Stoneridge, Inc. (SRI) Q4 2015 Earnings Report, Transcript and Summary

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 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 maybe 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 maybe 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 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 our 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 Electronic 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 are also looking to build upon the success of shift-by-wire by extending this product line on to 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 the 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 their cost structure in line with their reduced demand. For example, the third rightsizing of the cost structure in the last 12 months is being implemented in January and February of 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 [indiscernible] 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 top line 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 5-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 soot sensing in the European markets. Fourth, team. During my first 11 months as the leader of Stoneridge, I am pleased with the progress toward the goal of enhancing our team and deepening our organizational confidence. We have realigned our organization to allow our business units to primarily focus on profitable and sustainable top line growth by developing a 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 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 top line 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 on 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 to 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, which 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’s 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 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 U.S. dollar. The PST sales were unfavorably affected by $12.1 million because of the weakening of the Brazilian real the U.S. dollar. See Slide 4 for more detail. Passenger car and light truck revenues were $66.6 million in the fourth quarter and 11.6% increase over the fourth quarter of last year sales of $59.7 million as volumes increased from 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%. In 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 U.S. 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 were $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 U.S. 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 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 low landed cost facilities such as Xuzhou, 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 $2.1 million high temp sensor award for North America passenger car and light truck customer, a $2 million digital tachograph award for European commercial vehicle customer, a $1.4 million instrumentation cost awards for a European commercial vehicle customer, a $1.3 million EGT award for an Asia Pacific customer and finally, $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 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 of this year. The geographic detail could 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 top line 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 4.1x in 2012, dropped to 2.8x in ‘13, 2.5x in ‘14 as we have continued to de-leverage the company and have maintained 2.3x 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 of 2014 and the refinancing in October of 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 top line 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 5-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 North America market. And for both Control Devices and Electronics, we have a number of ways to increase top line sales. Our content for 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 cost due to uncertain customer demand, restructuring cost to lower demand in PST with a Class A market in North America. This is in addition to containing costs, so we can leverage our opportunities on top line 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 improved 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 and the North America Class A business. And as Jon indicated earlier, the PST management team is aggressively working on rightsizing their costs in the first quarter this year to match our forecasted 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 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 between 3% to 4% of sales in 2016. In 2015, we have 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 going 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 have 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 are also excited about the net new business guidance that Jon discussed and the operating profit leverage that has improved due to the 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 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] And our first question comes from the line of Tristan Thomas with Sidoti & Company. Your line is now open.

Good morning.

Hi, Tristan.

Good morning, Tristan.

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 kind of the best way for us to look at it?

Well, 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 was in the range of between $5 million and $8 million. So, that hasn’t really changed from ‘15, but our effective tax rate will continue to drop based on the improved profitability in North America.

Okay. Are we still expecting tax rate to kind of ramp up as we approach the end of ‘17 as we have got some of that?

Well, I think Tristan with our tax loss carry-forward, 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 everybody in 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 on to the net new business, 2016, the majority of that is shift-by-wire. With the mirror replacement kind of 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?

Yes. Tristan, the new business numbers that you see have no MIRROREYE 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 these numbers.

Okay. Any possible timeframe 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’s ‘18/19 timeframe for an SOP.

And Tristan, one of the things it’s the strategy is it’s more of an OEM driven strategy in Europe and it’s more of the fleet strategy in North America. So, to Jon’s credit we have built a team that’s dedicated 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 are working on a fleet strategy for North America.

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

Thanks, Tristan.

Thanks, Tristan.

And our next question comes from the line of Justin Long with Stephens. Your line is now open.

Thanks. Good morning, guys and congrats on the quarter.

Good morning, Justin.

Thanks, Justin.

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’s your flexibility to increase production with your existing infrastructure once these contracts are fully ramped?

Well, Justin, it’s 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 installed our capacity based on 5 days, 3 shifts. That’s how we capacitize and we are ramping up to that and we are adding crews in both Canton and in Juarez. Simultaneously, as we are ramping up we are learning things about machinery and we are trying to break bottlenecks. So, we are 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 over time, if we needed to do it, we certainly have at least 20% flexibility with what’s installed. But I believe that 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 are 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?

Well, 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 in some of it. And if we look back of our own experience through ‘08, ‘09, we were able to flex our schedules. We pull schedules back. We stopped overtime work on Saturday. So I think at that kind of levels, 10% we could manage within that system to really adjust our production schedules. And we have the ability to flex that pretty well. So and we are sort of conscious of that. I mean we have been talking as a team as if we saw some kind of a downturn out there late ‘17 or ‘18 how we would react to that. So it’s a conversation that we are having within our own management team related to that question.

But just 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 regards to 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 top line and operating income contribution?

It actually is relatively flat in terms of dollar terms. It’s 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 a market share in that area. And I think we have been hanging in there in terms of local currency growth. The one that’s been a little bit of a question mark has been the audio and we have seen both a reluctance of 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 are 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 we are doing very aggressive is we are managing the cost to serve each one of those channels. So we are looking at it, 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 top line, because it’s not all about just cost reductions. We are doing everything we can to enhance the top line too, which as I shared with you track and trace has actually been growing in the last couple of 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’s why we took an aggressive position in January and February. We are taking out roughly about 165 employees. That costs as I mentioned $3.8 million. But it’s got a payback over the course of the year that at least can off real, so that’s all real is, 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 and about 3% in the second quarter and will vary around 5% to 6% in the third and 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.

You are welcome.

And our next question comes from the line of Jimmy Baker with B. Riley & Company. Your line is now open.

Hi, good morning guys. Thanks for taking my questions.

Good morning Jimmy.

Good morning Jimmy.

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, at 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 referenced here. And then two, the offsetting negative impact from FX and then I suppose, three and most importantly, the new program wins?

Well, 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 negative headwinds 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’s not rising tide lifting on boats.

So is that a true statement I guess in each year in the sense that – and while I guess first, could you clarify are you using production estimates coming from your customers or using a third party forecast there to…?

We use multiple third-party forecasters. We don’t use our customer data. Let’s just say, we balance our customer data. And so we look at IHS, primarily for pass car. And we look at LMC primarily for commercial vehicle. And we update those on a regular basis to look at the positives and the negatives by overall market by region and then specifically by customer.

And Jimmy, in that light if you look at the forecast, the big three North America pass car is up about 2.4% in ‘16. The rest of the market is up 4%. And then in North America, the medium truck is down about 9.8%. And Class A is 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 your I guess the Q4 results and you had this a 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 $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’s been driving that tax rate lower or actually driving the tax benefit this year and how that is reversing next year?

Okay. Well, here is in the $0.5 million credit for taxes what’s included in that was $1.2 million valuation allowance, which we established for Brazil. So our overall credit would have been about $1.7 million, because the tax expense in Brazil was $1.2 million. What’s going to continue to drive – and if you look at our mix of portfolio of businesses sort of globally, we are still in a small tax loss carry-forward in Chin. So as the earnings come through, those will be shielded for at least ‘16 and probably part of ‘17. Europe, their effective tax rate is about 23%. Now with the valuation allowance we just established for Brazil, if we lose money in local currency basis, we cannot book a tax credit under the conventions for valuation allowance. If we make money, which we believe we will, we will still accrue taxes in the rate of 19% to 21%, that’s our effective rate. And then in the U.S., we are paying nothing until our projections are showing that we won’t pay any tax in the U.S. until about mid-2018. So you take that mix and it looks like 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 is that because of our continued performance improvement and the offset and reversal of the U.S. tax valuation allowance, there is a high likelihood that come fourth quarter 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 of consequences to it. And you remember this is all non-cash also. But what it would do is we reverse the valuation allowance, 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 ‘17, ‘18 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. 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 the core of Stoneridge business did record a modest tax provision that was substantially offset by this PST benefit?

That’s true. And then the taxes in Brazil have a non-controlling 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.

You are welcome Jimmy.

You are welcome.

[Operator Instructions] And our next question comes from the line of Tristan Thomas with Sidoti & Company. Your line is now open.

My question was actually answered, my apologies to that. Thanks again.

No problem, Tristan.

And our next question comes from Rhem Wood with BB&T Capital Markets. Your line is now open.

Hi guys, good morning.

Good morning Rhem.

Good morning.

Congrats on the nice quarter.

Thank you.

Thank you.

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 and the plans with lean and the purchasing efforts, maybe just some color where things stand there?

Well, 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 are 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’s the first quarter is we are adding capabilities within the organization that 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 our – 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 are 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’s getting started now. And we will certainly be glad to give you progress through – 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?

Well Rhem, we are going through – well, there is actually two processes. We have some relationships that we have already established that I would call they are more on a non-bid auction basis and there 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 India and one we are working with our mirror replacement activity. We think those deals can still get done in the range of probably 6x to 7x EBITDA, because most of them are in the sensor business, which are sort of higher end. And then we have started a more rigorous process. We have been into this for probably about six months now. And we screened a number of customers. We narrow 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-deduction basis. And so we still feel comfortable that we can do deals in probably somewhere between the 5x to 7x 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, as they fit into our business and we are going at by geographic needs, by technology, customer presence. So we are pretty comfortable with where we are at in the M&A process and it’s getting more robust by the month. So 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, enhances our electronic sides in China, it supplements our mirror replacement business or in the sensor business, which is clearly an automotive presence that’s growing 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 to 2.3x, I think you said it was – I mean would you be comfortable doing a really big deal at this point and kind of raise new debt levels or maybe even a big buyback because you are 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 opportunities that are not in our net new business. There is nothing in there for mirror replacement and we are 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 at this company. And I don’t see any reason for us to make a big acquisition at this point. I mean we have enough smaller wins that really bolt-on and fit into our organizations that can generate and improve our return on invested capital. That’s 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 sort of fits a sweet spot for us.

Rhem the other thing that 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 the note, but at least three of you have asked of what our cash taxes look like. There will be $3 million to $5 million in ‘16 and there will be $5 million to $7 million dollars in ’17, so that will help you with your model.

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

Thanks, Rhem.

Thanks, Rhem.

And 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.

Well, 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 are really excited for what 2016 has in store. We are going to continue to stay focused on both growing the top line 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.