Stoneridge, Inc. (SRI) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Stoneridge Third Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-session and instructions will follow at that time. [Operator Instructions] Now, it is my pleasure to hand the conference over to Mr. Ken Kure, Corporate Treasurer and Director of Finance. Sir, you may begin.

Good morning, everyone, and thank you for joining us on our call today for the third quarter. The release and accompanying presentation has been filed by the SEC, and it’s posted to our website at www.stoneridge.com in the investor section. Joining me on today’s call are Jon DeGaynor, our President and Chief Executive Officer; George Strickler, our Executive Vice President and Bob Krakowiak, Chief Financial Officer, who recently joined Stoneridge in late August. 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 or plans. Although we believe that such statements are based upon reasonable assumptions, you should understand that these statements are subject to risks and uncertainties and actual results may differ materially. Additional information about such factors and uncertainties that could cause actual results to differ maybe found in our 10-K with the Securities and Exchange Commission under the heading, Forward-Looking Statements. During today’s call, we’ll 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. After Jon and George had finished their formal remarks, we’ll then open up the call to questions. With that, I’ll turn the call over to Jon.

Thanks Ken and good morning everyone. Before I begin my remarks on the quarter, I’d like to welcome Bob Krakowiak to Stoneridge as our Chief Financial Officer. Bob brings a strong combination of financial expertise and related industry experience. Bob will be a valuable addition to our team as we continue to build on our financial strength and pursue long-term global growth opportunities for Stoneridge. At the same time, I want to thank George Strickler for all of his contributions to the company since becoming CFO in 2006. For more than 10 years, George has played a critical role in shaping the company’s business and financial strategy during a period of great challenge and transformation. He’s been a strong partner with me during my 10 year and I’m confident that his contributions to the success of Stoneridge will continue in his new role as he leads strategic projects supporting the company’s organic and inorganic growth initiatives. Earlier this morning, we released strong results for the third quarter. Our company continues to execute well and I’m pleased with our continued progress on our key metrics during the quarter. On Page 3, let me briefly cover our third quarter and year-to-date consolidated 2016 results. Sales were $174 million for the quarter and 523 million year-to-date. Net income was 10 million for the quarter and 29 million year-to-date. Earnings per share of 36% for the quarter and $1.03 year-to-date and our balance sheet remains strong with cash and debt of $51 million and $105 million respectively. Based on the current market outlook, we are revising our sales guidance to reflect softness in the North American passenger car and CV markets. However, based on our performance, we are reaffirming our full year guidance for gross margin, operating margin, EBITDA and earnings per share. We believe that we will perform towards the top-end of our EPS guidance. Turning to Page 4, the performance of our company continues to demonstrate the focused effort of our management team driven to deliver on our commitments. Sales for the third grew 7.3% versus the comparable period last year and 6.8% year-to-date. Our gross margin is has expanded over 76 basis points, compared to the third quarter of last year and 73 basis points year-to-date. Our company has improved earnings for eight consecutive quarters, compared to comparable quarter the prior year and we have rapidly responded to macroeconomic headwinds in South America, resulting in PST generating positive operating profit during the third quarter. In addition we have augmented our team with key talents to position the business for growth. Our new business awards demonstrate that we’re winning with our customers and growing faster than our respective markets. On Page 5, provides the summary of key financial metrics for both the third quarter and year-to-date 2016, compared with 2015. Third quarter sales of $174 million was 12 million or 7.2% higher than third quarter 2015.Operating income improved 31.7%, from $8.9 million to $11.8 million. Year-to-date sales of $523 million was 33 million or approximately 7% higher than year-to-date 2015 sales. And operating income improved 74%, from $19.5 million to $33.9 million. Earnings per share also improved 33% versus the comparable quarter last year from $0.27 to $0.36. Additionally, year-to-date earnings per share of $1.03 improved 69% versus the comparable period last year. We are pleased with the progress we’ve made in converting top-line growth into bottom-line results and our key financial metrics versus 2015 show that. On Page 6, let me provide an update on our progress with PST. Successful leadership teams execute decisive actions and challenging situations. At PST our management teams actions to adjust their cost structure and inventory levels in the face of South American economic uncertainty has yielded positive results. Although U.S. dollar revenue was down 8.2% compared to the third quarter of last year, gross margin improved by over 400 basis points. This improvement was driven by swift dramatic reductions in hourly payroll, SG&A and design and development cost. In total, these efforts resulted in PST generating positive operating income during the quarter. The tireless efforts of the management team to take out cost improved their supply chains, reduced inventory levels, improved pricing and pursue new top-line contracts has enabled PST to survive in the current economic environment and be positioned thrive in our recovery. PST is an important part of Stoneridge and has the capabilities to be a low cost B2C electronics and telematics provider in the marketplace. We believe our South American assets will serve our company well as a platform for profitability, rapid innovation and growth to quickly respond to our customer and our new electronic logging device for the North American market being developed by PST is just one example of this capability. Profitable sales growth continues to be an important focus for the entire Stoneridge team. On Page 7, it shows our new and replacement business awards for control devices and electronics during the third quarter. Our customers awarded business worth $48 million in peak annual revenue during the quarter, representing approximately 27 million in replacement business and 21 million in new business. More specifically, these new business awards include $9 million soot sensor award for a large European Pass Car customer, $6 million front axle disconnect actuator award for a large automotive Tier 1 in North America and $3 million instrument cluster award for European commercial vehicle customer. The soot sensor award is particularly important as it represents our customers confidence in our demonstrated ability to leverage our confidence in high temperature sensing, currently applied in commercial vehicle applications into adjacent passenger car markets. This market represents a strong growth opportunity as Western European and emerging market economies implement more stringent emission standards. Our soot sensor technology allows customers to achieve and ensure compliance to those standards. We’re pleased with our progress on new business awards. New business is the ultimate parameter of our customer’s confidence in Stoneridge and on our ability to deliver compelling solutions in the marketplace. We’re also pleased with the diversification of our products, customers and geographies. This diversification will allow Stoneridge to be more resilient in the event of a market downturn and we’ll discuss this diversification process more fully in the financial review. On Page 8, I’d like to provide you an update on our innovative active safety mirror replacement technology, MirrorEye. MirrorEye’s impressive functionality includes critical safety features such as blind spot elimination, night vision enhancement and overtaking detection. It also provides and expanded view with automatic panning. Safety is on the top of the agenda for most fleets and the Stoneridge lateral product is providing a great tool for fleets to address the safety challenge. More specifically, the average North American trucking companies spent $0.92 per mile in insurance premiums in 2015. A figure that is up 44% in two years and doesn’t include this year’s rate hikes according to the American Transportation recent censes [ph]. Higher insurance costs are spurring the trucking industry to adopt accident prevention technology, including devices that are lured if the trucks drift outside their line. MirrorEye, is just such an accident prevention technology. Recently Stoneridge participated in the IAA and ATA industry shows in Europe and North America. The feedback from our OEM customers and fleets has been extremely favorable. Within three weeks of the ATA management conference, we have already taken our innovation truck to multiple North American fleet providers to showcase our technology and we’re working with many of those fleets to develop, demonstrated trucks with their product trials. The level of interest has been heightened with our key OEM customers as well. The enthusiasm shown by our customers reaffirms that the market desires products and approve both safety and efficiency. The mirror replacement product line is targeted for early launch in the 2019, 2020 timeframe, with business awards expected in the next two to three quarters. But we also see retro fed opportunities that will precede those early programs. We are convinced that our MirrorEye product will evolve into a significant growth opportunity for Stoneridge. As you can see on Page 9, Stoneridge is strategically focusing in technological areas with stronger growth within the various global markets we supply. Segments were we participate such as intelligence, emissions, safety and security and fuel economy are all growing and are projected to grow faster than our end markets. The business awards I referenced on Page 7, confirm that our strategy to invest in these areas is paying off. Our soot sensor product is part of the emissions category which is growing at a healthy 16%, compound annual growth rate. Front axle disconnect is targeted to provide fuel economy solutions and MirrorEye which I discussed on Page 8, will be a growth catalyst for Stoneridge in safety and security area, a market projected to grow at a compound annual growth rate of 7%. These innovative products give our company confidence to Stoneridge’s positioned broad sales at a compound annual growth rate at a multiple two to three times the growth rate of our expected markets. Next, on Page 10, I’d like to provide a brief update on our headquarters consolidation in Novi, Michigan. This relocation is an important step as we deepen our customer relationships, expand our strategic opportunities and position Stoneridge for the future. This move is progressing according to plan, as we expect to have a consolidation and move completed in the fourth quarter. As previously mentioned, this move will provide a platform for collaboration between teams and enhance our capabilities to address corporate strategic initiatives. The location will facilitate more frequent interactions with customers, suppliers and technology developers, allowing our company to continue to develop products and solutions that anticipate the needs of customers. Our facility will also help to attract and retain talent as we prepare our company for future growth. Turning to Page 11, in closing I’m pleased with our achievements during the quarter. We continued to deliver on our commitments. The third quarter of 2016 was our eighth consecutive quarter of year-over-year improvement and earnings per share from continuing operations. And successful leadership teams execute decisive actions and challenging situations and this is demonstrated at PST, where our management team’s actions to adjust their cost structure has resulted in positive operating profit during the third quarter. Our customers awarded our company with $48 million in peak annual revenue business during the quarter. And I’m pleased with the continued development over new business wins that will allow the company to achieve the revenue targets we have outlined for the future. We positioned our company for continued growth with the new capabilities like our soot sensor and MirrorEye technology. In closing, I can assure you that our that our company’s committed to continue to drive shareholder value through strong operating results, profitable new business and focused M&A opportunities. We are confident that our actions will result in continued success in 2016 and beyond. Now, George will walk you through our financial results for the quarter.

Thank you, Jon. And thank you for the kind words of acknowledgment. It has been my privilege to serve the shareholders of Stoneridge and to work with our outstanding global team. I would also like to thank Ken Kure, for his effects in develop in the Treasury and financial planning, corporate development IR growth of Stoneridge. His 18 years of dedication experience with company will be missed. As Bob just recently joined Stoneridge, I will cover the financial performance to Stoneridge during the third quarter, but Bob will be available for the Q&A portion of discussion. Stoneridge reported strong earnings per share from continuing operations of $0.36 per share in the third quarter of this year, compared to earnings per share from continuing operations at $0.27 per share in the third quarter of last year. An improvement of $0.09 per share, an increase of 33% on the combined strength of North America Control Device, automotive performance, European commercial vehicle performance for Electronics segment and improving financial results of PST over the third quarter of 2016. The financial results were achieved by growing our top-line sales and maintaining key costs, direct labor, manufacturing overhead and SG&A expense slightly above the 2015 levels. Passenger car and light truck revenues were 90.4 million in the third quarter, a 26.6% increase over the third quarter of last year of 56.6 million as volumes increased in Control Device products which included new programs primarily through shift-by-wire. In addition the North America passenger car market continued to show growth in the third quarter of 2016, compared to the third quarter of last year. By business unit, sales in the third quarter increased to Control Devices by 16.7 million or 19.2%, in the lower Electronics by 2.9 million in comparison to the last year, with sales of 47.8 million. Electronics revenues were negatively affected by lower volumes in North America truck market. And PST sales were unfavorably affected by $2 million, due to the continued weakness of the Brazilian economy unfavorably affected by 2 million real to the U.S. dollar. However, we believe PST sales at the bottom in January of the year, has improved slightly month-over-month. See Slide 14 for more details. From a geographic diversification perspective, our sales in North America represented 63%, South America was 13% and Europe, Asia was at 25% of our sales in the third quarter this year. The geographic detail could be seen on Slide 15. Our customer diversification has improved with a balance between automotive and commercial customers is can also can be seen on Slide 15. See Slide 17 our deck has a complete EPS breakout on third quarter of ‘16 versus third quarter of last year continuing operations, with a bridge item differences identified on the right. Our business in China, which is part of our Control Device reportable segment, has continued to show improvement with an operating margin of 15.4% in the third quarter compared to an operating margin of 8.5% in the third quarter last year. And operating income increased from $400,000 to $900,000. Sales in our commercial vehicle category was predominantly electronic sales with 53.4 million in the third quarter compared to 56.6 million. Revenues were negatively impacted by lower volumes in the North America commercial market, but the sales decline was less than $4 million. And due to the strength of the Control Device in Electronics business units, Stoneridge’s third quarter of 2016 operating margin was 6.8%, which is a 130 basis point increase over third quarter of last year’s margin of 5.5%, due to the leverage of our SG&A and D&D cost structures. Third quarter operating margin excluding PST was 7.8% to net sales. This is an improvement over the third quarter of last year, which reported operating margin of 6.9% and higher than our first quarter of 2016, and is our highest performance of the last six quarters, which includes the 8% operating margin in the first quarter of this year. See Slide 6 for further details. PST’s third quarter sales declined by 2 million or 8.4% to 22.3 million compared to the third quarter in last year. These results were partially impacted by approximately 2 million for the FX translation as the Brazilian real devalued by 7.5% in the third quarter of this year compared to the third quarter of last year. On a local currency basis, PSTs sales were lower by about 15.2%. In addition, PST also experienced a favorable transactional impact of approximately $800,000 in the third quarter in direct material. The Brazilian real improved revaluation from the first quarter has offset some of the negative transactional impacts that we’ve experienced during the last 9 to 12 months. PST imports mostly electronic components from Asia and 70% of their imports are in U.S. dollars. Consolidated Stoneridge operating income margin was 6.8% in the third quarter of this year compared to 5.5% in the third quarter of last year. It was our expectation that we could leverage our cost structure to lift our operating income margin in 2016. Stoneridge’s operating margins excluding PST improved to 7.8% or 11.8 million in the third quarter of this year in comparison to 6.9% in the third quarter of last year, due mostly leveraging SG&A, D&D expenses, lower overhead and raw material costs. And PST experienced increase profitability from raw material FX transactional exposure to the U.S. dollar, those sales in local currency lower. Electronics’ profitability was negatively impacted by lower volumes in the North America’s commercial vehicle market. Minda Stoneridge, our unconsolidated JV in India posted third quarter sales of 11.7 million, which is an increase of $0.5 million or 4% in comparison to the third quarter of last year. The rupee weakened by approximately 10% in comparison to the third quarter of last year. And our share of Minda’s net income from operations in the third quarter was a profit of 249,000 compared to a profit of 163,000 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 Asian market. And our Control Device sales in China of 5.4 million increased in the third quarter by $0.5 million or 10.1% in comparison to the third quarter of last year. Like our first and second quarters of 2016 and fourth quarter of last year, the leverage on higher-margin sales has allowed Control Devices in China to achieve a double-digit operating margin. For the three months ended September 30, the company recognized income tax expense of $900,000 on pretax income from continuing operations of $10.9 million or an effective tax rate of 8.4%. The increase in tax expense, the effective tax rate compared to the same period of 2015 was primarily driven by the overall increase in earnings, and the PST operating loss for which we can no longer provide a tax benefit due to the full valuation allowance, we provide at December 31 of last year. The 2016 projected annual effective tax rate, which was caused to calculate our 2016 guidance, is based upon maintaining the valuation allowances that are currently provided against our U.S. and Brazil deferred tax assets to 2016. The exact timing and the amount of the valuation allowance reversal are subject to change on the basis of level of profitability that we are able to actually achieve as well as earnings the can be reliably forecasted. We will continue to maintain a full valuation allowance on our U.S. and Brazil deferred tax assets until there are sufficient positive evidence to support the reversal of these allowances. The other and most important thing to remember about this subject is that the timing and amount of any reversals does not change the intrinsic value of Stoneridge, or does it change the amount of cash taxes we pay in this year and the next couple of years. It merely affects the amount of book taxes we would recognize and less EPS for the period affected. The other focus for our team is free cash flow and return on invested capital. We are now projecting to generate free cash flow for the year that will exceed the top of our range of 3% to 4% of net sales. In the third quarter, operating cash flow was an inflow of 19.2 million in comparison to an inflow of 15.5 million during the second quarter of last year. Our free cash flow for the quarter was 12.7 million compared to a 7.0 million in third quarter last year. Our cash balance at September 30, was 50.6 million, a decrease of 4.7 million at June 30 2016. The decrease was primarily due to debt payment down to minimize interest expense with our excess cash and capital expenditures to facilitate a new business offset by operational profitability. And as indicated on Slide 21, we continue to improve our debt leverage from continuing operations as measured by total debt-to-EBITDA ratio. And another important metric that we’ve been tracking is our ROIC, which was at 12.6% last year. And our guidance implies our ROIC improve to the range of 17% to 19% based on our ability to increase our profitability by leveraging our sales and cost structure. We are very pleased with our third quarter results and our ability to build on the progress we made through 2015. Having repositioned Stoneridge to be a high-performing company based on top line growth with a focus in cost reduction and maintaining flat SG&A and D&D levels, our earnings illustrate our ability to increase our profitability and also leverage our sales increases resulting in our improved profitability in comparison to last year. We’re very excited the opportunities which will add to our revised net new business number of 232 million over the next five years for each one of our businesses and area business and safety. Any new business wins from this area would be an addition to our current annual business. We have a number of ways to increase top-line sales. Our content per vehicle has increased for products like shift-by-wire for Control Devices. Electronics has the opportunity do the same with mirror replacement. 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. This applies to PST as well. We’ve developed a sustainable technology process that is a pipeline for new products and technologies that will continue to drive organic growth over our five-year planning horizon. And in our existing 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 ELD legislation recently approved for the North America commercial market, which provides the opportunity for Stoneridge to utilize capabilities developed in Europe and PST for expansion in our North America market. Our plans are to continue to invest and our opportunities for organic growth, we’re actively pursuing M&A opportunities to cut our needs, to support growth in our Control Devices and Electronic business units. And we’re excited about our potential for 2017 as our performance so far this year demonstrated our improved profitability and financial results from organic growth. Now, let me turn over the call to any questions.

[Operator Instructions] And our first question comes from the line of Justin Long with Stephens. Your question, please.

Thanks and good morning, guys.

Good morning.

Good morning, Justin.

So you mentioned North America being the driver to the revenue guidance reduction but could you talk about how much of that reduction was related to light vehicle versus commercial vehicle and looking into next year, do you anticipate the headwinds linger into at least the early part of next year.

Well, Justin, couple of things. It is if you look at our history from a revenue guidance over here we modified - we modified our guidance once before for the commercial vehicle softness. This most recent change is primarily for light vehicle and primarily for one or two key customers. We continue to. It is pretty dynamic. Right now and we continue to watch that both for the balance of the year and into next year but we are - we are confident in the performance of the business and we continue to watch as our customers modify their own schedules.

And Justin, in light of that too is that we’ve as we’ve done all year we continue to leverage our cost structures there are profitability continues to run in the range that we always said in their annual guidance. And that’s why Jon very early in our in our speech or [indiscernible] this morning we reiterated that our performance will be the high-end of our range of EPS for the year.

Okay. That’s helpful color. Secondly, it’s nice to see the continued improvement in PST, and I was wondering if you could share any additional insight on how you’re thinking about the potential for that business in 2017 from both the top line and margin perspective.

I think George and I were just there, actually a week and a half ago, Justin. And while we don’t see huge economic upsides in the near term, well what we see is a business that is effectively sized now appropriately to win at much lower revenue levels. So we had a trough [ph] in January and we have seen sort of limited but sequential month-over-month include improvements in sales. We’re excited about what 2017 pretends for them from a sales growth perspective. But probably more importantly, I’m really thrilled with their operating performance and what they’ve done but the quarter, if you if you broke it down, we see month-over-month progress at the bottom line and that continues through the balance of the year and into next year. So this is a business that can deliver strong returns for Stoneridge, at a much slower sales level and we see the sales coming up. So we think that they can convert both on the top line and on the bottom line.

And just and they’re doing a great job in their cash flow their working capitals come down, inventory will be the lowest level, it’s been in three years. And they have room for opportunity in 2017. So we continue to reduce our debt in the eliminate the high cost at so we’re making great progress there. And we indicated we’d be near break even though we actually had a slight sit in the third quarter and we will perform in the range between 3% and 4% up operating earnings, on a dollar basis in the fourth quarter so the plans that we laid out over two quarters ago here at holding in Brazil at the current economic conditions that we’re experiencing.

Great. That’s a good to hear. And I guess my last question was on the pipeline for new business, George you listed a variety of different product then I know you’re going out and marketing and trying to tell the customers. I believe you mentioned MirrorEye potentially being a new contract opportunity in the next quarter or two. What are the other opportunities where you think you could see contracts materialize in the mid near term.

Yeah, Justin, this is Jon. Let me - let me take that. We do think that we should have something MirrorEye I if not by the end of the year early in 2017, the set something business we talked about want to word of $9 million but there are two that are right after that, that we see being able to talk about both in Q4 and in Q1. And we look at that product line alone is probably one $100 million business opportunity for us. So there are Telematics programs that we continue to pursue, there are additional actuation programs that we continue to pursue including some takeover activities from existing customers. And then the new technologies that we talked about with MirrorEye, the sub sensing and also the ELV [ph] business which is just really getting started in and we launched that product at the ATA show three weeks ago in Las Vegas.

And I think we announced in the second quarter, Justin is that we’ve landed for new businesses in our electronics in Europe. That will build in the net new business for 2017. So we feel pretty good about where we’re at in all the new activity in the products that we have to offer.

All right. Good to hear. I will leave it at that. Appreciate it the time this morning.

Thanks, Justin.

You’re welcome, Justin.

Thank you. Our next question comes from line of Christopher Van Horn with FBR & Company. Your questions, please.

Hi, this is Dan Droba [ph] on the line for Chris. Good morning, guys.

Good morning.

Good morning.

So I was wondering if you could potentially size up the time factor is that more moving control devices this quarter up double-digit sales growth. But can you me a sense of what’s - what sort of the fewer volume versus why maybe as new business versus what you had in the third quarter of 2015.

Well, the movement in control devices or is primarily controlled or is shipped by wire and as you know Dan that product really started as early as 2014. So sequentially it’s been building on relative platforms where the customers are and as we mentioned before we’ve moved from the original Taurus [ph] link into the Taurus [ph] and now the Fusion and that’s all their program is also becoming global not only in North America but in China. So that evolution and there’s been some impact and some this weakness in some of the platforms with Ford [ph] issue. You well aware but our progress continues to be very strong in that shift-by-wire and exemplified by their sales increase this quarter for almost 19%. So, we continue to see that move forward for the fourth quarter and in 2017.

Sure. Thanks for that. On shift-by-wire, how is the market shaping up there in terms of the next couple of years? I think you guys have talked, you guys said that you guys are in conversations with several OEMs, is there any new developments on that?

Well, Dan, as we talked before the follow-on to that is the hybrid protocol [ph] where it goes beyond just the current vehicle transmissions and the current vehicle architectures. We have one business award with that. We continue to pursue additional opportunities. But today we don't have any additional awards, but we're talking to - we're talking to other customers there. And I believe that the success that we're having in our ramp up and the relative success with those both of our primary customers, gives us credibility to go get those follow-on programs with those customers, as well as others.

Okay. Great. Thank you. Then I wanted to turn the mirror real quickly. So, you mentioned that you have some potential to get retrofit business ahead of those OEM - ahead of the OEM launch timing. Can you sort of give us a sense of the scale of that? Would these cars sort of more be prototypes? Are we talking larger scale retrofitting?

Well, the starting point on this, Dan, would be to do prototype trials for large fleets. But when you - when you talk about certain fleets that may buy a 100 or 200 trucks a month, the first thing that they want to do is they want to make sure that they're seeing the benefits. But the response that we've gotten is it far succeeds any - far exceeds anything that we would have expected. And so, we're working right now on a couple of plant trials. But we envision that probably in 2017 we can do something beyond some product trials with customers, but certainly in 2018.

Okay. Great. Thank you. I will leave it there and step back in queue. I appreciate the comments.

Thanks, Dan.

Thanks, Dan.

Thank you. [Operator Instructions] Our next question comes from Jimmy Baker with B. Riley and Company. Your questions, please.

Hi, good morning. Thanks for taking my questions.

Good morning, Jimmy.

Just wanted to delve more into the soot sensor one actually, so was that an OEM or you are already selling to their CV division or did you break into a new OEM there? And just kind of how significant do you think European pass car could become for your control device business over time?

Well, so the - Jimmy, this is actually the exciting thing about soot sensing, it's giving us a chance to penetrate customers that we have not had in the past, particularly for our control devices business. And the 100 million market opportunity that I mentioned to you that would all be - right now that would all be European. So, if you think about the conversation that we've had with regard to customer diversification and to regional diversification, that would behave a significant rotation with regard to control devices business balance between the North American region and the European region. The program win that we mentioned to you would be launched - will be launched in our Tallin, Estonia facility and we expect to have that this won't be the only win that we’ll be talking to you about in subsequent quarters.

Okay. Great. The - if we think about your current revenue guidance versus what it was, let's say, back the last time you updated the net new business, multi-year net new business outlook, I think this year's revenue was down about $36 million at the midpoint. So, can you just help us frame that in terms of the impact to 2017? In other words, did you have any delays that might actually help ‘17 any cancellations that would hurt or is it just really end markets customer leases performing worse than your initial forecast?

Jimmy, we have no losses in terms of business. What we really have is sort of an adjusting pass car market in North America. We've always provided for the commercial drop as you know in the North America side. What we're seeing is some softness in the fourth quarter with at least one customer, potentially two. We've adjusted that guidance when it dropped by $15 million. This is really wrapped around that. We are still evaluating 2017. We're going through our planning process now. So, we're not really providing any insight into ‘17 yet until we have a real good chance to understand where the market is moving. But some of what we see is really adjusting inventory level positions as opposed to taking future demand out of the schedule. So, that’s the issue that we really have to address and understand before we come out. But as you know, going into ‘17, we have a nice new business uplift. It's around $34 million. And we've alluded to some of the new wins we have in the third and fourth quarter. So, I think we still have lift coming in ‘17 from our net new business and we’ll evaluate the current trends we're seeing with our - especially our pass car customers in North America.

Okay, understood. Just last question and apologize if you already went over this. But the revenue guide comes down, but your margin guidance is unchanged, which would seem to imply that earnings should be down, but instead not only the earnings guide unchanged, but you almost effectively guided it up as you now see it at the high end of the range. So, there's something going on below the line that's allowing you to affect and almost raise the earnings guide?

Well, I think it's a lot of things, Jimmy, and I think it's - one of the things that's becoming very clear within Stoneridge is that we're working on driving productivity, especially at the direct labor and overhead level. So, we're seeing improvement at the gross margin level even on the lower sales. So, it's not really an issue of mix. It's more an issue of what we're doing to drive costs there. We've been able to leverage our SG&A and D&D costs. So, we're getting more out of those effects of expenses that we're making. And so - and we've been driving that all year. You've seen our earnings per share percentages of op income and gross margin continue to increase. So, this is more a reflection of that continued improvement that we’ve been driving in the second and the third quarter. We see it continuing in the fourth quarter. So, even on lower sales we expect our earnings percent to sales and EPS to be at the high end of our reported range and guidance for the year.

Understood. So, it's both the margin and the earnings that are tracking towards about the high end, if I heard that correctly?

It’s performance in the business, not - not stuff below the line.

Sure. Okay. Very helpful. Thanks a lot for the time.

You are welcome. Thanks.

Thank you. There are no further questions in queue. So, at this time I would like to hand the call back over to Jon DeGaynor, Chief Executive Officer for closing comments or remarks. Sir?

In closing, I just want to reiterate that we're pleased with the performance of the business in the quarter and we're confident in our ability to continue to deliver strong performance against all of the key metrics. We're focused on meeting our commitments as a management team and we're excited about the growth opportunities that are represented. Stoneridge has been committed to driving shareholder value and that focus will remain at the forefront of everything that we do. I'm proud of the work that everyone at Stonehenge has done during the quarter to drive our vision and I see significant long-term opportunity for our employees, customers, and shareholders as we continue to drive strong growth by investing in our core products, as well as in strategic opportunities to diversify both our customer and geographic footprints. I thank you all for joining us today and I look forward to speaking to you next quarter.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody, have a wonderful day.