Kerry A. Shiba - Chief Financial Officer & Executive Vice President Donald J. Stebbins - President, Chief Executive Officer & Director.

Jimmy Baker - B. Riley & Co. LLC.

Please standby, we are about to begin. Good day. And welcome to the Superior Industries Full Year and Fourth Quarter 2014 Earnings Teleconference. For opening remarks, I would like to turn the call over to Executive Vice President and Chief Financial Officer, Kerry Shiba. Please go ahead..

Thank you, Ann. And welcome everyone to our fourth quarter and full year 2014 earnings call. I'll tell you at the onset, I'm just recovering from a bit of a virus, so if I have some coughing on during the presentation, my apologies in advance.

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.

I'm going to start, as usual, with slide two with the presentation, where I would like to remind everyone that any forward-looking statements made in this presentation are subject to the Safe Harbor provisions of the Private Securities 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 our company's SEC filings, including our 2014 Annual Report on Form 10-K, which will be filed later this week, for a complete discussion on forward-looking statements and risk factors that may cause actual events to differ from these forward-looking statements.

We're also going to introduce for the first time on this call the use of two non-GAAP financial measures, one measure is adjusted EBITDA and the other is value-added sales. Don and I will speak further about these measures later on. So with that I would like to now turn the call over to our President and CEO, Don Stebbins for his opening remarks..

Thanks, Kerry. Hello, everyone, and thank you for joining us today. Entering 2014, our focus was to strengthen the foundation of our business through the following strategic priorities; improve global competitiveness, balance capital allocation, evaluate opportunities for growth and value creation, expand process and product innovation and technology.

We made progress across each of these key strategic priorities such as getting commercial production of our new plant in Mexico, strengthening our board management team and successfully transitioning product from our Rogers facility to other more cost-efficient facilities. I'm confident we are entering 2015 as a stronger company.

Our 2014 results reflect the continued focus on implementing changes across our business to improve operational execution and efficiency, which we are confident will lead us towards long-term sustainable growth and profitability.

We achieved solid 2014 results in a transitional period with decisions and actions taken that position our company for further success. I'd now like to provide a high-level overview of our financial fourth quarter and full-year results.

Consolidated net sales for the fourth quarter were $187 million, down slightly from sales of $192 million in the fourth quarter of 2013. Adjusted EBITDA was $15.7 million or 8% of net sales compared to $19 million or 10% of net sales in the prior year period.

Net income for the quarter was $1.4 million or $0.05 per share, compared to $6.4 million or $0.23 per share in the prior year period.

Net income for the fourth quarter includes $6.9 million pre-tax or $0.16 per share in cost associated with the closing of the manufacturing facility in Rogers, Arkansas, the sales process of the company's remaining aircraft and the impairment of an investment in an unconsolidated subsidiary located in India.

For the full year, consolidated net sales for 2014 were $745 million, down 6% from net sales in 2013. Adjusted EBITDA was $55.8 million or 7% of net sales compared to $63.6 million or 8% of sales in the prior year period. Net income was $8.8 million equal to $0.33 per share, compared to net income in 2013 of $22.8 million or $0.83 per share.

The impact of a number of actions to strengthen our company was $12 million pre-tax or $0.32 per share. The decline in net income was a result of the charges related to cost reduction initiatives, including the closing of our Rogers manufacturing facility. Turning to slide five.

Our focus to strengthen our long-term global competitiveness is highlighted by the launch of our new facility in Mexico, which was completed on time and within budget. We began shipments of wheels in the fourth quarter and we'll begin shipping our full range of wheels by the end of the first quarter.

We will continue to steadily ramp up production throughout the year. Additionally, the infrastructure of the facility was originally sized to allow for future expansion of up to 500,000 wheels per year. Expansion is already underway with our target date for completion in early 2016.

Another major milestone achieved in the quarter was the successful transition of production from Rogers to other more cost-efficient facilities. A portion of the machinery and equipment from Rogers will be redeployed to other superior plants to enhance production, expand capacity and reduce our capital outlays.

We anticipate the facility will be listed for sale sometime in the first half of 2015. These two major initiatives serve as an important building block as we evolve to become a more efficient and operationally stronger organization.

Along with disciplined operational investment to support our company strategy, we made several important hires to strengthen our management team and our board of directors.

In August, we added Paul Humphries, President of High Reliability Solutions at Flextronics International, and in December, we added Jack Hockema, Chairman and CEO of Kaiser Aluminum Corporation to our board of directors. We also have one board member retiring.

Phil Colburn will be stepping back this May after 25 years of extraordinary service on our board. On behalf of everyone at Superior, I'd like to thank Phil for his many contributions to our company.

We further bolstered our leadership team with the addition of Larry Oliver, our new Senior Vice President of Operations; and Jim Sistek, Senior Vice President of Business Operations.

Currently more than half of my direct reports have been hired within the past 12 months, and I'm pleased about the strength of our team and I'm confident in our ability to execute our strategy going forward. We ended the year well capitalized.

To provide additional financial and operational flexibility, we established a $100 million revolving credit facility. We'll remain committed to returning cash to shareholders through our quarterly cash dividend and our new share repurchase program of up to $30 million.

Overall 2014 and particularly the fourth quarter were defined by positive change in productive activity. We have positioned ourselves well for 2015 and very optimistic about our future. With that, I'll turn the call over to Kerry..

There goes my coughing. Thanks, Don. I now will present a more detailed discussion of our results for the fourth quarter and the full year and my comments today are going to focus a little bit more on the full year results.

Since Don already provided you a brief sketch of the financial results, I'm going to start on slide six where we can take a look at the North American light vehicle production. In the fourth quarter of 2014, the market reached 4.2 million units of production in line with Q3 of this year and up 5% from the same period a year ago.

Current production now has reached the highest level in the past decade. For the full year, light vehicle production totaled 16.9 million vehicles, a 5% increase over 2013. Superior's unit shipments for the fourth quarter declined about 8% to 2.7 million wheels versus 2.9 million in the prior year period.

However, fourth quarter shipments increased 3% sequentially. Shipments for the full year 2014 are 11.1 million, down 6.5% from the prior year. It's fairly easy to ascertain from these comparisons that our market share declined year-over-year.

For the comparison to 2013, we estimate our share declined 2.7 percentage points and 3 percentage points for the full year and fourth quarter respectively. Our share was up about 40 basis points on a sequential basis. Hopefully in my discussion over the next couple of slides will help you develop some understanding of our market share changes.

So let's start by turning to slide number seven. Slide seven shows total year comparisons by customer and is in the usual format we have used in the past. I will leave most of the detail for you to read on your own. However, there are a couple of observations to point out.

Ford is our largest customer and I believe most of you likely are aware that Ford's production was down roughly 5% overall. The overall decline in Ford was in passenger cars which clearly impacted us. I expect you also are aware the F-Series production, a very important program for us, also was lower in 2014.

Finally, you can see that increases at other customers occurred mostly in the light truck category. Let's move next to slide number eight, which shows a comparison between Superior's full-year shipments in 2014 versus the prior year.

As I noted earlier, shipments declined 6.5% for the full-year leading to an estimated reduction in market share of about 2.7 percentage points. While we were up very nicely at Nissan, we experienced declines at our other major customers. To understand the overall change, I need to spend a few minutes on the details. Let's start with Ford.

Our largest unit shipment decline was at Ford, specifically in the light truck category with the vast majority of the decline occurring in the F-Series truck. Concentration in the F-Series program (10:53) very nice increase in shipments for the Explorer.

We also were down in shipments for passenger car programs at Ford with the decline largely mirroring the reduction in vehicle production rates. Our second largest unit shipment decline occurred for GM, primarily reflective of lower volume for the K2XX platform. This platform remains a very important component of our product portfolio.

You likely are aware that GM's production rates on the K2XX were up in contrast to our shipment decline. Our decline on this platform reflects changes at the specific vehicle level, where trim line mix did not favor the models where our wheels were specified.

In other areas, our decline at Toyota largely followed lower production volume for the Avalon and Venza, while we had a 10% increase on the Highlander. Our unit volume decline at FCA was almost offset by a nice growth rate at Nissan which was spread across several passenger car programs.

For another perspective on our shipment volume and resulting market share, our factory capacity utilization in 2014 was about 94%, down from 99% in the prior year. You may recall that for 2011, 2012, and even part of 2013, utilization rates consistently have been at or above 100% of practical capacity.

Lack of available capacity from which to grow was the fundamental cause of the market share loss during those years. Keeping in mind the 2014 shipments reflect programs competed for two to three years prior, more conservative bidding during the time of capacity constraints is reflected somewhat in 2014 shipment volume.

I realize that I've repeated the same point on previous 2014 calls, but it is relevant to understanding our shipment volumes for the year. Our current 2015 expectation is for capacity utilization to rise again into the upper 90% range based on programs we've been awarded and our current view of the market.

The year-over-year comparison is predicted to be challenging initially, partially reflective of lower Q1 shipment volume on the Ford F-Series truck. However, we expect the trend to improve as we enter the second half of the year and move into 2016. Slide number nine represents the year-over-year comparison for the fourth quarter.

The overall rate of shipment decline was not all that different from the full-year result I just discussed. There were some differences in the magnitude of change by customer, but underlying reasons for the changes largely are similar as for the full year comparison, so I will not go into the details.

Moving on to slide10, we can look briefly at the sequential quarterly comparisons. Our shipments for the fourth quarter were up 3% when compared to the third quarter of 2014. Against the 1% increase in vehicle production, our shipment growth resulted in an estimated 40 basis point increase in market share.

This increase was achieved entirely in the passenger car category. It was driven primarily by higher unit volume for the Toyota Avalon and Camry as well as for the Ford Fusion.

While our unit volume in the light truck category was flat overall, we had higher shipments on several programs including the Ford Edge, GM's K2XX and Cadillac SRX, the Toyota Highlander, the Dodge Ram truck and caravan and the Chrysler Town & Country.

Let's next move to slide number 11, which shows a year-over-year comparison of net sales dollars for both the fourth quarter and the full year. Using the same format as in the past, there really isn't that much to point out this time.

To be expected, the largest contributor to the decline in total sales dollars was the unit volume decrease, while aluminum value was up, especially for the quarter. Slide number 12 provides the year-over-year adjusted EBITDA comparison.

As I mentioned very briefly at the outset of the call, we are introducing EBITDA for the first time in our presentation. Use of this measure will allow for a direct comparison to our financial guidance, which we issued in January.

We also believe the EBITDA measure will provide a more clear view of trends moving forward for comparison of Superior to other companies. We are including two items in the category of adjustments to EBITDA. The first item is cost associated with closure of the Rogers, Arkansas, manufacturing facility.

The second adjustment is the writ- down of value in the equity investment in Synergies, an aluminum wheel producer in India. For 2014, adjusted EBITDA was $55.8 million or 7% of net sales, excluding $3.1 million of costs for the Rogers plant shutdown and $2.5 million for the Synergies investment write-down.

This compares to $63.6 million or 8% of net sales for 2013. Not surprisingly, the largest driver of the EBITDA decline was sales volume, which had a negative impact of $8.3 billion. The favorable product mix comparison of $3.5 million largely occurred in the first half of the year.

The negative impact of metal at $3.8 billion reflects an increase in the cost of the alloy component of aluminum, which was not passed through entirely to our customers, offset partially by a favorable timing-related difference in the value of metal passing through sales versus costs of sales.

There are descriptions provided on the slide for other items which I will cover individually. Capacity utilization for the year declined five percentage points to 94% in 2014. As I noted earlier, we expect to see utilization increase beginning in the back half of 2015. Slide number 13 provides a quarterly year-over-year adjusted EBITDA comparison.

Adjusted EBITDA for the fourth quarter was $15.7 million or 8% of net sales, which excludes restructuring and impairment cost of $2 million and $2.5 million, respectively. The 2014 result compares to $19.1 million or 10% in net sales for the prior year period. Lower unit volume also had a significant impact on the quarter.

However, the impact of changes in product mix was negative for the quarterly comparison and reflects a lower amount of premium content wheels shipped. Another notable difference for the quarter was favorable cost performance relative to the prior year period.

This improvement resulted from higher production efficiency at the Rogers manufacturing location, as inventory was built to service customers during the post-shutdown period while production was being transferred to other facilities.

Reflective of this, capacity utilization for the current year quarter was 97% which was higher than for the total year of 2014 even if down from the fourth quarter of last year. Slide number 14 focuses on the sequential EBITDA comparison.

It is a bit hard to see based on how the slide is structured, but the total of significant adjustments were $3.4 million higher in Q4, $2.5 million for the Synergies investment impairment and $900,000 for the Rogers restructuring.

Improved cost performance again stands out due to running Rogers at relatively high production rates in the fourth quarter. Finally, SG&A costs were down in many categories including professional service fees and bonus accruals. Turning now to slide number 15. I will discuss a few more income statement items.

Please note that I will be focusing on performance for the full year. First, SG&A was up $2.8 million when compared to 2013. $1.7 million of the increase was for higher depreciation, about three quarters of which was one-time cost associated with the disposal of the company-owned aircraft.

SG&A also was impacted by higher professional fees including cost incurred during the proxy contest in 2014. We incurred foreign exchange losses of approximately $1 million for the full year of 2014, due to strengthening of the U.S. dollar against both the Mexican peso and the euro.

The effective tax rate was close to 44% for 2014, which compared to 38% in 2013. The effective tax rate in both years were affected by a variety of factors, but the increase in 2014 primarily reflected an increase in certain nondeductible cost related to recent tax law changes in Mexico.

The write-off of the tax receivable reduced R&D tax credits and changes in valuation and uncertain tax position reserves. Slide number 16 addresses a few comments on the balance sheet and cash flow.

The decline in cash and short-term investments primarily reflects the investments we made in 2014 for the construction of our new plant in Mexico and improvements in our existing facilities to improve the equipment reliability, increased production efficiency, and enhance the manufacturing process control.

Accounts receivable, inventory and prepaid expenses, which primarily include aluminum, all reflect the impact of higher metal values at the end of the year. Part of the accounts receivable increase also was due to a very short timing difference between years for certain customer payment.

The cash decline also reflects the impact of approximately $22 million of share buybacks during 2014 and $19 million of incremental cash dividends paid during the year. You may recall that minimal cash dividends were actually paid out in 2013. They were accelerated into December 2012 due to that existing uncertainty over changes in dividend tax rates.

During 2014, we repurchased total of 1,089,000 shares and total repurchases reached the maximum expenditure of $30 million authorized under the then existing program. In October, our board approved the new buyback program authorizing the repurchase of up to $3 million of our common stock. With that, I am going to turn the call back over to Don..

Thanks, Kerry. Turning to slide 17. Let me take a moment and walk you through our 2015 guidance that we first provided in January. Although we're providing annual guidance, we are focused on positioning ourselves for the success over the long-term.

In 2015, quarterly year-over-year comparisons will be difficult as we anticipate performance to improve as we move through the balance of the year.

The reason for improving performance in the second half of the year is threefold; first, we are ramping up our production at our Mexico facility throughout the year and aim to reach full capacity at the end of 2015; second, we anticipate our shipment volumes to gradually strengthen in the second half of year; and third, we're implementing operational excellence initiatives across the business to enhance our performance.

Based on these underlying assumptions and our current economic and market outlook, we expect to report net sales in the range of $725 million to $800 million. EBITDA margins are expected to increase 100 basis points to 200 basis points in 2015.

Value-added sales, which primarily removes from net sales the value of aluminum that is passed through the customers is expected to be in the range of $325 million to $360 million. EBITDA margins measured as a percentage of value-added sales are expected to increase 350 basis points to 500 basis points.

Capital expenditures for 2015 are expected to approximate $40 million, significantly lower than 2014 when the company was investing in the completion of its new manufacturing facility. Working capital is expected to be in net use of approximately $10 million for fiscal 2015.

As noted on slide 18, our priorities in 2015 remain unchanged, and we remained focused on executing on these strategic imperatives to drive shareholder value. Our priorities are as follows. First, we'll identify and implement operational improvements across our business to enhance our global competitiveness.

The completion and launch of the Mexico facility highlights a prudent reinvestment in the business to strengthen our manufacturing operations and advance our long-term growth opportunities. We're focused on balanced capital allocation to enhance shareholder returns.

We will direct resources and capital to areas of our business that deliver the best return on our investments. As part of this process to enhance shareholder returns, we will continue to return capital to shareholders through dividends and our share repurchase program.

Another 2015 strategic priority is to foster a culture of innovation and technology across our business. Working with our customers, we will actively seek to bolster our product portfolio and expand our service capabilities to create value. We also continue to explore and analyze all opportunities to assist our customers globally.

We are also improving the company's investor outreach and transparency. In January, we released annual guidance for the first time. We have been and we'll continue to be on the road, meeting with investors and plan on participating in four conferences this year. These are important steps in changing the way the investment community perceives Superior.

Lastly, as our financial performance indicates, 2014 was a pivotal year in the transition of our company.

We made key investments to reduce our overall cost structure and maximize operational efficiencies including closure of our Rogers facility, the successful launch of the manufacturing plant in Mexico, and our decision to increase our new plants capacity by 25%.

As we progress further into 2015, we entered the year with confidence and look to build upon the progress achieved in 2014.

We're seeing favorable market dynamics in the North American auto market and our commitment to become a more efficient and operationally stronger organization leave us well positioned to capitalize on the strategic investments made in our business. We will continue to work closely with our customers to enhance our value proposition.

We will continue to make prudent investments to support our strategy. In summary, we are pleased with our recent efforts to improve the company's performance and are focused on executing our strategy to drive shareholder value. At this time, I'll turn the call over to the questions.

Operator?.

We'll take our first question from Jimmy Baker from B. Riley & Co..

Hi, good morning, Don. Hi, Kerry. Thanks for taking my questions..

Good morning..

So you quantified the expenses associated with the Rogers closure, did you also incur any significant expenses launching your new Mexican facility in the quarter that were not capitalized? And then as we think about 2015, how much will it cost you to respond to another year of a proxy contest and are you expecting any significant restructuring charges in 2015?.

Okay. First off, with regard to Mexico plant, Jimmy, in the year 2014, it was just a few hundred thousand dollars that we incurred. I don't know the exact number, but just a few hundred thousand. As we ramp up into 2014 – or 2015, as you would expect, we're always having to invest in hiring people and training, ahead of the actual production curve.

So, I don't have an exact number for you. We will incur certainly some cost friction during that process, but as we get towards the fourth quarter of the year, we would hope to be running pretty close to full efficiency at that point. There will be some continuing cost for curing (31:05) Rogers as we go into 2015.

much of that cost is going to be focused to cleaning up the facility and dismantling equipment and going through all that process; could run in the range of $3 million to $3.5 million, would be our current estimate.

It's spread out to probably a little bit front-end loaded and then falling off a bit in the second half of the year, somewhat depending on the project timing as we go along the way on that one. Let's see. You had one more question, I think. What was....

The cost to battle a proxy contest..

Hard to estimate at this point in time. We're planning – we haven't announced an exact date yet but we're trying to keep our annual meeting more on a normal calendar and then go through this process efficiently as a result. I think only time is going to tell if it – it hopefully I would say directionally will be less than last year..

Okay thanks. And then if you hit the high-end of your 2015 guide, you'll be running about a 9.5% adjusted EBITDA margin, and that's reflecting this large facility ramping up and the underutilization in the front half of the year.

I guess with that context, why do you think it would take until 2017 to reach double-digits on an adjusted EBITDA margin basis?.

Well, I think there's a couple of things that are – dynamics that we're looking at there. First off, we intend to put some more investment into the new plant in Mexico.

As Don had mentioned, we're going to expand that a bit, that unit another 500,000 units, that will again be further expansion that will be running behind a little bit on the curve of efficiency for 2016 as we ramp up that additional capacity.

The continued progress in cost reduction at our Fayetteville facility clearly is an ongoing process that will take some time as we continue to get at that. Some of the expectations that we've built into the margin improvement also are based on continuing improvement in our manufacturing process production efficiencies cost in Mexico also.

You know, Larry's been on – Larry Oliver has been on board a few weeks at this point in time. So we know that there are certain things that are going to be systemic kinds of improvements that are going to take a little – take some time to implement..

Yeah, I think the other point, Jimmy, and you're assuming that we end up at the high end at the maximum 200% that we've guided, and so certainly, yeah it makes an easier jump if we end up at that range to get into double digits; there is no question about that. But it also assumes that we are at that range. That's the starting point..

Fair point. So then lastly for me, just appreciated the color on your expected shipment volume progression.

What are you assuming in terms of North American industry production in the 2015 guide? And then separately as, if you assume aluminum prices hold here, what is your backlog showing you in terms of the pricing trend year-over-year as we move through 2015?.

Let's see. With regard to the industry, we're looking at probably the low-to-mid $17 million – 17 million unit build rate. So, that will – and it will likely be growing ahead of where our own volume curve is going to be as a result.

With regard to average selling price for next year, to tell you the truth, I don't have that off the top of my head for you, Jimmy. We would expect that as we go through 2015 that I don't expect a major product mix shift as the year goes on.

I think a lot of what occurs as far as any improvement we see in average selling price, we would be looking more towards the back half of the year as our volumes also continue to build, but I don't have a specific rate of growth for you on that..

Okay.

And actually if I could just sneak in, just a housekeeping item for comparative purposes, could you just give us the value-added sales for 2013 and 2014, do you have that?.

For 2014, it's about $360 million. I don't have 2013..

Actually, I do not either..

Okay. I'll follow up offline. Thanks a lot for the time, Don. Thanks, Kerry..

Okay. Hey, Jimmy, just as a thought by the way, if you go back to our 2013 annual presentation, I think we have the same sales analysis in there, which breaks out metal, breaks out up charges so you could – you could get to that number probably off the information that we provided. I just don't have it in front of me, right now..

Understood. Thanks a lot..

And at this time we have no further questions in the phone queue..

So. Thank you everyone for your kind attention this morning for attending the call and we look forward to talking to you at the end of the first quarter. Thank you..

Thank you..

This does conclude today's conference. We thank you for your participation..