Stoneridge Inc (SRI) 2015 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Stoneridge third-quarter 2015 conference call. (Operator Instructions). As a reminder, this conference may be recorded.

I will now turn your conference over to Ken Kure, Corporate Treasurer and Director of Finance. Sir, please go ahead.

Good morning, everyone, and thank you for joining us on today's call. By now, you should have received our third-quarter earnings release. The release and the accompanying presentation has been or will shortly be filed with the SEC and has been posted to our website at www.Stoneridge.com.

Joining me on today's call are Jon DeGaynor, our President and Chief Executive Officer, and George Strickler, our Chief Financial Officer.

Before we begin, I need to inform you that certain statements today may be forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe 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 filed with the Securities and Exchange Commission under the heading Forward-Looking Statements.

During today's call, we will also be referring to certain non-GAAP financial measures. Please see the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

As a result of the sale of the wiring business, starting in the second quarter of 2014, our control devices, electronics, and PST segments have been reported as continuing operations while the wiring business was reported as a single line called discontinued operations. In addition, our balance sheets and statements of cash flows included the wiring business through July 31, 2014. Our forward projections for 2015 are four our three remaining segments as our financial results, including the wiring business, are not indicative of our future performance.

Jon will begin the call by addressing the strategies discussed during our third-quarter earnings call and our progress to address the near-term challenges and longer-term value enhancements for Stoneridge. George will discuss the financial and operational aspects for the third quarter. George will also review our revised sales and earnings guidance based on the trends that we have seen through the third quarter and what we expect for the fourth quarter.

We have prepared and published an earnings presentation to provide more detailed schedules to help the understanding of our third-quarter results, trends for our continued improvement, and update you on key initiatives to improve financial performance. A copy of these items can be found on our website at www.Stoneridge.com in the Investor Relations section. After Jon and George have finished their formal remarks, we will open up the call to questions.

With that, I will turn the call over to Jon.

Thank you, Ken, and good morning. I'm pleased to report that we recorded a strong third quarter. The organization was able to overcome the headwinds cause by currency changes in Europe and Brazil as well as continued deterioration in the economic situation in Brazil. This performance by the team is a reflection of the capability of Stoneridge to perform in the face of challenges, consistently deliver improving results, as we have in the first three quarters of 2015. George will provide more detail in his section on the performance for the third quarter.

During last quarter's call, I outlined for you my initial assessment as to where we are in our journey to generate sustainable earnings and sales growth. I described the themes that are providing focus for the organization. I'd like to provide a short update on those themes.

The first theme -- predictability. We have applied analytical tools to reduce variation in our business results and prioritize both capital and human resource deployment. In conjunction with in-depth business reviews, the tools have allowed us to better control discretionary cost, reduce inventory levels, and reduce or postpone capital expenditures. The impact of this effort can be seen in the changes in the utilization of our global manufacturing footprint, thus lowering our costs by leveraging our global capability, and in the utilization of our capital, increasing production on existing equipment and eliminating redundant assets wherever possible.

Let me provide a couple of specific examples. In our control devices business, we are moving a portion of our EGT production from a US facility to our China facility to support sales growth globally and in the Asia-Pacific region specifically. This action allows us to expand our overall business, improve profitability and optimize existing capacity utilization. In addition, we have undertaken productivity initiatives for our PCB and SMT lines to align all plants with best-in-Company and best-in-class performance. For example, in Juarez, Mexico, this initiative will eliminate -- enable the elimination of four older lines and the consolidation of production on two newer, more cost-efficient lines.

Second theme -- deepening our organizational competence. The leadership team is in the middle of a robust organizational review to assure that we have prepared the team, correct skills, right locations to drive future growth and performance. As part of this initiative, we have incurred business realignment expenses in the third quarter. This is part of our overall effort to strengthen the organization as well as to adjust our cost structure to changing business conditions.

A critical portion of strengthening the organization for the future is leadership, and I'm excited to talk about a few changes that are impacting my direct team. First, we've hired a new Chief Human Resources Officer, Alisa Nagle, who will drive the initiatives to develop and retain talent, elevating our skill sets and capabilities to face future challenges. She will also work across the globe to improve the communication and workforce engagement across the Company. The capabilities that she brings will be a great addition to the Stoneridge team and we are excited to have her on board.

Another step in deepening the organizational competencies is the creation of a new position of VP of Procurement. This position will accelerate our ongoing efforts to leverage our global spend, reduce our raw materials costs as a percent of sales, and improve the efficiency of our supply chain. Expects more news on this position in the near future.

Finally, we have created a vice president level position for the role of business development for all of Stoneridge. Steve Fox, who led that same effort within the control devices business, has assumed this position. Steve will be responsible for leading a review of all product lines and product families to refine our growth strategy, both organically and acquisitively. His activities will also focus on developing strategies to prioritize our customer expansion, advanced engineering and our geographic growth initiatives.

The third theme is the program launch execution. We have shared with you previously the progress of our shift-by-wire launch. This launch is the largest organic growth opportunity in the history of the Company, nearly $90 million in new sales. Our number one focus for the second half of this year has been to launch each of the new shift-by-wire programs flawlessly, and I'm pleased to report that our launched is our launch is going as planned and that the activities in our Canton, Massachusetts and Juarez, Mexico facilities have met all customer commitments and internal objectives.

The fourth theme -- a clear understanding of our current and future strategic positioning. The VP of Business Development role was established to enhance our capability and analytical approach. We are working to more clearly understand our markets, our competitive position, and refine our product offerings to serve the needs of our customers and to lead us to future growth opportunities. As a result of this activity, we will refine our global product line, customer and footprint strategies. We expect the outcome to support the fifth theme, which is consistent topline growth. Along those lines, as we've completed our business restructuring and created a capital structure that enables growth, we are now focused on delivering consistent, profitable organic growth targeted at over 10% per year through the application of our technical capabilities, customer relationships and footprint as well as creative use of partnerships. As we announced in our press release on July 17, mirror replacement systems is a good example of this theme.

Mirror replacement was developed jointly with our Alcoa company based in Budel, Netherlands, and is currently targeted for commercial vehicles that employ the use of cameras and internal display screens to replace external mirrors. The primary benefits of this system are improved fuel economy and increased safety through improved visibility. This system has the potential to be another significant product line for Stoneridge with applications globally and has been well received by commercial vehicle OEMs in both Europe and North America.

Our team has been pushing hard to apply these five themes and take Stoneridge to the next level. We believe the actions we have taken and will take will prepare the organization to perform in the face of challenges and allow us to continue to deliver the growth and profitability improvements we have generated so far this year. I look forward to discussing our progress in forthcoming calls.

With that, I will now turn over the call to George to discuss Q3 in greater detail.

Thank you, Jon. In spite of currency headwinds and a difficult Brazilian economy, Stoneridge reported a strong earnings per share for continuing operations of $0.27 per share in the third quarter of this year compared to adjusted earnings per share from continuing operations of $0.16 per share in the third quarter last year, an improvement of $0.11 per share, an increase of 69%.

Our third-quarter results show the strength of our combined businesses and the ability of our PST management team to react quickly to a deteriorating economic situation. In spite of severely unfavorable economic conditions, PST has managed to turn an operating profit, excluding non-cash purses purchase account charges, in the third quarter and record a sales increase in local currency compared to last year. They are also expected to generate a modest operating profit, excluding non-cash purchase accounting charges, in the fourth quarter. This is a direct result of PST's management focusing on sales opportunities in a tough market, adjusting prices to partially offset the Brazilian real devaluation, taking additional headcount reductions in July, and implementing other cost actions taken during the third quarter to size the cost structure to match the market demand, at the same time reducing inventory to pay down expensive local currency debt.

Our plans are focused on reducing inventory by BRL30 million by December 31 of this year from the high at June 30, 2015. And in spite of the negative trends of currency for the year euro and the Brazilian real and the difficult economy in Brazil, Stoneridge continues to perform well. Our control devices and electronics businesses continue to perform better in spite of currency headwinds and help to offset some of the unfavorable effects of PST's performance.

Stoneridge's consolidated revenues in the third quarter were $162.1 million, a decrease of $8.2 million or 4.8% over the third quarter of last year. On a constant currency basis, which excludes the impact of foreign currency exchange translation, Stoneridge's sales would have grown by $11.5 million or 6.7% compared to the third quarter of last year, as shown on Slide 4 in the earnings deck.

By business unit, sales in the third quarter increased at control devices by $8.6 million, or 10.9%, due to the continued strength of the passenger car market. Electronics sales decreased by $4.3 million, or 7.8%. Electronics revenues were negatively affected by approximately $6.6 million on translation of sales due to weakening Swedish krona and euro against the US dollar. PST sales were unfavorably affected by $13.2 million because of the weakening of the Brazil real to the US dollar. See Slide 4 for more detail.

Passenger car and light truck revenues were $71.4 million in the third quarter, a 12.8% increase over the third quarter of last year on sales of $63.3 million as volume increased for control device products, which included new programs in shift-by-wire, Seat Track Position Sensors in keyless entry.

North America automotive production continued to look very favorable in the third quarter for control devices and the outlook for the rest of 2015 remains equally positive.

In addition our business in China, which is part of our control device reportable segment, is beginning to show significant improvement. During the third quarter, China reported an operating margin of 8.5%, which is a 1.5% improvement on flat sales growth compared to last year.

Another important point centers around PST as to why we had a strong quarter. Stoneridge's third-quarter operating margin, excluding PST, was 6.9% for the third quarter. This is a significant improvement over the first quarter of last year -- of this year in which we recorded operating margin of 4.2% and is at about the same level as the second quarter. See Slide 5 for details.

Sales in our commercial vehicle category, which are predominantly electronics sales, were $50.7 million in the third quarter compared to $54.9 million, a 7.6% decrease over the third quarter of last year. Revenues were negatively impacted by approximately $6.6 million for FX translation as a result of a weakening Swedish krona and euro against the US dollar.

PST's third-quarter sales declined by $12.7 million, or 34.3%, to $24.3 million compared to the third quarter of last year. These results were negatively impacted by approximately $13.2 million for FX translation as the Brazilian real devalued by 67.8% in the third quarter of this year compared to the third quarter of 2014.

And on a local currency basis, PST sales actually increased by BRL1.2 million, or 1.3%. In addition, PST also experienced a negative transactional impact of $3 million in the third quarter in direct material, which was largely offset by the design house and new supplier sourcing initiatives we began in 2014 and recent pricing actions. Our PST management team is balancing their cost structure to match the revenue declines and economic environment. To offset the unfavorable currency impact, PST management raised prices by 11.3% in March and April in the aftermarket channel, by 10% in the audio line, and 12% in the OES dealer channel in April and has followed with another 1.2% price increase in October to help offset the currency devaluation impact of imported direct materials based on US dollars.

Our PST management team continues to adjust to economic currency and market changes by adjusting their cost structure to match market demands, implementing pricing actions to offset currency changes, and further headcount reductions in July to drive and maintain gross margins by product line and channel distribution. The cost actions taken to redesign the audio line in 2014 is benefiting PST in 2015 although much of the improvement is being offset by the negative impact of the currency changes. PST is also fitting from favorable mix from higher sales of services, which has helped to offset unfavorable FX impacts caused by the strong US dollar.

The restructuring programs affecting overhead and SG&A cost actions taken in 2015 are expected to cost BRL1.3 million in 2015 and be neutral to 2015 earnings. Finally, PST still expects to reduce inventory and generate enough cash to pay down expensive local currency debt by approximately $30 million from its peak in September of the third quarter.

Excluding the effects of purchase price accounting, PST had an operating margin of 1% in the third quarter mainly due to the pricing actions taken in the second quarter and our management team's ability to manage costs. We expect PST to generate an operating profit, excluding purchase price accounting, in the fourth quarter of this year as seasonal demand increases.

Consolidated Stoneridge operating income margin was 5.5% the third quarter this year compared to 4.7%, excluding the PST good will impairment benefit in the third quarter of last year and despite PST's performance. Stoneridge's operating margins, excluding PST, remain flat at 6.9%, or $9.5 million, in the third quarter of 2015 in comparison to 7% in the second quarter of this year due mostly to decreased sales in our electronics business that were offset by increased sales in our control device business.

On a constant currency basis, our third-quarter operating margin, excluding PST, would've been even higher. See Slide 5.

Both PST and electronics experience decreased profitability from raw material FX transactional exposure to the US dollar. Slide 5 of our deck has a complete P&L breakout on third quarter of this year versus third quarter of last year for continuing operations with the bridge item differences identified on Slide 6.

Slide 3 identifies Stoneridge's segment sales increases and decreases versus the prior year's third quarter.

New and replacement business awards for control devices and electronics in the third quarter were $62.7 million, representing $33.1 million in new business awards and $29.6 million in replacement awards. The new business awards includes a $6 million commercial vehicle door input-output module for window and mirror function award for a European commercial vehicle customer, a $5.6 million commercial instrument cluster award for a European commercial vehicle customer, a $2.5 million digital tax graph award for a European commercial vehicle customer, a $7.7 million keypad award for North American passenger car and light truck customer, a $7.4 million vapor-blocking valve award for North America passenger car and light truck customer, and finally a $1 million shift-by-wire actuator award for a North America passenger car and light truck customer. These six new programs represent over 90% of the net new business awards in the third quarter with 47% created for our electronics business and 53% created for our control device business. While our primary focus this year continues to be on flawlessly executing our shift-by-wire launch so we meet our customer commitments, we continue to win new business awards and focus on enhancing our long-term pipeline.

Minda Stoneridge, our consolidated JV in India, posted third-quarter sales of $12.9 million, which was flat in comparison to third quarter of last year. The rupee weakened by approximately 3.6% in comparison to third quarter of last year and our share of Minda's net income from operations and third quarter was a profit of $160,000 compared to a profit of $205,000 in the third quarter of last year.

China continues to show the improved operating performance as a result of the focus of SRI product lines for the China market. Our control device sales in China have remained flat in the third quarter at $3.9 million compared to the prior year, though their operating margin improved by over 150 basis points. The leverage on the higher-margin sales has taken control device products in China to double-digit operating margin. We continue to ship products that can be manufactured in a low-cost facility, such as Suzhou, China, and have added $5.3 million of EGD production to our 2016 sales plan that previously had been manufactured in Lexington, Ohio and sold in the Asia-Pacific market.

From a geographic diversification, our sales in North America represented 60%. Latin America was 15% and Europe/Asia was at 25%. Our current sales growth projection of net new business of $130 million is being driven across all regions, so our balance and sales by region will remain. The detail can be seen on Slide 8. Our customer diversification has improved with a balance between automotive and commercial customers, as can be seen on Slide 8.

For the three months ended September 30, the Company recognized income tax expense of only $32,000 on pretax income from continuing operations of $7.4 million, or an effective tax rate of 0.4% compared to the tax benefit of $1.2 million on pretax income of $8 million. And this is primarily driven by continued higher profitability in our US operations. The increase in tax expense and the effective tax rate for the third quarter of this year as compared to the same period for last year was trivial to the cumulative effect in the third quarter of 2014 due to forecasted debt refinancing, non-tax-deductible goodwill impairment, and deteriorating Brazilian economic conditions, the improved earnings related to the US operations which currently do not attract tax due to the valuation allowance, and the smaller operating loss and related tax benefit for PST.

Our ability to drive topline sales and reduce our costs will improve profitability and generate positive cash flow and remain our primary focus for continuing operations. In the third quarter, operating cash flow was an inflow of $15.5 million in comparison to a inflow of $6.2 million during the third quarter of last year. Our cash flow in the third quarter of last year included the wiring business' results, which produced $400,000 inflow of operating cash.

As indicated on Slide 13, we improved debt leverage for the continuing operations as measured by totaled debt to EBITDA, which stood at 4.1 times at December 31, 2012, dropped to 2.8 in 2013, 2.5 times in 2014, and as we've deleveraged the Company and have maintained 2.4 times in the third quarter this year.

Our favorable outlook for the remainder of this year and our confidence in 2016 is based on the facts that we have repositioned the Company for improved operations and financial performance. Control devices continues to generate consistently improved operating profits by leveraging their sales growth. Their disciplined approach to targeting advanced development projects in the emissions space will continue to sustain their growth trajectory for years to come. For electronics, new programs launched in North America in 2015, coupled with advanced display technology in Europe to service the safety and fuel efficiency markets, should further enhance the growth of this segment.

In addition, near-term programs to reduce controllable costs, differ noncritical investments in headcount and judicious reduction in advanced development will improve electronics contribution in 2015 despite the FX headwinds they are experiencing.

In addition to implementing certain natural hedging strategies from one of our European customers, which reduced our European team's US dollar disbursement exposure, we have already taken FX positions for 2016 which should protect against some of the unfavorable currency impact we experienced throughout 2015 caused by a strong dollar compared to the sikh and the euro.

We are excited about our new mirror technology that has significant opportunities in both the European and North America markets. We are currently working with a number of commercial accounts that view Stoneridge as a key supplier in this new market.

PST has experienced significant foreign currency headwinds from both transactional and translational exposures and lower GDP. The PST management team has worked diligently to offset the negative impacts from these headwinds. We have implemented pricing actions during the course of this year and expect to see benefits from the costing actions and redesigned body of products that we started in 2014.

We have implemented further cost actions in July of this year that we expect to be earnings neutral in the second half. But even with the headwinds and currency changes in Europe and Brazil and the continued weakness in the Brazilian economy, we have reported our third consecutive quarter of improved operating earnings, and the quality of our earnings was a significant improvement over the first quarter. We are pleased that we are able to report another good quarter. This, coupled with our confidence in the fourth quarter, has prompted us to raise our full-year EPS guidance from $0.77 to $0.92 per share to $0.86 to $0.93 per share.

Our sales guidance has been reduced by approximately $23 million primarily because of unfavorable foreign-exchange translation as the Brazilian real has dropped from a forecasted 2015 rate of BRL2.76 to the dollar to the current rate of approximately BRL3.85 to the US dollar, a devaluation of 43% of the real against the US dollar.

In conclusion, we are realizing the benefits from our efforts to refocus our business around our control device and electronics business units. We are executing the right changes to position PST to at least maintain profitability even at a low level of sales to benefit significantly when the market returns to higher levels.

We will now open up the call for questions.

(Operator Instructions). Justin Long, Stephens.

Thanks. Good morning and congrats on the quarter. So, the first question I had was, looking into next year, you've spoken about the potential for somewhere around an $85 million to $90 million revenue uplift from shift-by-wire. First of all, is that still your expectation? And second, can you help us think about the timing of that impact over the course of next year as we update our model?

Justin, as Jon mentioned, we see the launch of shift-by-wire pretty much as planned. There's been a little bit, a slight push out from our original forecasts, but nothing material. We will be ramping through the first quarter. It will pick up roughly in the second quarter and start to run stronger at that level and then be at a full level of that annualized amount of $85 million to $90 million through the third and fourth quarters. So, you are going to see roughly a pretty significant uplift in the second quarter, some about halfway through the first quarter and then third and fourth quarter will be running at those full levels.

Okay. Great. That's helpful. And you know, is there still an opportunity for the shift-by-wire product to be included on additional platforms beyond the contracts you previously discussed? I'm just curious how you are thinking about the addressable market and any potential runway beyond what you've already announced?

Justin, as we've discussed before, we continue to speak not only with our current customers about additional applications or on the basis of the technology and in some ways where it might be able to be applied even to hybrid vehicles, but also with additional customers, particularly in the Asia-Pacific region. So, we do believe that there is growth potential beyond the current booked programs.

And even with one of our current customers, they have an extension in Asia beyond the original forecast. So, it clearly has an implementation in the Asian market, specifically because it's a bolt-on product so you can take existing powertrains and transmission platforms and apply our technology to it.

And maybe how should we think about the sales cycle on that? I mean are these opportunities that could materialize in terms of revenue over the next couple of years, or would this be something longer-term?

Justin, the way we are looking at it right now is that answer is it's probably some of both. When you start talking about on to existing vehicles, you could see it in the next couple of years but as we start thinking about hybrid and future programs, it is probably further out.

Okay. Great. I'll leave it at that. Thanks so much for the time.

Jimmy Baker, B. Riley & Co.

Hi. Good morning and congrats on the quarter.

Thanks, Jimmy.

Thank you, Jimmy.

Just a few questions on the guidance, first. So, first, if I look at the topline and adjust it for FX. it looks like you actually raised that guidance slightly from your initial expectations. So can you just talk about where the upside is coming from? And then I guess conversely what triggered the gross margin guidance reduction? It seems PST is tracking in line or better than what you outlined on the second-quarter call . So I just want to understand where that margin pressure is coming from.

Well, we've seen the continued impact of the currency, especially in Europe, Jimmy, and also in PST. So, we've had some influence at the gross margin level really more because of the currency impact on imported dollars. But we are, as Jon mentioned, we are starting to drive sort of efficiency through our manufacturing process to increase productivity. We are looking at machine utilization. So I think we believe that, moving into 2016, that we can begin to address some of the issues and also the key position that Jon talked about, bringing in a procurement individual, a vice president, to really begin to focus on better sourcing alternatives on a global basis.

The real impact on the sales is that it is primarily almost all driven by PST and the currency. If you look at it on a low currency basis -- in fact, Jon and I have been there three times in the last four months and we are driving hard, not only the cost side but just as important what are we doing on the revenue side? But as we started the year as you know and I mentioned is that the currency was at BRL2.70. We are sitting -- it's been bouncing right around BRL3.90 to BRL4.00. So we've had an impact clearly from that but we track currency sales pretty closely and the markets are starting to respond a little bit in the track and trace side of the business, which we are encouraging. Alarm systems seem to be inching up a little bit. We've had some positive feedback on the OES channel, but we are somewhat cautious because we've seen this before. And I don't think -- we do believe we are in the trough now and we've seen some improvement in the third quarter but nothing that we'd say that we really have seen a significant turn in Brazil. But the sales guidance change was almost entirely driven by the currency impacts at PST.

Right. I guess, if I do the math on the currency, it seems like that would have been a more severe headwind than what you guided to. In other words, adjusted for currency, it actually looks like you raised the guidance slightly. And I think the real in and of itself would've been close to a $30 million headwind to the topline. So I'm just wondering if you are seeing volume above expectations in maybe electronics or control device or where the incremental upside is coming from?

You know, it's been a mixed market on the electronic side. There have been reductions in the North America market, but we are not as highly exposed as we were before. When we had wiring, we had a significant exposure to both the ag and the commercial market. We've seen a robust market in Europe and it's been driven both in Western Europe and even the exports in Brazil have continued with two of our key customers. So even though the euro has gone from EUR1.24 on average down to around EUR1.10 -- in fact, it's bounced between EUR1.10 and EUR1.14, we in local currency have seen a nice increase, especially in the first half. We were up over 10%. This quarter, we were up about 6%. So we've seen a slight downturn in Europe, at least in the converted side, in local currency but the markets have been very strong for us in Europe over the course of the year.

And then one of the things we are working on that I think we alluded to in the talk today is a discipline we brought in the organization is how do we look at our capabilities and manufacturing across the globe?

Jon mentioned that we are moving EGT into China. Well, that's looking at capacities worldwide, so rather than installing any new increase in capacities, we are looking at machine uptime and efficiency in productivity to drive more installed capacity and get our volume up and, secondly, using existing floorspace for better capacity. So, I think you are going to see that we will control our capital a little bit stronger over the course of the next year, that we'll be utilizing existing capacity and machine equipment.

Jimmy, just to expand a little bit on EGT, the fact that we made some of those transfers in this calendar year allowed us to follow a customer in places where we were already stretched and working overtime and working on the weekends. So I'm making the move to China, we actually captured some additional revenue that we wouldn't otherwise have had based on our North American installed base.

Okay. That's helpful. And then I just had a follow-up on some of your commentary regarding the market opportunity for shift-by-wire. Maybe just to help frame this, if you were to look at your penetration let's say mid-2016 once your book business is ramped, what percentage of your two customers' vehicles would you say would have shift-by-wire as standard content? And then what would your market share be inside those two customers?

That a hard question to answer but I think the best way to answer, Jimmy, is that we're going to be across three major platforms with one key customer, all pass car applications, so there potentially is room for extension into SUV or light vehicle. We have one SUV application they are looking at now but nothing definitive.

The other major customer really only runs seven platforms, so we're at a very small percentage to there. And if they expand similar to what the other customer did ,that could have a major uplift. And as Jon mentioned, we are starting to see some real interest in the Asia market because it fits those powertrain and transmission existing platforms, especially on the broad-based vehicles. And those are customers like Nissan and Hyundai and Honda and Toyota. They are all driving major volume platforms that this technology would fit very nicely on those large volume passenger car applications. That equates to a market share -- I think it's hard for us to really say that, but I think looking at it the way I just explained it will give you a rough idea of sort of where we are at looking at platforms.

I think inherent in this, and I know it might be said a little bit, but I think Jon mentioned Steve Fox, his whole role. And that is all about identifying product families and product lines that we are growing across the globe. And how we address those by markets and customers is really starting to penetrate things, just like the question you asked on shift-by-wire, is that that's a significant product line for us. How do we penetrate global markets and customers that we don't have a presence today to sell those applications? So you are going to see us much more active in that kind of thought process in dealing with our customers.

Another important thing is, on the commercial side, Jon has visited four key customers in the last two months. So we will be after the same activity on the pass car side as we begin to elevate our presence in these key customers as it relates to our product lines and our technologies.

Very helpful. Just lastly, if I could, looking into your backlog, I just want to understand the cadence in the net new business wins and also kind of your opportunity to add to that. So when you are bidding today, are you bidding 2019, 2020? In other words, is 2018 fairly solidified at this point? And just helping us understand why that is looking kind of flattish (technical difficulty) year versus 2017? Was that a function of you being resource constrained due to shift-by-wire when 2018 was more active?

Jimmy, one thing that I think you should recognize is we don't really update that platform for future growth. We are going through our product and our budget process right now. I can tell you very clearly that that number will be upgraded. We are starting to backfill some of 2017, 2018, 2019 now that we are aware of, but we generally do not update that until probably when we come out with our guidance around early February or March, probably early February, late January I meant to say. So it's clear to me that we have backfilled some of that number if you compare over the two years and it's starting to fill in.

The other thing that we've changed dramatically in the Company is every future quote that we do globally, Jon and I are personally involved in now. So we know what activity is going on. We know what the quotes are. We know what customers we are directing it to, and we've set certain thresholds on returns and profitability because those decisions influence what we're doing in 2017, 2018, 2019, and 2020. So we've taken a much more active role in that in any quotation of any subsequent substantive size. We see -- and this is how we're getting to the heart of some of the issues of where we are placing capacities and we are doing forward planning of our capacity levels and where we want to position products in certain plants and markets to address customers.

And Jimmy, just to be clear, 2016 is probably pretty well set but we have the ability to impact the back end of 2017 and particularly 2018. So as we are continuing -- as we talked, in future calls we will update that but we're confident about our ability to still impact 2018.

Okay. Very helpful and, again, a very impressive performance in the face of the Brazil headwinds. Thanks for your time.

(Operator Instructions). Tristan Thomas, Sidoti.

Thanks for all the insight you provided to all of the previous questioners, very helpful. I just had two questions. First, regarding PST, are we seeing in the uptick in some of the new products just track and trace to some new markets?

Tristan, we are watching -- we watch it a couple of different ways. We are watching how some of our new product introductions are working, whether it's in track and trace or in audio. And one of the advantages that we're seeing right now by the economic crisis is there are some OEMs who are decontenting, which is giving us an opportunity with our aftermarket channel to actually see some additional volumes. But we're watching this down at the granular level to try to get a sense for what's really going on economically.

And we are seeing opportunities in track and trace, some better penetration with regard to specific audio lines and what we're watching is down almost at the SKU level in deciding which things we're going to focus on and which things we are not. So because it's not just a currency issue but because it's also an economic issue there in Brazil, we are refining our portfolio and targeting where we can win and where we can't, and we're moving resources to react that way.

In fact, there is some strong indication, Tristan, that in one of the key channels of distribution, they are going to narrow the supply base. And it appears that we are one of two of the leading suppliers within the audio line within the mass merchandisers. So I think those companies that maintain quality and positioning of brands, which we have a very strong brand in Brazil with the Positron brand, we are becoming a preferred supplier even in a tough market.

Okay. Shifting gears a little bit, pun unintentional, I know you mentioned you won some business in China. We are also seeing an increase of maybe you are bringing out more product to try and get on some of the global passenger car platforms, kind of leveraging that footprint. Maybe you can provide an update on that?

Are you talking specifically on shift-by-wire or in general?

Probably both.

Well, let's talk more generically because I think it applies in both places. We are looking at the product offerings that we have, both current technology and future technology, and pursuing those positions regardless of where in the world the customers are, and then working, utilizing our global footprint to supply that.

So in previous years, you may have heard certain plants talked about as electronics plants or control devices plants. That's no longer a portion of the conversation. So today we're quoting business out of our very capable Tallinn, Estonia facility for control devices, and we're seeing growth opportunities with current and future products in the European market in the same way we are looking at both growth activities in China with global programs like the EGT transfer that we've talked about as well as looking at where the emissions legislation is going to go in China and making sure that we have capabilities that are in place there before those are needed.

So the answer is we're looking at where the customers are moving, what the emissions regulations or other regulations or other market trends would be, and then making sure that our footprint is prepared in all of the regions to be able to respond.

Okay. Two modeling questions. In terms of tax rate, is there a good way to look at it moving forward? I know it has jumped around quite a bit. You do expect it to continue to be a lower aggregate tax rate in 2016. But is there maybe a little more color you could provide on that, a little more insight?

On the overall tax situation?

Yes.

Well, it's sort of a unique dilemma. We have a tax loss carry-forward of about $108 million and that still goes back to the acquisition we made in 1997 as part of the control device business that was in Lexington, Ohio. In addition to that, as you know, and many of you have asked about it -- is that we have established a valuation reserve against our deferred tax asset when we had sort of the downturn in the economy in 2009 and 2005 -- and so there is a deferred evaluation valuation allowance that was established against those.

I guess the challenge we have there, as our US earnings continue to improve, it raises issues in terms of do you have the ability to predict forward earnings? Clearly, what you are seeing, Tristan, as a result of this is that our US income has been improving significantly.

So when we started the year, our effective tax rate was roughly between 13% and 16%, and that's what we guided to. As a consequence of the improved earnings, our effective rate has dropped, it continually has dropped over the course of the year and is down to 0.4% this quarter. It was 6% to 7% last quarter.

There is an accounting guideline that says if your earnings continue to improve, then you can improve your forecasting in terms of your probability of success, which I think we are clearly showing that there are certain guidelines that may follow.

But I think the most rational thing to think about is that we will continue to generate significant earnings in the US, which will continue to shield a lot of the income we have. We will not utilize our tax loss carry-forward of $108 million until roughly about 2018 from what we see in our current forecast.

So our cash taxes, which is probably the primary question you really have, will continue to run in the range of somewhere about $5 million to $8 million, and that's been pretty consistent over the last couple of years.

The effective tax rate, there are some issues related to valuation allowance. There are issues to the tax loss carry-forward. We are currently studying those and working with those. We do not have any definitive answer on that basis.

So, our current forecast would say, with no changes, that our effective tax rate will remain in that range of probably 6% to 10% in 2016 unless it changes because of something with the valuation allowance, which we are currently looking at. But the real thing that will not change is that our cash taxes paid will be somewhere in the range of $5 million to $8 million over the course of the next three years until we utilize the tax loss carry-forward.

So I apologize for a long-winded answer but I think there are some issues with taxes. But I think, at the end of the day, the real answer is we have now established a better quality of earnings that we have in the US. We're generating a lot of earnings here that will be shielded because of our tax loss carry-forward and our valuation allowance. So our effective tax rate is going to remain very low. And for the rest of this year, it's going to stay in the range of probably 3% to 6%.

Next year, as we give our guidance, we will have a lot more detail on the tax because I think it's important for all of you to understand what that tax rate will look like and then what's the effective difference between the tax reserve number and cash taxes paid so you can help with your own model and your cash model. So we're very cognizant of that fact and we will spend time with each one of you trying to -- once we get through our own budget process and realize where we're at and have discussions on where the accounting will go from that, we'll give you a lot of guidance on taxes to help you with your model in that light.

Okay. That was great. Thank you.

Rhem Wood, BB&T Capital Markets.

Good morning. Nice quarter, and I like this pattern you've established here. First question, it seems like, in the last couple of days, VW has kind of with its omissions issues have widened it to now include Audi and Porsche. Can you give us maybe a little bit of an update on that and how that could impact you guys?

Yes, Rhem, thanks for your question. When the first announcements came out, it was very clear we had no content on the four-cylinder vehicles from VW. With regard to the six cylinders, the most recent possible announcement, we do have content on the Audi 3.0 liter, but it's with the SCR. And as you look at the problem that they are getting into and where they are needing to go as well as where the other OEMs are, they will be transitioning from a lean NOx trap to the SCR. So, while they are having problems, the vehicles that we're on with our products are actually where VW will need to go and where the technology will need to go, and that's with SCR.

Okay. Great. That's what I thought. Okay. That's good. And then can you just comment on inventory levels in general, but especially at PST? It seems like you guys have gotten pretty lean now. How are inventory levels across the organization?

We watch inventory levels pretty closely and specifically as we're ramping up shift-by-wire to make sure that we're watching that. But within -- let's just use the PST example -- George talked about the reduction. We're talking about a 22% reduction in inventory from October time frame until the end of the year and an even larger reduction in our debt, because what we're focused on is sizing that business appropriately, setting the supply chain appropriately, and then making sure that the savings that we drive out of that or the cash that we generate out of that we are using to pay down debt.

So throughout the entire organization, we are looking at our inventory levels. Probably the best example of that today is what we're doing in PST. But it's one of the reasons why our operations organization needs to be complemented with a head of supply chain, and it's not just a purchasing activity because we need to look at wall-to-wall from suppliers all the way into how we deliver to our customers and how do we optimize that. And that's how we think about it from a supply chain perspective.

Great. Thanks for the time. Keep up the good work.

Thank you. This does conclude our question-answer-session for today. I would now like to turn the call back to Jon DeGaynor, Chief Executive Officer, for closing remarks.

I want to thank all of you for your time, your interest and your questions today. We believe that our third-quarter results are a continued demonstration of the ability of Stoneridge to overcome challenges and to deliver.

One measure of progress that is emerging and will be a topic in future calls is the quality of our earnings. As we simplify the organization and remove distractions, we are able to focus on performance driven be a fundamental improvement at the operating income line. When you compare our Q3 results with those of Q3 2014, excluding goodwill impairment gains, you will see an approximately $1 million improvement in operating income. That improvement is driven by performance within our business.

Fundamental improvements. The organization is focused on fundamental improvement and is becoming more acutely focused on it every day. I'm excited to see the way the team is embracing this challenge and I look forward to updating those of you on this call regarding our progress in forthcoming calls. Thank you and have a great day.

Ladies and gentlemen, this does conclude today's program. You may all disconnect. Everybody have a wonderful day.