Good day, and welcome to the Superior Industries Third Quarter 2014 Earnings Teleconference. At this time for opening remarks, I would like to turn the call over to Mr. Kerry Shiba. Please go ahead sir..

Thank you and welcome, everyone, to our third quarter 2014 earnings call. During our discussion today, I will be referring to a PowerPoint presentation, which is available on our website at www.supind.com.

Joining me on the call today is Don Stebbins, our President and Chief Executive Officer; and Michael O’Rourke, our Executive Vice President, in-charge of Operations.

I will start, as usual, with slide number two of the presentation, where I would like to remind everyone that any forward-looking statements made in this webcast or contained in this presentation are subject to the Safe Harbor provisions of the Private Security Litigation Reform Act of 1995.

Actual results could differ materially because of issues and uncertainties that need to be considered in evaluating our financial outlook. We assume no obligation to update publicly any forward-looking statements. Specific conditions, issues and uncertainties that may be discussed from time to time are noted in detail on the slide.

I also would like to point you to the company’s SEC filings, including our 2013 Annual Report on Form 10-K, for a complete discussion on forward-looking statements and risk factors that may cause actual events to differ from these forward-looking statements.

Before we begin the discussion of results for the quarter, I first would like to turn the call over to President and CEO, Don Stebbins, who have some opening remarks.

Don?.

Thank you, Kerry. Hello, everyone, and thank you for joining us today. As you have seen in our press release, including restructuring and other actions taken during the quarter, we incurred a net loss of $2.4 million equal to $0.09 per share versus net income of $5.2 million, equal to $0.19 per share a year ago.

Included a net loss was a $4.2 million restructuring charge related to the closure of our Rogers manufacturing plant. $1.5 million in expenses related to the proxy contest and strategic assessment reviews and approximately $1.2 million associated with the sale of two company-owned aircraft.

These special items represented $6.9 million of expense or $4.3 million after-tax. Net sales for the third quarter were $176.4 million, down from $191.6 million reported last year, principally reflecting an 11% decline in unit shipments to 2.6 million units from $2.9 million units in last year's third quarter.

Kerry will fill in the financial details of the third quarter momentarily, but to summarize, it was a busy and productive period where the financial impact of our restructuring and other actions masked the progress we continue to make on two of our key initiatives.

The closure of our Rogers facility and the startup of our new manufacturing facility in New Mexico. During the quarter, we took major steps to reduce costs, operate more efficiently and better leverage our team and begin to position superior toward achieving a basic and strategic goal that of enhancing our global competitiveness.

The closure of the Rogers plant was announced at the end of July and all is on schedule to complete the process by mid-September. The scheduled production at Rogers has been successfully shifted to other Superior manufacturing facilities including those in Fayetteville, Arkansas and Chihuahua, Mexico.

The closure is anticipated to generate a net savings of approximately $15 million year-over-year. Construction of our new manufacturing facility in Mexico is going very well and we are excited to see the facility in the verge of startup. It is somewhat ahead of our schedule and on budget.

All major equipment is now in place and our machine lines are all operational. We are working with our customers to receive production approvals with commercial production and shipment set to begin shortly.

I also want to mention that just subsequent to the close of the quarter we announced that our Board approved a new stock repurchase program, authorizing the purchase of up to $30 million of Superior's common stock. Our prior stock repurchase program also in the amount of $30 million was completed earlier this year.

Additionally, today, we announce that we have signed a commitment letter for a $100 million revolving credit facility. Lastly, we are all happy to be recently notified of winning two prestigious quality awards, one from General Motors and the other from Nissan.

With that, I will turn the call over to Kerry, then I'll ramp up and we'll open the call for your questions..

Thanks for your comments, Don and as usual, we'll address questions at the conclusion of the formal presentation. So let's begin with the detailed discussion of the third quarter. I'm generally going to follow the same format I've used in the past.

And Don provided a nice overview and I think, in context for the quarter, if you want to turn to slide number 17, we have the summary income statement for the quarter, which I think just helps confirm some of the data that Don provided to you.

Maybe one more perspective, when you look at the unit sales volume in revenues, we basically fall back to what we experienced in the first quarter. Although, many of the underlying causes were a bit different.

So the sales planner for 2014 fundamentally has been down in the first quarter, then up in the second quarter, then down for Q1, Q2, and Q3 respectively when compared to the prior year.

Just as a reminder, I mentioned last quarter that I expected the sales comparisons for the third and fourth quarters to remain challenging, and that also remains the case still for the upcoming fourth quarter. I won't go over any of the other large items that went through the income statement as Don just covered those.

So, let's start some of the detail. We can go to slide number three first, if you will. And there we’ll look at some of the key factors that were affecting the business. Slide number three is where we framed the market environment in which we operated. Let's first take a look at North American light vehicle production which is shown in red line.

As most of you know, North American vehicle production provides a broad indication of the demand driver for our products. As usual, I will also provide some perspective on customer and product mix in the next couple of slides, which often is important to help you understand any distinctions between the overall market and what happened at Superior.

The market reached 4.2 million units of vehicle production in the third quarter this year, which is up 8% over the same period of last year. As third quarters go, Q3 of 2014 was the best in recent history. Ford, who is our largest customer, ran against the trends and was down roughly 8%.

Superior's unit – first quarter unit sales volume was down almost 11% year-over-year. Against the growing market – I'm sorry, third quarter was down 11% year-over-year. Against the growing market we lost an estimated four percentage points per share compared to Q2 of last year. As usual, I will dissect this more in a few minute.

If you now please to move to slide number four, we will take a look at the production analysis by major customer. The slides in the customary format we use, but I will take a minute to explain because there is a lot of information on information on the slide.

Our top five customers are shown individually on the left, with the remainder of the OEMs grouped together in the last set of bars. For each customer we provide year-over-year production volume comparisons for the quarter including a product category breakdown between light trucks, which was shown in blue, and passenger cars which is shown in red.

Vehicle mix for the overall industry is shown in the chart on the right. To remind you of the total industry context, total production was up about 8%. First, let's take a look at overall vehicle mix. The upward trend in light truck production continued into the third quarter with another double-digit increase over the prior year.

As a reminder, the light truck category includes SUVs, crossover vehicles and vans, in addition to pickup trucks. Following two quarters of year-over-year decline, production of passenger cars also increased with fairly healthy 5% overall.

It doesn't show on the slide, but the producer mix shifted rather significantly versus last year with over a 2 percentage point swing away from the Detroit three. The remainder of the slide shows the few key observations regarding our major customers.

As usual, we provided quite a bit of details which you find helpful to aide your understanding of what happened in the North American market. I am not going to go through all of the comments shown on the slide which you can read through at a later time and I believe they are self explanatory overall.

However, there is one observation I would like to point out. Ford is the number one customer in our portfolio as I noted on the previous slide, one thing that stands out is the Ford production at minus 8% we’re on contrary to the overall industry. The decline was focused across their passenger car models.

The light truck category was about flat, although a 2% decline in F-series production, by far the largest Ford truck – for light truck program in their line-up as compared to relatively low production rates for this platform in the prior year.

Additionally, although our focus on Ford is weighted more heavily toward light trucks, we definitely felt the impact of their production decline in passenger cars. As I mentioned, I am not going to move the rest of the detail on the slides, but please ask questions at the end of the presentation if you have any.

Turning to slide number five, let's take a look at what drove Superior unit volume change when comparing the third quarter 2014 to the same period last year. Once again, we’re using the chart point one that is just shown except now focus is on Superior's unit shipments to our customers.

As I noted earlier, the first quarter of this year started very slowly for us in terms of sales and unit shipments, while the year-over-year sales comparison improved in the second quarter as we ended up with plus 1% in terms of unit volumes shipped.

As we saw a couple of slide back, our third quarter unit shipments were down almost 11% from the prior year.

I've noted this in the last two conference calls, but as a reminder, please remember the business we are seeing today largely was competed for two to three years ago, the time when our then existing manufacturing capacity limitations resulted in us being more selective, regarding the capture of new business.

Overall, while our shipments to Nissan were up, we saw declines at our other major customers. While it’s difficult to discern from the charts, our third quarter sales mix by type of vehicle shifted 150 basis points towards light trucks.

Now, let's take a look at our individual customers, with Ford as our largest customer, our 11% volume decline would basically reflected Ford’s 8% decrease in vehicle production volume. For the F-Series, which is our largest program, we were down at a rate greater than Ford’s overall production change.

The F-Series vehicles are produced by Ford at two different assembly plants. Our F-Series real programs are focused more heavily on vehicles assembled at the Dearborn truck plant, which incurred an extended five-week shutdown for retooling to accommodate the new model introduced this year.

On the plus side, we did see a sizable increase on shipments for the Lincoln MKC ramp-up. At GM, our shipments were down 12.5% overall, while we saw a larger percentage point in passenger car programs, the larger unit volume decrease was for light trucks, mostly focused on the K2XX.

Although our sequential shipments for K2XX, were down only slightly, we saw a 12% year-over-year decline, which ran counter to GMs 10% year over build rate increase on this platform. There are a couple of key factors driving the year-over-year disparity. First in 2013, GM still was producing the GMT900 at its Arlington assembly plant.

Arlington did not convert to the new K2XX program until the first quarter of 2014. Because of our participation at Arlington, our overall unit volume in the third quarter last year for both the GMT900 and K2XX platforms was relatively high. The second factor affecting our sales change is trim line mix.

Our K2XX participation happens to be focused on vehicle options that simplify aren’t being emphasized as much this year. A good example is the 20-inch diameter option where we have had limited participation. While we expect to be launching more 20-inch product in the future for the K2XX program, this will not occur until the fourth quarter of 2015.

The year-over-year decline at Toyota was 15.7% overall, with the entire decline occurring in the passenger car category. The largest decline was for the Avalon, the program where assembly rates were down significantly from the third quarter in a row when comparing to 2013.

There was some launch surge for the redesigned Avalon during a great portion of 2015 which does affect the comparison. Also, Toyota's largest year-over-year production increase was for the Corolla which was a program for which we don't participate.

We were up about 1%, but in the light truck category with nice increases across most programs and I think somewhat offset by declines for the Venza. At Chrysler, our overall decline basically reflects our exit from the Dodge Challenger program.

The shipments for light trucks was about flat year-over-year as increases for the Chrysler Town and Country and the Dodge Durango were offset by declines for Dodge Journey in the Ram Truck. Our year-over-year increase at Nissan was in the passenger car category and driven by two programs, most notably the Altima and also the Nissan note.

If you would now turn to slide number six, we can look at the sequential market and sales volume comparisons. The change is going from Q2 to Q3 of this year tell a bit of a different story mostly for the market. Let's start with the context of what happened in the market.

Second quarter assembly rates were down 5% on a sequential basis, which compares to the 8% year-over-year increase we discussed a few minutes ago -- I'm sorry, that should've been have been third quarter assembly rates were down to 5% on a sequential basis. The decline was a bit larger for light trucks at minus 6% than for passenger cars at minus 4%.

The mix between customers shifted about 180 basis points away from the Detroit Three. You can see from the specific comments that the decline in production occurred at all of the larger OEMs for the largest increase occurring at Ford.

Our shipment declines largely followed the decrease in vehicle production in our major customers with the exception being for Chrysler. Similar to the year-over-year comparison, the sequential decline there again reflects our exit from the Dodge Challenger program.

In addition, shipments for the town and country were down from a somewhat robust prior quarter volume. I won't take time to go through all the individual comments, as again, I think you can review them on your own and they are pretty much self-explanatory.

Next, please turn to slide number seven which focuses on net sales dollars and a year-over-year comparison for the third quarter. We also showed the first nine months of the slide. Once again, we’re using the same format as used in the past. So, let's go right to the data. Excuse me.

At the very top of the table, you can see the 11% volume decline for the quarter and 6% decline for the year-to-date. Not surprisingly, the monetary impact of the unit volume decline which you can see just below the total net sales line is the largest item in the revenue analysis.

The only other item I will mention is the impact of changes in metal value which you can see on the first line in the bottom section of the table. After being down year-over-year for the first six months, the sales impact of changes in metal value turn positive in the third quarter.

This change reflects overall increases in both the London metal exchange and the Midwest Premium we pay for the commodity portion of our prime aluminium. If you would now turn to slide number eight, let's review what happened with gross margin when comparing third quarters for the current and prior years.

As discussed earlier during the overview, gross margin for the current year was just over $8 million lower which equated to 3.9% when measured as a rate of sales. When you look at the waterfalls analysis on slide number eight, you quickly can spot the impact of the expense we recognized for closure of the Rogers’ Arkansas manufacturing facility.

As Don mentioned, the Rogers impact was $4.2 million in total or 240 basis points in gross margin, almost three quarters of the third quarter charge was for accelerated depreciation on assets that will go out of use after the closure and all of the $4.2 million charge was non-cash for the quarter.

We will continue to see charges for closing Rogers in the fourth quarter, which will include accelerated depreciation roughly similar to the third quarter charge. Severance cost should kick up a bit in Q4 and also will turn to cash.

In total, we currently estimate that our total book cost to be incurred will approach $15 million with a little over one-half being in cash. Roughly one-third to 40% of the total is expected to fall into 2015. I will address other items in the gross profit comparison quickly. The volume impact is the next largest item.

We have discussed in previous calls this year that we are absorbing a negative impact for higher cost of metal alloy. And, finally, plant cost performance continues to be hampered compared to last year, largely due to the lower production volumes which reduce fixed cost absorption and negatively impact other plant inefficiencies.

We are incurring the impact of overall volume reductions mostly in the U.S., which we use generally as our flex capacity. As a final note on the slide, capacity utilization in the third quarter was at an estimated 92%, which was lower than in the prior year and also below the first half of 2014.

Please now turn next to slide number nine, which provides a sequential comparison of gross profit performance. The comparison is quite similar to the year-over-year analysis. The impact of the accruals for the Rogers closing and the effect of lower volume pretty much tells most of the story.

Moving on to slide number 10, we can address a couple more areas of the income statement for the third quarter. As I pointed out generally during the overview, SG&A expense for the quarter was impacted by some relatively significant items. Overall SG&A cost was up $1.7 million when compared to last year.

The vast majority of the increase was associated with the disposal process for our two company-owned aircraft. The sale of one of the planes was completed during the quarter, and the other aircraft is on the market and book value was adjusted accordingly. We also incurred higher professional fees during the quarter.

As Don mentioned, some of the increase was cost incurred due to the proxy contest, which concluded in the third quarter. And also as part of Don’s early assessment process, we also engaged the assistance of outside professionals to help us look at market strategy and opportunities to improve overall business processes.

We expect to continue to engage outside assistance, when appropriate, to help us accelerate improvement in the business. The foreign exchange line moved $154,000 unfavourable to a $374,000 loss in the current year third quarter. The change reflects weakening of both the Mexican peso and the euro when compared to the prior year.

The effective tax rate for the income tax benefit this year was only 12%, which compares to an effective tax rate of approximately 33% of the of the last year.

The reduction to this year’s tax benefit was affected by discrete items recognized in the quarter, including a negative tax receivable adjustment, which was offset partially by the release of a reserve for a prior year. If you would now turn please to slide number 11, we’ll take a quick look at the balance sheet and cash flow.

The financial schedules are shown on slide numbers 19 and 20, respectively. Cash and short-term investments ended the quarter with approximately $87 million, which was a decline of $116 million since the beginning of the year and $44 million during the quarter.

As expected, both the total year and quarterly decline reflect higher capital expenditures, driven by expending for new manufacturing facility in Mexico, but also including continued reinvestment in existing facilities. The quarter also included $4.8 million of dividends and $8.8 million for shares repurchased during the quarter.

With regards to last year, the lack of dividends in the cash flow statement is because we accelerated payment of the existing 2013 dividend into December 2012. This action was taken due to uncertainty of our future dividend tax rates.

With respect to the share repurchase, we completed the existing $30 million buyback program which brought in a slightly over 1.5 million shares in total. I think the remaining comments on the slide are self explanatory. Next, if you would turn to slide number 12 and we will give you an update regarding some key factors affecting our liquidity outlook.

The major draw on cash, of course, has been for the new manufacturing facility. In 2013 we invested just under $36 million in the new plant, the bulk of which was for the building and infrastructure. The investment in 2014 has been for machinery and equipment.

In Q3 of this year, we invested another $28 million, bringing us to $67 million in total for 2014 and $103 million cumulatively for the project. We expect to spend another approximately $20 million in in the fourth quarter to complete the project.

I want to remind everybody that we also anticipate a current startup cost in the range of $8 million, mostly in the fourth quarter. About 60% of this cost is estimated to be capitalized. With respect to the base business, you saw in the last slide that we invested $9 million in our existing facilities in Q3 of this year.

We continue to see total year spending in this area to be in the $30 million to $35 million range. For aluminum sensitivities, total aluminum value has moved higher since the end of the year due to increases in both the LME price and especially the Midwest premiums.

Our dividend payment should approximate $20 million or 2014 at the current dividend rate. We will continue to assess our capital allocation alternatives overall. As part of that process our Board authorized a new $30 billion stock repurchase program in October.

Finally, also as Don mentioned, we announced today that we have received a commitment from JPMorgan Chase Bank and Wells Fargo Bank for a $100 million credit facility. The facility will be used for general corporate purposes and to take advantage of future opportunities to support profitable growth and create shareholder value.

Turning now to slide number 13, let's complete a brief update on physical progress on the new manufacturing facility project. We also have provided just a few photographs on slide number 14. As we reported last quarter the building was completed and the infrastructure now was also complete.

Most of the machinery and equipment is installed and is in the process of being commissioned. The photographs show casting decks on the left, a look into the machining operation in the middle and part of the coding operation on the right. We had noted previously that the coding system would be the last major operation installed.

We are currently in the last stages of integration and testing of the system. The process to obtain initial customer approval is underway. We expect to start limited commercial production in the first quarter of next year.

While we will map you at full operational capability until much later in 2015, we are excited to begin shipping wheels in the early part of next year. Our overall cost estimates for the plant remained relatively unchanged.

As we’ve also noted before, infrastructure is been provided to support expanding the new plant by an additional 500,000 units per year.

While we will be able to transfer -- we will be able to transfer certain equipment from the Rogers facility to help facilitate the expansion which is estimated to reduce the estimated cost for this expansion by about $8 million.

Finally, if you would now please turn to slide number 15, I will provide a brief update on the status of the Rogers facility closure. Our current expectation is for production to seize around the middle of December. Production requirements are being transferred to other facilities as part of the closure process.

The approval process for these transfers is mostly complete. We greatly appreciate the support and cooperation; we’ve received from our customers during this process. As Don mentioned, we would also like to offer our sincere thanks to the employees of Rogers who have been highly supportive during a time that's understandably difficult for them.

I believe the remaining bullet points in the slide have been explained previously or in earlier discussions that we’ve had with you. A summary of concluding points are on slide number 16 and I’m not going to read the list of bullets points as they were all covered in the presentation.

The Form 10-Q for the third quarter of 2014 will be filed tomorrow with the SEC, and once filed the 10-Q will also be available on our website at www.supind.com. With that, I would like to thank each of you for your attention and I will turn the call back over to Don..

Thanks, Kerry. We remain opportunistic about the long-term opportunities for Superior. However, there is considerable work to be done on our path to leverage our brand and industry position to enhance the company’s growth and profitability.

It is our plan to keep everyone apprised of our activities and the steps we are taking towards meeting our objectives. Moving forward, we will be playing a more active role of Investor Communications, including participation at Investor Conferences and regular informational visits with analysts and investors.

As one example, we are conducting today’s call from Las Vegas where we will be presenting tomorrow morning at the Annual Gabelli Automotive Conference. Our presentation will be webcast and maybe accessed from the webcasts link in the Investor’s page at our website at www.supind.com. I would now like to open the call for questions..

(Operator Instructions) We’ll hear first from Jimmy Baker, B. Riley & Company..

Hi, good afternoon. And thanks for taking my questions.

First, are you seeing these production trends or I suppose more accurately your shipment trends continue this variance from production trends into Q4 and then I guess as we think about 2015 in light of your comments on the selective bidding two to three years ago, would you expect that you might continue to shed some market share in 2015, I appreciate your focus on profitability over market share, I just want to understand kind of how this progresses..

Yes. I think for Q4, I think, we'll see the same trends. For 2015, I think the trends will be less severe. We've made a concerted effort in the marketplace to try to pick up some additional smaller programs, so to speak, that will launch in the beginning of the year. So we've been fairly successful in that. Although, there's only so much you can do.

In terms of how it all plays out, it will depend on trim line performance, so to speak. And again, it's – those are hard to predict at this stage how certain trim lines will perform..

Okay. And then, I think, Don, in the release you mentioned that your New Mexican plant will be in a ramp-up mode for most of next year.

Can you just, kind of, help us understand the costs associated with that ramp up and, I guess, even more specifically, just kind of break down the cash cost headwind, we'll see hit, EBITDA versus how we should think about it all-in on an operating basis?.

Yes, Jimmy, it's Kerry. The ramp-up period should – it will be – the lines will be on a relatively steady incline as the year progresses. I think that that’s a natural process to think about as you're starting up what's a relatively complicated operation from the foundries through the machining, through the finishing operation.

We're going be starting the year with wheels that don’t require a coding. We’ve mentioned before the coding operations are the most complicated part of the plant to get started. And then, we'll be moving as aggressively as we can to make sure that we get the full range of qualified products through the process as the year progresses.

I don’t think we’ll be hitting full capability run rates until the late part of the year, probably into the fourth quarter overall. I know that you very much are looking for feedback to better model what's going to be happening to us from a cost perspective and I'm not prepared today to be able to offer you that specific kind of an outlook.

We know it’s important for you. I think, I said this last quarter and I still think it's an important thing to keep in mind. Let’s get focused – we’re focused internally on getting this coding operation up and running. It’s very complicated. We're not through that process yet. While we’re moving through the process it's not done yet.

So, until we get everything debugged here, a little bit hesitant to try to give you a more specific guidance. I know that doesn’t specifically answer the question that you’re – provide the data you're searching for right now, but it’s pretty much where we're at right now..

Okay. Fair enough. We'll wait on that one. And also the various costs associated with Rogers closer that are on slide 15. I assume, you'll be able to call those out as they’re recognized. And then, separately, can you just clarify the 78 million in capital avoidance on slide 13, I realize that was in their last quarter as well.

But is that spend that would have gone into Rogers, or is that capital that would have gone into your remaining facilities that you're now able to avoid as you redeploy the 500,000 unit capacity?.

I think, it’s the benefit of redeployment, basically, some of which again will direct at the new facility in Mexico and some of which will go into other of our facilities. So, it’s the comparison of being able to redeploy the capital versus the cost of having to buy new stuff and invest in the other plants..

Okay. And I was just interested if those costs associated with the Rogers, I suppose, if it will still be able to call those out as you recognize them kind of as you did in this quarter..

Sure. We will be sure to do that..

Okay, great. Just last from me, kind of at a high level here, just as you mentioned the financial results today are really masking kind of some of the strides that you’re making there and I guess for lack of a better term, there will be some continued pain before you can enjoy the fruits of these efforts.

So, I guess with that in mind, is there any targets or any framing that you can offer to investors regarding how we should be thinking about the business or targeting the business on the other side of these fairly significant structural changes?.

Yes, I think the answer to that will be we’ll provide that on the fourth quarter call or the year end call, if not sooner. What we need to do is get through the planning process for 2015 and then in 2016 and 2017 and we’ll be able to provide you with some guidance around those outer years..

Okay. Well, thanks very much..

You’re absolutely right that you would expect to see, as you phrased it, some pain in the fourth quarter that you wouldn’t expect to occur throughout the next few years.

I mean we need to get through some of these restructuring activities and streamlining activities and then get on with a full planned 2015, the close Rogers and then really start running the business..

And as Jim as I mentioned some of the decommissioning costs for Rogers will continue across the year end line and continue into 2015 also. So, there will be some period of this noise still, but we’ll help you try to understand it as best we can..

Okay. Well, very helpful as always. Thanks for the time..

Thanks, Jim..

[Operator Instructions] And gentlemen, with no further questions, I’ll turn the conference back to you all for closing remarks..

Okay. Thank you very much. Appreciate your support and interest in Superior. And we will talk to in a quarter or so. Thanks..

Thanks, everybody..

Bye, bye..

And that will conclude today’s conference. Again, thank you all for joining us..