so many different platforms that even if the market isn't robustly recovering, from our perspective, we have a great opportunity here to outperform the market by the nature of what we're bringing forward from a new product perspective in those launches.
Maybe if you look ahead to 2025, if the background kind of remains more challenged, what are the cost levers? Can you kind of bucket them out that you can pull to see some kind of Stoneridge-specific improvement kind of regardless of that backdrop?
I'm not sure. Maybe I tried to cover that perhaps a little bit earlier, and again, I think from a cost perspective, all the things I mentioned about addressing COPQ, and that is for things we can do right now, those are the remedial things, so minimizing scrap and addressing any warranty concerns early, but we're also working through a lot of efficiency improvements in the organization as well and making sure that we are organized in such a way where we're getting the most that we can out of the workforce that we have.
Certainly, there's some footprint considerations to be made as well to make sure that you've got the right skill in the right place and that you are cost-effectively placing your headcount as well.
I think for the most part, the answer to that is similar to what I had provided for the prior question as well.
Yeah, I'll maybe expand on that a little bit. So if you think about what we're doing on particularly COPQ, Cost of Poor Quality, like Jim said, and material cost, those are not always all-at-once fixes. Generally, they're kind of stepped through multiple processes. So you've got a pipeline of material cost improvement plans. You have to do one to do two to do three. So we'll continue to see that benefit, even in the face of some macroeconomic headwind, particularly in the first half of the year. We'll continue to see the benefit of the things that we're doing.
Similarly, I would say even more so on the cost of poor quality side, the processes that Jim mentioned, the centralization of some of our functions for global consistency and adherence to those processes, typically you will see the fix in the process well in advance of any financial performance you'll see on actual reduction of cost, and like Jim mentioned, you're never going to completely eliminate quality-related expenses.
The idea is to minimize the peaks and neutralize how long they last so that you can deal with them in a confined area, so the processes that we've put in place are anticipated to do that, reduce the peaks, reduce the amount of time that you have quality-related issues, and thus significantly reduce the expense that you incur for that. That will take some time to materialize as well.
So between kind of this step-by-step change in material cost improvement and this kind of quality-related process improvement, I would expect you'll continue to see that for a pretty good period of time. Also, like Jim mentioned, we've taken out quite a bit of operating expense. When you look at centralizing some of these functions, Jim mentioned footprint rationalization, right capability in right areas. We've done a lot of that work, and you're seeing that come through in the expense side. Not only does it come through as reduced cost, it improves efficiency as well.
So all of those things, I think there's a lot of self-help for us here. That although we can influence a significant portion of our top line, which Jim mentioned, I know we'll go into some more detail. There's a lot of self-help below the top line that we can really build a good fundamental base for the company as we get into particularly the back half of the year when I would expect the macro picks up for us. Gotcha.
Maybe just let's talk about MirrorEye a little bit. Can you give us an update as to where we are today with your launch programs? Are there meaningful programs left to win in North America and Europe? And I think you mentioned the European launch earlier this year. How has that progressed?
Yeah. So maybe starting off on the retrofit side. So we are still working with fleets primarily in North America. We have more than 40 fleets currently active. You may have heard in our most recent quarterly earnings call that a new fleet, DB Schenker, has been brought on board, and they're going to evaluate the product on 75 units and have the potential to perhaps grow that once they're done with their evaluation.
Some buses, we had a large bus order for some electric buses in Europe as well. Again, an aftermarket opportunity. So those things are still ongoing. We're focused more so on the bigger fleets these days. Ones that perhaps have more influence on the OEs have a greater voice with those truck-producing organizations. On the OEM side, if you look at what we have talked about, we have four awarded programs, global programs for MirrorEye.
Those four awarded global programs serve eight different brands. Eight different brands. So for example, PACCAR has three brands, and several of them have multiple brands. So we are serving many of the truck brands around the world. And so that's a very good thing. We talked that DAF was one of the, actually, was the first MirrorEye program that we launched. That was in December of 2022. And that's our most mature program.
They recently announced again that they're going to convert some of the product to standard equipment on several models. So that's going well. Volvo, obviously, launched in Europe this past summer. Again, they'll launch North America this coming year. Daimler Truck will launch this coming year.
And there's a few other brands that are launching that are subsidiaries of those global companies that we really aren't at liberty to talk about relative to name, but those two are launching in the same time period. So we have a lot of things that are either launched or are launching. Now, there's really one major customer that is yet to be booked and either hasn't brought Camera Mirror systems forward on their vehicles or have brought it forward in just a small way.
And it's a global OE that has both brands in North America as well as in Europe. And we're actively pursuing them to try to make our best way into that global OE as well. So I think that's always very helpful in terms of how to grow in this space.
If you take it a bit further, where do we go from a base MirrorEye? There's a lot of advancements in MirrorEye system that are coming, whether it be in recording or AI-based enhancements to the MirrorEye system with proper overlays and object and pedestrian detection. And that's, I'll say, an enhancement to the base system. And now we're talking about the connected trailer as well. Last year, we had the Gen 1 connected trailer out front.
This year, we've brought the Gen 2 with a lot of the advanced activity now shown on that trailer. And it shows a significant addition of more cameras. It certainly has that rear view camera, but it has the cameras that we have placed now on the front ends of the trailer so you can see down the sides of the trailer under any circumstance.
It's got a hitch-based camera so the trucker can see his hitching process. So he doesn't need to jump in and out of the truck multiple times. It's got multiple ultrasonic sensors to ensure appropriate pedestrian detection, especially around the tail end of the trailer. It has the capability to take in temperature and pressure sensor input, a camera inside the cargo area. All of this detail brought into the cab of the vehicle through the MirrorEye system and displayed openly on the display inside the cab without adding any wires.
This is the technology we brought forward that was wired, but without additional wiring harness by superimposing the signal over the current power and ground lines on the vehicle. So it's a great innovation. It's easy to implement.
You don't change even a single connector going from trailer to cab, and you're able to bring all that information into the cab, and the driver can much better monitor what's going on. So there's a lot of opportunity here on the MirrorEye space, both from a launched, about to launch, and then expansion on the MirrorEye platform perspective.
Yeah. Pricing and margins compared on the retrofit versus the buy-in?
Yeah. So the retrofit is higher, a higher margin because generally it's a more customized system. It's obviously lower volume depending on the fleet. We haven't been specific with how much higher the retrofit is, but it's higher than the OE. The OE has obviously much higher volume, but it is generally higher across any of the retrofit applications. The retrofits can have, like Jim said, we've got DVR capabilities plus or minus. You've got a corner view plus or minus.
You've got different size screens, different potential trailer applications. So the margin's higher, but kind of commercially sensitive on how much higher. Okay. At the beginning of the year, you gave guidance for $100 million in revenue contribution from MirrorEye. Could you kind of give us an update as to what you're expecting for 2024 as we sit here today?
If it's different from where it was at the beginning of the year, could you kind of give us some color as to what's driving the difference? Yeah. So we said $100 million at the beginning of the year. Right now, we expect between $65 and $70 million of total MirrorEye revenue for this year. It's still a 25% increase over last year, which I would expect to continue to accelerate into next year. As Jim mentioned, we have several launches.
We've got the annualization of the Volvo program. We expect some incremental take rate even on the existing programs with some of the standardization across different platforms. There's a couple of things that have really changed the number for this year. Obviously, overall macroeconomic condition has reduced the number of trucks being built, which take rate applied to trucks is pretty simple.
Also, I would say that the retrofit programs have probably shifted more into the OE bucket. As we get closer to the OE launches, I think particularly in North America, we've been very heavy with very large brand name fleets. They would prefer to buy it from the OE. It's why we offered it pre-wire. Originally, it's a much easier, cleaner installation. They would prefer to buy it from the OE, and we're very close to those being broadly available on several of the largest OEs here in North America.
So I think there's been some validation in the retrofit market by the fleets. I think there's been a lot of communication between the fleets and the OEs on what that system means. It's probably why you're seeing the OEs step up on their expectations of volume going forward.
But a little bit of that has shifted to the right as the OE programs launch time-wise into early next year. And then finally, I would mention the programs that are currently launched. The PACCAR program, like we've talked about in the last couple of quarters, has been a little bit slower from a take rate perspective. We are working with PACCAR to improve that. I think we're starting to see some uptick there, particularly as we go into next year with maybe some added feature functions to that system to make it more appealing to the broader market.
And as you see these other North American programs launch early next year, early to mid next year. And then finally, we've talked about the Volvo launch in Europe. The good news is it's a great story going forward.
We expect the momentum in the Volvo program in Europe is growing pretty substantially to the extent, like Jim said, there are applications now where it's standard equipment, and it's really an option across all their platform. But it was a little bit slower to ramp up than we expected a bit here in the first couple of quarters. So I think that's probably a transient issue that as we get into 2025, we'll see kind of normalization at potentially even a higher take rate level.
Maybe just going down that same path as we look ahead to 2025, I feel like one of the stories with Stoneridge has been its ability and opportunity to outgrow its end markets. So considering just the recent weakness in those end markets, do you still think you guys can outgrow your end markets in 2025?
If so, could you kind of hit on what the major drivers behind that outgrowth would be?
Yeah, sure. Look, over the long term, we expect to outperform our end markets by two to three times. A lot of that is based on content growth of products where we already own real estate. So for example, we've talked about our digital information driver information systems going from mechanical to hybrid to digital systems now. There's a significant amount of content around basically the same piece of real estate in the vehicle.
Similarly, on the Control D evices side, when we talk about actuators replacing mechanical things with electromechanical actuators, you're seeing significant content increase because the device does something that's incrementally better for the vehicle or makes it more efficient. So self-help on the content side should continue to help us grow in several of those areas, even products that are existing that aren't new launches today.
And then when you look across new launches between MirrorEye, obviously launching with several additional brands next year, the annualization of some of the MirrorEye that launched this year, and what we see as good momentum on take rate, I think there's a substantial amount of growth in MirrorEye 2025 and certainly in 2026 when all of those programs are mature and out on the road.
I also think that that probably brings in some incremental fleet activity, particularly around the trailer expansion of what I would call the MirrorEye product to the MirrorEye platform, which for those of you here can go see in front of the hotel this afternoon. So I think that that platform continues to expand, which drives market outgrowth.
And then finally, if you look at the Smart 2 tachograph, at least for the next couple of years, there will be a retrofit application for that as these new vehicle classes come in under that regulation that should drive market outgrowth. So we don't typically talk about specific quarters or periods when we expect market outgrowth, but because of those things, content, new launches, and the incremental take rate on existing launches, we feel very comfortable with the backlog will support substantial growth forward.
Maybe we could talk about Smart 2 just for a second. I think you've mentioned before that some of the delayed adoption has kind of been a headwind to Smart 2 ramping this year. Could you talk about what your customers are telling you or why the adoption has been delayed? And just is that adoption that you expect to see now in 2025, or is there a change? Just any update there?
I mean, I don't think we saw a very significant reduction in revenue on tachograph in 2024 so far. Yeah, it's a little bit reduced, but the market in Europe, which is exactly where that's marketed, is very depressed, right? Down 17% or something like that.
20%.
So at the OE level, there's certainly less than what was anticipated. The aftermarket is the aftermarket, right? The retrofits have to happen based on regulation. And so we actually are pretty optimistic here. Again, because as we said a bit earlier, we've got this first round of retrofit that needs to be completed by the end of the year. And if you have a deadline of December 31st, will you get it done on August 1st or will you wait till December 30th and hope you can get it done in a day? So you do usually end up getting these back-end weighted kind of rush to the finish situations. So there's some of that.
And then you have the next retrofit round coming for even the older tachographs that are out there that will commence now and go all the way through August of 2025.
There's another bulge of that retrofit that will come. Then, of course, this new class of trucks. We are very optimistic, actually, that this will be a nice revenue bump for us. This will go as planned. We are doubling down on our marketing, both on the aftermarket side as well as on the OE side, trying to book new OE business with customers that perhaps don't use us today for their tachograph supplier. Yeah, we're positive on this. It's mostly market-driven softness. It's not a really big change from what we had anticipated. That's about $60 million or so in revenue in 2024.
Yeah. One thing I would add here, we talked about influenceable revenue where we can really drive some top line, even if the macro remains moderate here or even depressed for a period of time. This is one area where we've talked publicly the fact that we own about 30% of that market. So there's really just one other primary competitor. There is a significant opportunity for us here to take market. And over the next couple of years, that can be very significant.
And going back to the question from the audience previously, that aftermarket revenue can generate some pretty significant margin, some pretty accretive margin. So we are really focused on a couple of areas where we can drive that top line growth.
This particularly in the aftermarket side and particularly over the next couple of years as the Smart 2 regulations roll on in Europe, this is one we're really focused on. I want to spend a minute just on the financials. Matt, I mean, working capital is something you've mentioned before as an opportunity for Stoneridge. Could you talk about what the opportunity is ahead there? And in the event the macro doesn't improve in 2025, can we see improved cash flow of the company just outside of that?
Yes, absolutely. One of the key focuses for us, one of the key priorities for us as a management team is driving inventory reduction. A little bit of how we got here. If you look at what happened over supply chain shortages on electronic components and you think about where Stoneridge was in the launch cycle of some of these big electronic systems, we had very long lead times with new products that had at the time higher volume than what we're currently seeing in the market.
What we ended up with is a lot of electronic components in inventory that have a longer burndown time than they did historically, and generally higher cost, bill of material type things on the electronic side. What we have seen is a lot longer stretched out burndown of that inventory than we expected.
Right now, we're at just over four turns of inventory, which is embarrassingly low, frankly. Both when you look at us historically, what we've been kind of high single digits, even touching 10 historically. Our peers historically have been at least double that. So there is a significant amount of inventory opportunity here, and it's probably over the next 12 - 15 months as we get into the back half of next year. Obviously, more volume will help that, but we have the ability to burn down some of that inventory just supply chain strategy, supply chain management now that volumes are a little more stable.
Even if they're stably low, stability provides us a little bit more visibility and inventory opportunity. So I would say a significant opportunity on inventory. CapEx is pretty light for the business in general, kind of around 3.5% or maybe 4% maintenance and growth.
CapEx will be a little bit lighter than that this year as we kind of navigate some of the continued macroeconomic challenges. But certainly, even without significant earnings expansion next year, there is certainly an opportunity to improve cash flow and is primarily focused around inventory.
Sure.
Yeah. I mean, if you look, yeah, right now our debt is pretty expensive, and I would say we're on the high end of comfortable leverage from where we would want to be. So I would say the best use of capital right now is to pay down debt. If you look at what we've done historically, we've looked at share repurchases. I would say at this leverage level and at this cost of debt, it probably, although with the stock price where it at, maybe you can make a different argument for that.
But yeah, primarily first pay down debt. The good news about this business is it doesn't need anything inorganically to really significantly grow and create a lot of earnings power. So when we look at capital deployment, it's first make sure we invest in what we've already got because it's really good.
And then second, where can we minimize cost? And right now the cost of debt with our debt load is a little bit higher than what we would like. So that's where we focus. As we get a little further into that pay down and deleveraging, you start to open up what the scope of possible is and look at how you might return capital to shareholders or add a little fuel to the fire if there's an opportunity. But for the time being, we'd focus on net debt.
Yeah. Key reason why inventory has got to come down.
That's right.
Yeah, that's exactly right.
Maybe just on the margin front, there's been a lot of near-term volatility. But over the long term, can you help us think about what normalized margins look like for Control D evices and electronics? Is there any structural reason why one segment would have better margins than the other? Just help us think about.
No, I mean, if you look back historically, both segments have performed at kind of our targeted range, which is kind of mid-teens EBITDA margin. That takes a little bit of scale to get there. I think electronics is scaling a little faster right now than Control D evices. So maybe there's more accretive margin more quickly in the electronics segment. But Control D evices has some real opportunity on material costs in particular to drive margin expansion, even if passenger car is expected to be plus or minus 1% next year. So structurally, there is really nothing different in the segments but for size.
They each have an interesting value proposition from a components to system integration perspective. From the real estate they own and the value proposition of the products is very good. So structurally, there's nothing different but for size.
I think electronics probably gets there a little bit faster than Control D evices does at this point.
Jim mentioned it a little bit earlier, but there was an election here just a few weeks ago given the incoming administration change. Could you just talk about any potential opportunities or risks you see developing with Stoneridge either on passenger or commercial vehicle?
I mean, the one that is coming up a lot, a lot of our investors are asking us about whether or not tariffs can be a problem for us. And I think you know, Brady, that we've got a pretty sizable business in China. Fortunately, that business is in Asia for Asia. There's almost nothing that comes out of there and goes elsewhere in the world and certainly not back to North America. So from that perspective, we don't really see a lot.
However, like every other company that uses any kind of electronic components in the microprocessor space, silicon-based products, no matter what you do, there's always seemingly a pathway from Taiwan to China for final processing and then back. And so I think we all will see some potential risk for those components and seeing a higher price.
And if that's the case, then it will not be uncommon for suppliers in this space to go back to their customers saying, "This is the price of the product. This is happening." So we've got a good track record of engaging our customers during COVID and being respectful and appropriate in how we brought price increases. We were very successful in making that happen. And if that were to happen here, we would do some of the same. But overarchingly, as a company, we don't have a big, big risk here because it's only in that microprocessor space that we see a problem right now.
Now, if something happens with USMCA, that could be different. If it gets torn up somehow and the current regulations for products already being produced there or vehicles already being produced there somehow are being penalized, that could be another arm of this.
But I think we're pretty far away from knowing whether or not that's going to have any kind of impact or if it will occur at all and to what degree and what kind of impact it would have.
Just want to take a minute and see if there are any final questions from the audience. Maybe we could just hit on how the new business pipeline contract activity has trended recently. Have there been any major changes in activity across the different product lines or geographies in recent months?
We've been moving quite well. I mentioned on the Electronics side, especially with MirrorEye, there is one major global OE that we're pursuing relative to that product and the implementation there for sure. On the Control D evices side, you read or heard about our leak detection module. A new booked business with a Chinese joint venture OE that we are bringing a new technology to bear for emissions control reasons. It's evaporative emissions control. It's a new, robust, very reliable product that really meets the need of many OEs that have difficult evaporative emission problems on their vehicles.
Hybrids are notoriously difficult to control the evaporative emissions because the engine doesn't run very often in some cases, and you have to manage that vapor that forms even without running the engine. It's also applicable to larger vehicles as well.
So we have a lot of customers coming in now interested in applying that more sophisticated, more capable product to their vehicles as well. And it's interesting too in the Control D evices space, there are some Tier 1s that are getting out of more conventional business. They've already decided to move on to something else. And now that hybrids and internal combustion engine vehicles are seeing a bit of a resurgence, getting back to some normal level, you're seeing some customers coming forward looking for improvements or design changes.
And some Tier 1s are saying, "No, I've taken all the engineering off that." We are looking into many of those businesses as well and taking the opportunity to grow the business by taking over some of that business that has a long, long tail, especially those in the diesel space, the diesel engines for delivery and commercial vehicles being around for a long time. So, there's a lot of activity ongoing for sure.
Jim, Matt, I think we're about out of time, but any final thoughts, anything we didn't touch on?
Anything you need, Matt?
No. I think it's good. I appreciate you guys having us. I think that's it.
Yeah. And look, I'm extremely optimistic about Stoneridge. I mean, you heard about the launches, you heard about the new launches that are coming, you heard about the opportunity is coming on additional product and expansions on our platforms. We have a great pathway to increasing revenue in this company and markedly expanding the margins well beyond market. So, we're very optimistic here at Stoneridge.
Team, thanks for your time.
Thank you very much.