Stoneridge Inc (SRI) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Stoneridge fourth-quarter 2015 conference call. (Operator Instructions).

I would now like to introduce your host for today's conference, Mr. Ken Kure, Corporate Treasurer and Director of Finance. You may begin.

Good morning, everyone, and thank you for joining us on today's call.

By now, you should have received our fourth-quarter earnings release. The release and the accompanying presentation has 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 those statements that are not historical in nature and include information concerning our future results and plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties and actual results may differ materially.

Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-K 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 statement of cash flows include the wiring business through July 31, 2014. Our forward projections for 2015 are for the three remaining segments, and as are the historical results, including the wiring business, are not indicative of future performance.

Jon will begin the call by addressing the strategies discussed during our previous 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 of the fourth quarter. George will also review our 2016 sales and earnings guidance, based on the trends that we have seen through the fourth quarter.

We have prepared and published an earnings presentation to provide more detailed schedules to help your understanding of our fourth-quarter results, trends for our continued improvement, and update you on key initiatives to improve our 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 then open up the call to questions. With that, I will turn the call over to Jon.

Thank you, Ken, and good morning to those of you on the call.

I am pleased to report that we recorded a strong fourth-quarter financial performance. The strength of our performance in the quarter and for the year was the result of continued improvements in our control devices and our electronics segments of the business. The results of these segments allowed Stoneridge to overcome the headwinds caused by currency changes in Europe and Brazil and the difficult economic situation in Brazil.

The financial performance by the Stoneridge team continues to demonstrate the resolve of a management group working collectively to deliver on our commitments. This is the fifth consecutive quarter that we have delivered to our commitment of increased earnings, excluding unusual items, compared to the prior year and the quality of our earnings has improved. George will provide more detail in his section on the financial performance of the fourth quarter.

During the last quarter's call, I described focus areas for the organization. The diligent efforts of our management team in these focus areas have helped us deliver consistent financial performance in the face of the difficulties we have experienced in certain markets. Let me highlight a couple of examples.

First, new program execution. Our number one focus for the second half of 2015 was to launch each of the new shift-by-wire programs flawlessly. This launch is the largest organic growth opportunity in the history of the Company, nearly $90 million in new sales. Our launch continues to go as planned and the activities in our Canton, Massachusetts, and Juarez, Mexico, facilities have met all customer commitments and internal objectives.

In addition, first-quarter 2016 sales of shift-by-wire are going according to plan. We're also looking to build upon the success of shift-by-wire by extending this product line onto existing platforms with existing customers, as well as with new customers.

Second, PST. At PST, our management team continued to analyze the customer demand in the various end markets we serve and aggressively adjust the cost structures and inventory levels in the face of those changes. We have not achieved all the goals we set for ourselves in PST in 2015, due to the continued decline in the economy and currency devaluation. However, we believe that our efforts have improved PST's performance in sustainable ways.

Though PST did not record an operating profit, excluding the amortization expense related to the purchase of PST in 2011, as we expected in the fourth quarter they performed much better in the second half of the year compared to the first half, even though Brazil's GDP continued to decline over the year.

In the face of continued market challenges, PST's management team redoubled their efforts and developed additional plans to bring that cost structure in line with the reduced demand. For example, the third rightsizing of their cost structure in the last 12 months is being implemented in January and February 2016. We expect PST to be profitable in the second quarter of 2016, excluding the previously mentioned amortization expenses.

The relentless and diligent efforts of the management team to take out cost, improve their supply chain, and reduce inventory levels has enabled PST to survive the current economic environment and has positioned PST to thrive in the recovery.

To strengthen their operations, supply chain, and commercial efforts, we have added [Kytono Fiorollo] as PST's Chief Operating Officer. He brings an extensive experience in Brazil and other international management positions that will add strong execution capabilities to the PST management team.

Third, consistent topline growth. Profitable sales growth is the objective for the entire Stoneridge team. Every year, we evaluate our sales growth trajectory during our long-range planning sessions. Last year at this time, we announced that Stoneridge had a five-year net new business projection of $130 million for the years 2015 through 2019. In fact, our sales of new business in 2015 beat our 2015 projection of $20 million by approximately $12 million and was fairly evenly split between control devices and electronics.

This year, I am pleased to report that our commercial efforts have been productive and our projected net new business pipeline has expanded to approximately $179 million for the years 2016 through 2020, an increase of $49 million, or 38%, from our last projection. The increase in projected net new business sales is due mostly to new program wins in high-temp sensing and sub sensing in the European markets.

Fourth, team. During my first 11 months as a leader of Stoneridge, I am pleased with the progress toward the goal of enhancing our team and deepening our organizational competence. We have realigned our organization to allow our business units to primarily focus on profitable and sustainable topline growth by developing a clear and current -- clear, current, and future vision of our products, technologies, and targeted customers.

We have added new members to our leadership team to expand and strengthen our functional excellence. We've created new roles, such as the Vice President of Global Business Development, who has the responsibility to lead the alignment of our product, customer, and technology strategies on a global basis. This position also is responsible for working with the business units to develop both organic and inorganic growth strategies.

We also created the new role of Vice President of Global Procurement. Our largest costs are direct and indirect material and purchased services, with an annual spend of more than $500 million. This position will work with our business units to optimize our spend, taking advantage of leverage across businesses to reduce costs both directly and indirectly.

We also hired a new Chief Human Resources Officer, who is working with the business and functional leaders to build our organizational capabilities to enable the execution of our global growth and improvement initiatives. In 2016, we will continue to drive organizational realignment and reinforcement and to expand our organizational capabilities. This will support our development of organic and inorganic growth opportunities and the improvement of our execution capabilities.

The combination of the diligent efforts by our employees to deliver the 2015 results and the enhancements that have been made to the team in 2015 provide me with great confidence that we will be able to address the most significant topline growth that Stoneridge has realized in the last 10 years and ensure that the future growth will be executed well.

With this as a backdrop, George will now provide some specifics as to our accomplishments in 2015 while positioning Stoneridge for 2016. I will now turn the call over to George.

Thank you, Jon.

Stoneridge reported a strong adjusted earnings per share from continuing operations of $0.25 per quarter in the fourth quarter of 2015, compared to adjusted earnings per share from continuing operations of $0.23 per quarter of last year, an improvement of $0.02 per share, an increase of 8.7%, on the combined strength of North America control devices, automotive performance, and European commercial vehicle performance for our electronics segment.

Included in our fourth-quarter results was a non-cash valuation allowance tax expense for PST, which was included in our reported earnings per share of $0.22.

Recognizing the further deterioration the sales volumes caused by the near-term economic situation, PST's management team continues to react quickly to a deteriorating economic situation, as Jon mentioned earlier. Our first-quarter plan includes the recognition of approximately BRL3.9 million in the first quarter of 2016, but should be fully recovered by cost savings during the remainder of the year. And on a constant-currency basis, which excludes the impact of foreign-exchange translation, Stoneridge's sales would have grown by $4.8 million or 2.9% compared to the fourth quarter of 2014, as shown on slide 4.

And Stoneridge consolidated revenues in the fourth quarter were $154.6 million, a decrease of $12.2 million or 7.3% over the fourth quarter of last year.

By business unit, sales in the fourth quarter increased at control devices by $7.1 million or 9.6% and decreased at electronics by $4.8 million or 8.5%.

Electronics revenues were negatively affected by approximately $4.8 million on translation of sales, due to weakening Swedish krona and euro against the US dollar. The PST sales were unfavorably affected by $12.1 million because of the weakening of the Brazilian real to the US dollar. See slide 4 for more detail.

Passenger car and light truck revenues were $66.6 million in the fourth quarter, an 11.6% increase over the fourth quarter of last year's sales of $59.7 million as volumes increased on control device products, which included new programs in shift-by-wire. In addition, our business in China, which is part of our control device reportable segment, is continuing to show significant improvement, and during the fourth quarter China recorded an operating margin of 15.6%, which is a significant improvement over last year's fourth-quarter operating margin of 1.2%.

And sales in our commercial vehicle category, which are predominantly electronics sales, were $58.5 million in the fourth quarter, compared to $60.9 million, a 4% decrease over the fourth quarter of last year. Revenues were negatively impacted by approximately $4.8 million for FX translation as a result of a weakening Swedish krona and euro against the US dollar.

And due to the strength of the control devices and electronics business segments, Stoneridge's fourth-quarter operating margin, excluding PST, was 7.5% for the fourth quarter, the high quarter of the year. This is a significant improvement over the first quarter of 2015 in which we recorded operating margin of 4.2% and is our best performance of the year. See slide 5 for details.

PST's fourth-quarter sales declined by $14.5 million or 40.4% to $21.4 million compared to the fourth quarter of last year. These results were negatively impacted by approximately $12.1 million for FX translation as the Brazilian real devalued by 50.1% in the fourth quarter of 2015 compared to the fourth quarter of last year. On a local currency basis, PST sales decreased by $9.1 million or 10%.

In addition, PST also experienced a negative transactional impact of $2.5 million in the fourth quarter in direct material, which was largely offset by the design house and new supplier sourcing initiatives that began in 2014 and recent pricing actions.

Consolidated Stoneridge operating income margin was 5.4% in the fourth quarter of 2015, compared to 3.1%, excluding the PST goodwill impairment expense in the fourth quarter of last year. And Stoneridge's operating margins, excluding PST, improved to 7.5%, as I noted before, or $10 million in the fourth quarter of this year, in comparison to 7% in the third quarter of 2015, due mostly to lower SG&A expenses.

Both PST and electronics experienced decreased profitability from raw material FX transactional exposure to the US dollar. Slide 5 of our deck has a complete P&L breakout on fourth quarter this year versus last year from continuing operations, with the bridge item differences identified on slide 6. Slide 3 identifies Stoneridge segment sales increases and decreases versus prior year's fourth quarter.

Minda Stoneridge, our unconsolidated JV in India, posted fourth-quarter sales of $10.1 million, which was a decline of 8.3% or $900,000 in comparison to fourth quarter of last year. The rupee weakened by approximately 6.6% in comparison to the fourth quarter of last year, and our share of Minda's net income from operations in the fourth quarter was a profit of $116,000, compared to a profit of $227,000 in the fourth 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 of $4.8 million increased in the fourth quarter by $1.6 million, or over 50%, in comparison to the fourth quarter of last year. And the leverage on higher-margin sales is taking control devices in China to a double-digit operating margin.

We continue to ship products that can be manufactured in our low landed cost facilities, such as Suzhou, China, and have added $5.3 million of EGT production to our 2016 sales plan that had previously been manufactured in Lexington, Ohio, for sales in Asia-Pacific market.

New and replacement business awards for control devices and electronics in the fourth quarter were $82.2 million, representing $10.8 million in new business awards and $71.4 million in replacement awards. And the new business awards included a $2.1 million high-temp sensor award for a North America passenger car and light truck customer, a $2 million digital tachograph award for a European commercial vehicle customer, a $1.4 million instrumentation cluster award for a European commercial vehicle customer, a $1.3 million EGT award for an Asia-Pacific customer, and, finally, a $1.3 million EGT award for another Asia-Pacific customer.

And these five new programs represent over 75% of the new business awards in the fourth quarter, with 44% for our electronics business and 56% for our control device business.

While our primary focus this year continues to be on flawlessly executing our shift-by-wire launch so that we may meet our customer commitments, we continue to win new business awards and focus on enhancing our long-term pipeline.

And from a geographic diversification perspective, our sales in North America represented 57%, Latin America was 14%, and Europe/Asia was at 29% in the fourth quarter this year. The geographic 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.

And for the 12 months ended December 31, 2015, the Company recognized an annual tax benefit of $0.5 million on a pretax income from continuing operations of $20.2 million, or an effective tax rate of 2.7%, as our earnings in North America continue to improve.

For the fourth quarter of 2015, the Company recognized an income tax benefit of $300,000 on a pretax income from continuing operations of $4.6 million or an effective tax rate of 7.5%, compared to a tax benefit of $[1.0] million on a loss from continuing operations of $32.4 million or 3.3%. The tax benefit decreased from the prior year due to providing a valuation allowance against the PST deferred tax assets of $1.2 million.

And 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.

And in the fourth quarter, operating cash flow was an inflow of $37.6 million, in comparison to an inflow of $20.7 million during the fourth quarter of last year. Our free cash flow for the year was $26.1 million or 4% of sales, which is at the high end of our target, and as a result our cash balance has improved to $54.4 million at the end of this year from $43 million at the end of last year.

And as indicated on slide 13, we continue to improve our debt leverage from continuing operations, as measured by total debt to EBITDA ratio, which stood at 4.1 times in 2012, dropped to 2.8 in 2013, 2.5 in 2014, as we have continued to deleverage the Company and have maintained 2.3 times in the fourth quarter of this year.

In the past two years, our debt balance has been reduced by $78.8 million, which saved over $10 million in interest expense in 2015, compared to 2014. This is the fifth consecutive quarter that we have improved our earnings, excluding unusual items, compared to the prior year since the sale of the wiring business in August 2014 and the refinancing in October 2014.

We are pleased with the progress we have made during 2015, but we are just as excited about 2016. We have repositioned Stoneridge to be a high-performing company based on topline growth, with a focus on cost reduction and maintaining flat SG&A and D&D levels. As a result, we will leverage our growth and profitability at a much higher rate than our sales growth.

We have developed a sustainable technology process that is a pipeline for new products and technologies that will drive organic growth over a five-year planning horizon, and as Jon mentioned earlier, we have increased our net new business to $179 million, an increase of $49 million, or 38%, over last year's pipeline.

And in our pipeline for future opportunities, we are focused on soot sensing, turbo actuation, high-temp sensing, and shift-by-wire, to name a few product families for control devices.

In electronics, we have opportunities such as MIRROREYE, a new and exciting product in the commercial market, and the ELD legislation recently approved for the North America commercial market, which provides the opportunity for Stoneridge to utilize capabilities developed in Europe for expansion in the North America market.

And for both control devices and electronics, we have a number of ways to increase topline sales. Our content per vehicle has increased for products, like shift-by-wire for control devices, and electronics has the opportunity to do the same with mirror replacement.

For control devices and electronics, we have the opportunity for growth by cross-selling our products and technologies in other markets, such as in Europe and Asia and especially India and China. We are also focused on our cost structures to either reduce costs due to uncertain customer demand, restructuring costs for lower demand in PST with the Class 8 market in North America.

This is in addition to containing costs so we can leverage our opportunities on topline growth. This will be a key driver for 2016 as our SG&A and D&D expense is expected to remain flat with 2015, which will result in higher operating margins, net income, and earnings per share.

We are working to improve our productivity and efficiency with our plant layouts of our production lines improve machine utilization. We are improving our productivity and efficiency in our work centers and our plants. These actions have been worked on and will offset some of the weakness we are experiencing in PST in the North America Class 8 business.

And as Jon indicated earlier, the PST management team is aggressively working on rightsizing their costs in the first quarter of this year to match our forecast of lower demand in Brazil for 2016, and with this latest business realignment effort, we anticipate that PST will be profitable, excluding amortization from the purchase of PST, in the second quarter of 2016.

The restructuring programs undertaken in the first quarter of 2016 will affect our first-quarter earnings performance, which will be our weakest quarter of 2016 from a profitability standpoint. This is part -- due primarily to the restructuring costs for PST and electronics in North America and the realignment of the engineering resources in Europe.

Our internal goal is to generate free cash flow of between 3% to 4% of sales in 2016. In 2015, we generated $26.1 million of free cash flow or 4% of sales. Our cash balance was $54.4 million and our net debt was $64.1 million as of December 31, 2015. And based on our 2016 guidance, we will continue to generate significant cash flow, at the upper end of our range.

Our plans are to continue to invest in our opportunities for organic growth. We are actively pursuing M&A or opportunities that fit our needs to support our growth in both control devices and electronics business unit.

And based on Jon's and my comments on the business opportunities for 2015, which had been supported by enhanced organizational capabilities, building on people, talent, and skill sets, we are prepared to manage our growth opportunities to substantially improve our profitability, control costs, which should enhance free cash flow generation and improve our ROIC for the business.

Needless to say, we are excited about our potential for 2016. We're also excited about the net new business guides that Jon discussed and the operating profit leverage that has improved due to higher sales, as shown on slide 15. We are projecting that our sales will grow between 12.5% to 14% in 2016 over 2015. Our operating margin will improve by nearly 2% to net sales. By leveraging our cost structures and our earnings per share of $1.10 to $1.30, it will improve between $0.17 per share and $0.37 per share above our adjusted EPS of $0.93 in 2015.

We will now open up the call for questions.

(Operator Instructions). Tristan Thomas, Sidoti & Company.

Real quickly, just a housekeeping question. For your 2016 guidance, could you maybe give us a little color in terms of what you are assuming for a tax rate and then the best way for us to look at it?

As I mentioned, our earnings have been improving and so our overall tax rate will show at about 8% to 9%, but our cash taxes will be very similar to what we paid last year. It was in the range of between $5 million and $8 million. So, that hasn't really changed from 2015, but our effective tax rate will continue to drop, based on the improved profitability in North America.

Okay, are we still expecting tax -- the tax rate to ramp up as we approach the end of 2017 (multiple speakers)

I think, Tristan, with our tax loss carryforward we have $108 million, and so our projections are showing that the tax rate will probably start to move around midyear 2018, and I think, as I mentioned to everybody on the call before, there is an issue that always stands in front of us is that will there be a time and period that we would reverse our valuation allowance, which, as you know, we have a deferred tax asset on our balance sheet of $48 million, and that issue will probably be addressed somewhere during the course of 2016 as our earnings continue to improve.

Okay, thank you. Moving onto the net new business, 2016, the majority of that is shift-by-wire. With the mirror replacement, looking at the numbers, does it assume a much slower ramp in terms of customer adoption? Could you maybe give us some insight into that and your expectations?

Tristan, the net new business numbers that you see have no MIRROREYE or replacement in there because of where we are in the development cycle and just because of the timing. So, we actually look at that as opportunity above this -- above these numbers.

Okay, any possible time frame you can give us?

We are hoping to -- we believe that there will be some decisions made in this calendar year for awards and we think that from an OE standpoint it is an 2018-2019 time frame for an SOP.

And Tristan, one of the things, it is -- the strategy is it is more of an OEM-driven strategy in Europe and it is more of a fleet strategy in North America, so to Jon's credit we have built a team that is dedicated to this. We have resources from the engineering standpoint working on both sides of the marketplace and we are the lead of three platforms, two in Europe and one in North America, so we have a good presence in OEM and we're working on a fleet strategy for North America.

Okay, thanks. I am going to hop back in the queue for now.

Justin Long, Stephens.

Good morning, guys, and congrats on the quarter. So after the new shift-by-wire contracts are fully ramped later this year, I wanted to ask about your manufacturing capacity utilization and what it will look like for that product. So, if we start to see shift-by-wire adopted on additional platforms or used by additional OEMs, what is your flexibility to increase production with your existing infrastructure once these contracts are fully ramped?

Justin, it is a good question. Let me try to answer it in a couple of ways. I don't have an exact capacity utilization off the top of my head, but what I can tell you is we are -- we have installed capacity and we install our capacity based on five days, three shifts. That is how we capacitize and we are ramping up to that and we're adding crews in both Canton and in Juarez.

Simultaneously as we are ramping up, we are learning things about the machinery and we are trying to break bottlenecks, so we're actually finding additional capacity from what we purchased.

So our belief is that with the additional capacity that we have found through continued efficiency focuses, as well as, then, Saturday overtime if we needed to do it, we certainly have at least a 20% flexibility with what is installed, but I believe that number is higher and we will continue to see that as we ramp up all of these lines because you must remember that only one of the primary products are in any significant level of ramp-up. We're just getting started now. So we will see more of this over the subsequent months.

Okay, great. That's helpful. Second question I had, I think there has been a growing level of concern about the North American light vehicle cycle coming down from peak levels as you look out over the next couple of years. So, I wanted to ask if we see a market that were to fall, let's say, 10% from where it peaked, what kind of impact would you expect to your overall business in this scenario, and could you just talk about your ability to manage to that type of environment?

Our light vehicle and our pass car volume, which is predominantly control devices, represents somewhere around 36% of our overall volume, Justin.

And at that level, we are already growing above the market, so we would have to probably pull back on some of it, and if we look back of our own experience through 2008 and 2009, we were able to flex our schedules. We pulled schedules back. We stopped overtime work on Saturday. So I think at that kind of level, 7 -- or 10%, we could manage within that system to really adjust our production schedules.

And we had the ability to flex that pretty well, so -- and we are conscious of that. We have been talking as a team as if we saw some kind of a downturn out there late 2017 or 2018, how we would react to that. So it is a conversation that we are having within our own management team related to that question.

But Justin, let me just build on top of that. One of the things you heard in George's section is, for example, moving production to China to support our growth in China.

What we are working very aggressively on is making sure that we are balanced between the regions as much as possible so that one particular market going up or down doesn't adversely impact us, and it also allows us to balance our footprint with regard to our lowest total delivered cost. So we think we are positioning ourselves to respond regardless of what happens.

Great, that makes sense, and I will just ask one last one and then hop back in line. But what is your assumption for PST in the 2016 guidance in terms of topline and operating-income contribution?

It actually is relatively flat in terms of dollar terms. It is slightly up in local currency terms, Justin.

I think the unknown that we don't see is we have three basic business segments in Brazil. We have the traditional aftermarket alarm systems. Those have been relatively flat over the last year. Our track and trace, which is an auxiliary, that product has been growing somewhere in the range of 10% to 15%, and we have been gaining probably market share in that area and I think we have been hanging in there in terms of local currency growth.

The one that has been a little bit of a question mark has been the audio, and we have seen both a reluctance in the consumers at the OES level, which is the dealer channel, and also the mass merchandiser level. And what we are seeing with the consumers is they are buying down in the product line, so they're going to the low end. So they still want the product, but they are buying less and less features.

So we are managing each one of those. In fact, Jon will be down there -- Jon and I will be there in two weeks, and one of the things that we are doing very aggressively is we're managing the cost to serve each one of those channels. So we are looking at the product lines, what we are doing at the gross-margin level, and then what we are doing in op income with the cost to support that channel.

So, we will continue to stay very aggressive based on what we can do on the topline, because it is not all about just cost reduction. We are doing everything we can to enhance the topline, too, which, as I shared with you, track and trace has actually been growing the last couple years and we will continue to focus on that area, but we will manage the cost structure to support those channels to make sure that -- and we do believe is that is why we took an aggressive position in January and February. We are taking out roughly about 165 employees. That cost us, as I mentioned, 3.8 million, but it has got a payback over the course of the year that at least can -- reais, and that is all reais, Justin, is it will offset some of the pressure that we are seeing in the market, and for that we believe we will make money at the op income level at about 3% in the second quarter and it will vary around 5% to 6% in the third and the fourth quarter, as long as all the factors stay about where they are at today.

Okay, great. That's good color. Thanks for the time, guys.

Jimmy Baker, B. Riley & Co.

Thanks for taking my questions. Just wanted to go back to the new business cadence for a moment that you updated earlier this year. If we compare that to, let's say, your expectation this time last year or the time of the prior update, could you maybe just put that -- the increase, the delta, into three buckets, the first being an increased assumption for overall production volume increases out of LMC or whatever third-party data source you reference here? And then, two, the offsetting negative impact from FX? And then I suppose, three, and most importantly, the new program wins?

Jimmy, let me do my best to try to answer those in qualitative terms. The first one, with regard to what we see with regard to the market, year-over-year would be down slightly, percentage points. The same is true as we would see a negative headwind from an FX perspective with regard to just our sales mix. So, the move, the increase in net new business is truly additional new sales with customers. It is not rising tide lifting all boats.

Is that a true statement, I guess, in each year in the sense that -- I guess, first, could you clarify are you using production estimates coming from your customers or using a third-party forecaster to (technical difficulty)

(technical difficulty) North America, the medium truck is down about 9.8 and Class 8 down about 23 and Europe is about flat. So if anything in the mix of all those, the market is actually flat to down, so that the net new business, as Jon said, is really being driven by net new awards.

Okay, that's very helpful. And then, I just wanted to go back to the tax rate for a moment. So, if we walk through, I guess, the Q4 results, and you have this little over $300,000 tax benefit in the GAAP results and then I think your adjusted results add back a little over $900,000. So, is it correct to say that the adjusted results include a $1.3 million tax benefit versus, I guess, the Q3 call you were expecting a tax provision of 6% to 7% in Q4?

And then, separately, could you just explain what has been driving that tax rate lower or actually driving a tax benefit this year and how that is reversing next year?

Okay, here's -- in the $0.5 million credit for taxes, what is included in that was a $1.2 million valuation allowance which we established for Brazil. So, our overall credit would have been about $1.7 million because the (technical difficulty) tax is at a rate of 19% to 21%. That is our effective rate, and then in the US, we are paying nothing until -- our projections are showing that we won't pay any tax in the US until about mid-2018.

So you take that mix and it looks like with that portfolio mix that our effective tax rate this year will be somewhere in the range of 6% to 8%. The only thing that could influence that is if we make more money in North America or we have losses in Brazil, and then Europe has been fairly consistent and their tax rate is 23%.

I think the last question you asked of that is that because of our continued performance improvement and the offset and reversal of the US tax valuation allowance, there is a high likelihood that come fourth quarter of 2016 that we may reverse the valuation allowance, which we have a deferred tax asset on our balance sheet of about $48 million, and that has a couple consequences to it. And you remember this is all non-cash, also.

But what it would do is we'd reverse the valuation allowance and it would improve net worth or the equity of the business by $48 million, and then moving forward we would have to recognize what I would call a combined tax rate where you would be using 35% in North America, even though cash taxes will not change through 2018 and I think that's the most important number you want to know is that our cash taxes in 2017-2018 will still remain at about $5 million to $8 million, but our effective tax rate would look higher if we do reverse the valuation allowance in 2016. And it would go to roughly about 25% to 27% because of our mix of tax rates around the world.

Okay, but the $1.7 million benefit in Q4, is that net of the minority interest? And I guess is the broader way to think about that that you -- the core Stoneridge business did record a modest tax provision that was substantially offset by this PST benefit?

That's true, and then the taxes -- the taxes in Brazil have a noncontrolling minority interest that would have an impact when you get down to the net income attributable to Stoneridge. So that's the one piece that would be affected, so that like the $1.2 million that we reflected for the valuation allowance in Brazil, our minority partner absorbed 26% of that cost.

Okay, understood, very helpful. Thanks for the time.

(Operator Instructions). Tristan Thomas, Sidoti & Company.

My question was actually already answered. My apologies as to that, but thanks again.

Rhem Wood, BB&T Capital Markets.

Congrats on the nice quarter. So my first question is just, Jon, I know you have been focusing on this, but what inning are we in with regards to efficiency efforts in the plants with lean and the purchasing efforts? Maybe some color where things stand there.

Can I change the analogy from a baseball to a football analogy? I really look at this, Rhem, as we are in the first quarter. Our operations team is doing some good things, but we really just getting started on leveraging across the world.

We have put some significant efforts into looking at things like our SMT capacities around the world and that drove huge benefits in Mexico, and now we are seeing that leverage into Brazil and into India, and we have got a leader who is supporting our joint venture over in India to drive that now.

But what you are seeing, and the reason why I say it is the first quarter, is we're adding capabilities within the organization from a lean standpoint and the supply-chain activity is really just getting started, so I look at it certainly as we are just getting going and are -- with changing some of the lean capabilities and also I think we have discussed in previous calls changing the way we quote new business, we are actually changing how we set our plant capacity and really our utilization of capital from the point when we quote business.

And so, we're just starting to see those impacts as well. The conversations that we have well upfront in the design of the process and how we quote the business has changed.

So, I look at this as something that is getting started now and we will certainly be glad to give you progress throughout 2016 as to how it goes.

Okay, that's good color. Thanks. And then, you mentioned you are actively pursuing M&A. Maybe just some more color on what you are seeing out there, deals, multiples, areas of interest, just any color there.

Rhem, we're going through -- there are actually two processes. We have some relationships that we've already established that I would call they're more on a non-bid auction basis and they are things that bolt into our operations. One was brought to us by a customer in Asia, in China specifically, one we have been working with our joint venture partner in India, and one we're working with our mirror replacement activity.

We think those deals can still get done in the range of probably 6 to 7 times EBITDA, because most of them are in the sensor business, which is higher end.

And then, we have started a more rigorous process. We have been into this for probably about six months now and we've screened a number of customers. We have narrowed that list down to a manageable level, which we are now starting to solicit, and almost every one of those are being done on a non-bid auction basis. And so, we still feel comfortable that we can do deals in probably somewhere between the 5 to 7 times EBITDA from what we are seeing so far.

And most important, there are size deals that we can fund within our operations, but just as importantly is they fit into our businesses, and where we are going at it by geographic needs, by technology, customer presence.

So, we're pretty comfortable with where we are at in the M&A process, and it is getting more robust by the month. And we have a number of active ones we are looking at, but in all cases they fit very nicely with our operations, either backfilling something we need in India. It enhances our electronics side in China. It supplements our mirror replacement business or in the sensor business, which is clearly an automotive presence that is going across the globe. We have some very focused ones that are really key to us integrating into our operations.

Okay, that's great. And then, just last one, you have really brought down the debt 2.3 times, I think you said it was. Would you be comfortable doing a really big deal at this point and raising your debt levels or maybe even a big buyback, because you're generating a lot of cash as well?

Well, buyback, I think we clearly have the opportunity to increase our returns with the investments we make, both organically that we have some -- we have some opportunities that are not in our net new business today. There is nothing in there for mirror replacement, and we're getting excited about where we fit in the market and what we bring to that.

So, there may be some investments there, the M&A activity, and I guess the most important thing is that the balance-sheet strength is something that is part of the assets that we have of this Company, and I don't see any reason for us to make a big acquisition at this point. We have enough smaller ones that really bolt on and fit into our organizations that can generate and improve our return on invested capital that that is where we will stay in the short term.

Maybe as we get leverage, you look at some other things, but the deals we are looking at, the sales revenues tend to be somewhere between $30 million and $80 million, and I think that fits a sweet spot for us.

Rhem, the other thing, and it goes back to the question about where we are at in the cycle, is we are very cognizant of making sure that in all dimensions we are prepared for ups and downs. So, we look at where our balance sheet is as we look at our position in the cycle as well.

Rhem, one thing I will clarify because I got -- I just looked at a note, but at least three of you have asked what our cash taxes look like. They will be $3 million to $5 million in 2016 and they will be $5 million to $7 million in 2017, so that will help you with your model.

Great, thanks for the time. Keep up the good work, guys.

I am showing no further questions at this time. I would now like to turn the call back over to Mr. Jon DeGaynor, Chief Executive Officer.

Once again, thank you all for your questions and for your time. We as an organization are really pleased with what we achieved in 2015, but probably more importantly we're really excited for what 2016 has in store. We are going to continue to stay focused on both growing the topline and executing to grow the bottom line, and we look forward to talking to you in future quarters to show you what we have done. Thanks very much. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.