Good day, everyone and welcome to the Superior Industries Fourth Quarter 2016 Earnings Call. For opening remarks, I would like to turn the conference over to Kerry Shiba, Executive Vice President and Chief Financial Officer. Please go ahead, sir..

Thank you Lauran and good morning everybody, and welcome to our fourth quarter 2016 earnings call. During our discussion today, I will be referring to our earnings presentation, which is available on the Investors section of our Web site at www.supind.com. Joining me on call today is Don Stebbins, our President and Chief Executive Officer.

As usual, I’m going to start as usual with the second slide of the presentation, where I would like to remind everyone that any forward-looking statements contained in this presentation or commented on today 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 represent forward-looking statements are noted in detail on the slide.

I would like to point you to the Company's SEC filings also, including our annual reports on Form 10-K for a more complete discussion on forward-looking statements and risk factors that may cause actual events to differ from these forward-looking statements.

We will also be discussing or providing certain non-GAAP financial measures today, including value-added sales, and adjusted EBITDA.

Reconciliations of these measures to the most directly comparable data presented in accordance with GAAP may be found in the financial tables included with our fourth quarter 2016 earnings press release and in the appendix of this presentation. With that, I would now like to turn the call over to Don Stebbins, our President and CEO. Don..

Thanks, Kerry and good morning, everyone. Please turn to Slide 3 of the earnings presentation. Over the course of 2016, we made significant progress in our Company’s transformation.

Our team’s execution of our strategic plan drove market share gains and shipments of an additional 1 million units supporting significant growth in value-added sales and earnings.

Through a number of disciplined capital investments we continue to strengthen our manufacturing platform, drive industry leading innovation and further enhance our global competiveness. We also identified and executed on a number of operational improvements. These initiatives include increases to our manufacturing capacity.

After the ramp up of our new and most advanced manufacturing plant in Mexico in late 2015, we added capacity with limited capital investment by completing the 750,000 unit wheel expansion in the first quarter of 2016 bringing the facilities annual capacity to 2.75 million wheels.

We also made meaningful progress towards a 24x7 operating schedule creating additional capacity across our manufacturing platform. We also gained flexibility and improved our ability to support our global customers by establishing a new relationship with an Asian wheel manufacturer.

And in line with our plans by the second quarter of 2016, we completed the ramp up of our new partner Chihuahua based polishing facilities. These initiatives support our strategic push toward winning higher value-added programs, these include products lighter in weight and with larger wheel diameters, as well as with more sophisticated finishes.

For example, wheels with the diameter of 19 inches or greater accounting for 17% of our total units in 2016 compared to 13% in 2015 representing the 34% unit increase. Also in 2016, we launched our first 22 inch wheel program.

Looking ahead, we anticipate wheels of 19 inches in diameter or greater to represent an even larger percentage of our overall product mix. In 2019, we anticipate they will represent over 30% of our total units. Our expanded finishes and proprietary technology allow us to provide higher levels of wheel customization to our customers.

One example is our new patent pending Alulite wheel design for which were recently awarded our first program on one of our customers premium platforms. The Alulite wheel is specifically designed, cast and machined to reduced the weight of the wheel by approximately 10% and example of our Company’s innovation and differentiation in the marketplace.

As we have mentioned on previous earnings calls in 2016, we initiated investments an additional premium finishing capabilities. Specifically, we began PVD finishing facility adjacent to one of our plants in Chihuahua. PVD provides an environmentally friendly chrome like finish.

We expect the facility to be operational in 2018, consistent with Superior’s history of innovation Superior will be the first OEM wheel supplier that provide PVD finishes in-house. We expect this offering to contribute significantly to our value-added sales. As of today, we already have orders to fill our new capacity.

We currently expect the total cost of this project to be approximately $30 million of which $15 million is reflected in our 2017 outlook.

We believe, combined with other investments these projects further enhance our global competitiveness and strengthen our customer relationships by bringing more complex, higher value-added wheels as they look further to differentiate their vehicles.

Additionally, last year we were awarded our first ever program by a well-known global German OEM establishing a new and important partnership for our Company. And from the tax perspective, in the beginning of 2016, we successfully rolled out our new tax strategy reducing our corporate tax rate to 24.4% in 2016 down from 32.1% in 2015.

Please turn to Slide 4. AS you can see from the slide, the progress we have made towards our strategic goals have led to positive financial performance. For the full-year we achieved earnings of $1.62 per share and 80% increase year-over-year.

This was driven by 9% increase in unit volumes of 12.3 million units, which significantly outpaced North American light vehicle production growth of 2.5%. Net sales increased only modestly over the prior year due to the pass-through of lower aluminum cost despite a 13% increase in value-added sales to $409 million.

Our strategic push into higher value-added products combined with our higher overall unit volume led to a 16% increase in full-year 2016 adjusted EBITDA to $88.5 million and supported $78.5 million in operating cash flow, a solid 32% increase over 2015. Now, if we could turn to Slide 5 to discuss our fourth quarter financial performance.

Fourth quarter value-added sales increased 3% to $106 million driven by favorable price and mix, partially offset by lower unit volume. Unit volumes declined 3.6% as we left a near record quarter in the fourth quarter of last year which benefitted from a ramp up of one of our customers new model platforms.

The pass-through of lower aluminum cost to our customers and lower unit volume led to a decline of fourth quarter net sales of 3% year-over-year. Nevertheless, fourth quarter diluted earnings per share remained flat at $0.31 and we generated strong operating cash flow.

Adjusted fourth quarter EBITDA was $18.7 million or 17.6% of value-added sales including $5.9 million of expedited freight cost, which was in line with our expectations. As we discussed with you on our third quarter earnings call, we experienced inefficiencies in the back half of 2016 driven by a number of operating issues.

These disruptions led to $13 million of expedited freight cost in 2016. We have taken a number of actions to reduce these risks and we have not expedited any shipments since the beginning of January. While we are all disappointed that we faced these obstacles, I’m pleased by our team’s response and dedication to address them.

I’m also encouraged by the underlying earnings power of our business and a substantial opportunity for mainly for improvement going forward. Excluding the expedited freight cost, full-year 2016 adjusted EBITDA would have increased by 34% and EBITDA margin as a percentage of value-added sales would have expanded by 382 basis points.

This underscores the true strength of our business model as we drive higher levels of efficiency throughout our entire manufacturing platform. To conclude we are entering 2017 in a stronger position poised to build on our strategic investments.

We seen many opportunities to drive greater levels of operating efficiency, increase our capacity and improve our mix, which we believe will continue to drive bottom-line growth. With that, I would now like to hand the call over to Kerry..

Thank you Don. Let’s begin with Slide 6 please. As Don mentioned, despite a challenging comparison to the prior year period, Superior’s fourth quarter shipments were strong at 3.1 million units.

Full-year 2016 shipments were 12.3 million units, an increase of 9% year-over-year, which significantly outpaced the 2.5% increase in North American light vehicle production. We continue to see improved volume for passenger car programs in the fourth quarter, reflecting a 9% increase year-over-year.

This growth was driven by continued strong shipments for the Chevrolet Malibu increasing by 180,000 units over the prior year period. We also experienced solid volume growth with Nissan Sentra and the Subaru Impreza programs both of which were conquest wins launched in late 2015 and early 2016 respectively.

Sales in the light truck category which includes pick-ups and SUVs declined by 2.7 % or 44,000 units when compared to the prior year. Just a reminder, we are now set pretty crossover vehicles out of the light truck category during our discussions.

Growth in largest platform, which is GM’s K2XX remains solid, because our shipments increased 57,000 units. Sales for the Toyota, Tacoma and Highlander, Dodge Ram truck and Ford Explorer also improved.

Offsetting this growth the volume decline in the Ford F-Series, which was down 167,000 units reflecting our lower participation on the new heavy-duty model since its launch in the second quarter of 2016 as well as some trim line impacts.

Sales for the crossover category, which included minivans were now 45% year-over-year due to the continued wind down of our participation on the Cadillac SRX as well as the Chrysler Town & Country, which we have discussed in the past.

This was partially offset by solid volume for the Nissan Kicks, a new program as well as the nice increases for the Ford Edge and the Lincoln MKV.

For the full-year of 2016 the 9% increase in our shipments was supported by strong increases in the Malibu, K2XX, Sentra, Kick and Tacoma programs, partially offset by declines in the SRX, Town & Country, F-Series, Fiesta, Escape and Avalon.

Looking briefly at the sequential comparison, unit shipments increased 6.4 % in the fourth quarter when compared to the third quarter, which compares to 1.5 % sequential decline in light vehicle production.

A strong sequential growth was driven by increases on several programs including the K2XX, F-Series and Impreza that were partially offset by a sequential declines for the Toyota Camry and Avalon and the Subaru Legacy. Turning to Slide 7, let’s take a look at the year-over-year change in both net sales and value-added sales.

The first chart as usual shows the reconciliation of these two sales figures as it displays value of the metal and third-party up charges pass-through to customers, which we exclude from value-added sales. Net sales were roughly $188 million in the fourth quarter of 2016 which compares to $195 million in the prior period.

The benefit of favorable product mix contributed $3.8 million, but was more than offset by $6.6 million impact for lower unit volume as well as $5.9 million impact for our lower aluminum volume and third-party up charges, which again we pass-through to our customers.

The comparison was also impacted by $1 million in negative currency changes due to peso denominated sales contracts and a weaker peso to U.S. dollar relationship. Project development revenues also were lower. Value-added sales were about $106 million an increase of $3.4 million or plus 3.3 % compared to the fourth quarter of 2015.

The increase by driven by favorable price and mix which as just pointed out in the net sales comparison contributed $3.8 million combined with the previously mentioned higher project developments. These benefit were partially offset by $2.8 million due to lower unit volume and the negative currency impact.

Moving to Slide 8, which addresses the full-year comparison, net sales increased $4.7 million to reach almost $733 million. The benefit of volume growth and favorable product mix, which contributed $61 million and almost $15 million respectively were partially offset by $70 million in lower aluminum value and third-party up charges.

Similar to the fourth quarter, there was a negative impact from currency resulting in an approximate $5 million impact on sales. Full-year 2016 value-added sales were roughly 409 million, an increase of about $48 million or 13.3% compared to the $361 million in 2015.

The increase was mainly driven by higher unit volume which contributed [$34] (Ph) million to the improvement as well as favorable product mix, which had a positive impact of almost $15 million. As I just mentioned, there was a negative impact from currency approximating $5 million.

Turning to Slide 9, our fourth quarter adjusted EBITDA was $18.7 million, which compares to $25.3 million in the prior year period. In the current year, this includes $200,000 of carrying cost related to the closed Rogers Arkansas plant as well a $1.4 million gain from the sale of this facility in the fourth quarter of 2016.

These adjustments for 2015 removed $3.1 million of cost primarily related to asset impairment for the Rogers plant closure. As shown in the waterfall chart, there was a nice contribution from improved product mix which was partially offset by the impact of lower volume.

Similar to the third quarter, weaker cost performance was the largest factor drive in the year-over-year decline. In adjusted EBITDA, as we incurred $5.9 million of expedited freight in the current year as well as additional plant related costs caused by operational challenges that carried over from the third quarter.

Although not shown separately in the waterfall chart, SG&A cost for the quarter were lower than for the prior year period primarily reflecting lower accruals for incentive compensation expense. There also was a favorable currency impact of $3.6 million impacting EBITDA, which was driven by the lower Mexican Peso, the U.S. dollar relationship.

The remaining items on the chart were relatively minor. Moving to Slide 10, our full-year adjusted EBITDA increased 16% year-over-year reaching $88.5 million or 21.7% of value-added sales. This represents 60 basis points of margin expansion year-over-year.

As you can see from the chart, the majority of the adjusted EBITDA increase was driven by higher volume and favorable mix. This improvement was partially offset by negative cost performance, the largest cause of which was $13.3 million an expedited freight cost incurred during 2016.

Additionally, we experienced a favorable currency impact during 2016 due to the decline of the Mexican Peso relative to U.S. dollar. SG&A expenses were about flat for the full-year.

Adjustments to EBITDA for the full-year 2016 excluded approximately $1.2 million of carrying cost related to the closed Rogers plant and the previously mentioned $1.4 million gain on the sale of the facility of the fourth quarter of 2016.

2015 EBITDA adjustments consisted of $6.3 million of plant related closure cost largely as a result of the asset impairments for the Rogers facility. I would also like to comment briefly on the sequential quarterly changes in EBITDA, once again we have put these in the appendix of the debt, but I just want to make a brief comment please.

You can find this on Slide 17. Adjusted EBITDA is benefitted from improved volume across performance partially offset by an increase in SG&A, primarily reflecting a reduction made year-to-date compensation accrual in the third quarter reflect previous profit expectations for the year at the time.

Turning to Slide 11, I would like to finish with the few remarks on our cash flow and capital allocation. For full-year 2016, operating cash flow was $78.5 million an increase of 32% when compared to just under $60 million for the prior year. The change primarily reflects higher net income and lower working capital.

Capital expenditure were $9.4 million during the fourth quarter and $39.6 million for the full-year of 2016. This compares to capital expenditures of $6.9 million and $39.5 million respectively in the prior year periods. Full-year 2016, capital expenditures include $10 million related to the new PVD finishing facility has Don previously discussed.

And lastly, I would like to highlight cash we returned to our shareholders. During the fourth quarter, we paid cash dividend of $0.18 per share for a total cost of $4.6 million, we also repurchased approximately 300,000 shares of our stock for $7.2 million.

For the full-year of 2016, we returned a total of $39 million to shareholders through a combination of dividends and share repurchases. In addition for 2017, year-to-date through March 1, we repurchased 194,000 shares $4.5 million with $35 million remaining on under the $50 million share repurchase program approved by a board.

And with that, I would now like to turn the call back over to Don, to walk you through our 2017 expectations..

Thanks, Kerry. Turning to Slide 12. So now let me take a moment to walk you through 2017 financial guidance, which we originally provided on January 11.

We expect our shipment volume to be in the range of 12 million units to 12.25 million units, which at the low end is in line with our assumption for 2017 North American vehicle production to decline approximately 2% to 17.5 million units and imply that our market share remains in line with 2016.

Also as you can see on the slide, we continue to expect first quarter volumes to be 200,000 to 300,000 units below first quarter of 2016 due to the timing of production schedules. We anticipate value-added sales to be in the range of $400 million to $410 million and benefit from continued favorable product mix.

We expect net sales to be in the range of $730 million to $750 million, the higher growth rate of net sales in comparison to value-added sales reflects the current market price of aluminum, which is pass-through to our customers.

We expect 2017 adjusted EBITDA to be in the range of $97 million to $105 million this represents an increase of 10% to 19% compared to 2016. Our guidance implies adjusted EBITDA as a percentage of value-added sales to be in the range of 24.3% to 25.6% an increase of 260 to 400 basis points year-over-year.

We expect CapEx to be approximately $50 million, which is slightly higher than it has been in the recent years this was primarily due to the new PVD finishing project as I previously discussed, which we will begin to ramp up in 2018.

We also anticipate working capital will be a net use of funds and that our effective tax rate will be in the range of 25% to 28%. Additionally, we expect to return approximately $18 million in cash to our shareholders in the form of dividend in line with 2016.

In conclusion, we continue to be encouraged by the progress we have made in the transformation of our business. We remain confident that we have the right strategy in place to drive greater levels of operational efficiency while delivering industry leading product innovation to our customers and long-term value for our shareholders.

And with that, I will now turn the call back over to our operator Lauran to open it up for questions..

Thank you. [Operator Instructions]. We will go first to Jimmy Baker with B. Riley & Company..

Thanks. Good morning Kerry and Don. So just hoping that you could start with kind of further explaining this $30 million PVD project you outlined. I just didn’t catch where that’s located and was hoping you could speak a bit more to how that positions you competitively and how you are thinking about the return profile on that investment..

Yes, so I will start Jimmy. Today we shipped wheels non-painted wheels to an outside service provider that puts the PVD finish on it. So we are going to continue to do that, we also have received orders to fill not only the first 500,000 but more somewhere in the 800,000 to 900,000 unit level for our own PVD process.

So the facility has been built adjacent to what we refer to as our Plant 10 in Chihuahua and so we would literally through conveyance system take non-payment wheel and PVD finish them and then ship them to the customers..

Okay.

And then any way to think about the cost savings on the other side of this then once its fully ramped?.

Not really a cost savings, the PVD finish carries with it an additional charge to our customers to put that finish on. So we will continue to also use our outside service provider. This is really kind of a backward integration type play. So to capture some of that profitability in our system so to speak..

But we will still have as Dan just mentioned relatively significant volumes going through our Tier-2 supplier too, two outlets, two channels to the market for us..

Okay. Understood.

And then did you pick up any conquest wins that will begin shipping in 2017 or is your unit guide kind of purely existing regular backlog? And then I guess conversely just want to make sure you didn’t shed any programs either near-term or in the backlog as a function of the production issues late last year?.

So I can talk to 2017, so we have 28 launches in 2017, 10 in the second quarter and 11 in the third. Some of those certainly are conquest wins that were won two years ago, year and a half ago. So that they are now coming on stream, I don’t know if that’s helpful to you, in terms of answering it..

Yes, that is. And then I guess just wanted to shift gears a bit and was hoping that you could share any updated thoughts on how you are kind of planning for or evaluating potential impact from a border adjustment tax or other negative revision to NAFTA.

Is this something you are discussing with customers, anything you can share in terms of realistic options and are you withholding any investments in your Mexican facilities until you do gain clarity?.

Yes, so I would say probably relatively consistent with most industrial companies. It’s difficult to determine the impact of those discussions whether it’s border tax, NAFTA, renegotiation, corporate tax reduction without knowing the specifics. What we do know is that 80% of the wheels used in OEM, U.S.

assembly plants are important primarily from Mexico and Asia. So, the supply chain of aluminum wheels was optimized several years ago. And so what I would tell you is, yes we are continuing to monitor the situation and speak with representatives both from the national association of manufacturers, as well as [OUSA] (Ph) along with our customers.

So continue to monitor the situation and in the end like all of these situations will end up working with our customers on the right solution..

Okay. Got it. And then just lastly, I had a question, balance sheet inventory is up quite a bit year-over-year and sequentially. So it seems like you have not only rebuilt, but maybe built some additional safety talk.

Is that the way to think about this that given your expectation for working capital as a net use of cash this year, did you determine that previously were running to lien and this is kind of the new norm excluding changes in metal value of course?.

Yes, I think as in part of that is changes in metal value, but also as you think of some of the things that we have done let’s say reduce the risk of what happened in the back half of last year.

Inventory positions are certainly an important part of that, where we were running probably between a week and a week in a quarter in our facilities let’s call it mid-last year, we will target 1.5 to one and three quarters weeks now.

And I would also say that as I mentioned given the fact that we have got launches coming up in the second quarter, yes we started to build inventory for those launches nearly end of the year..

Jimmy one more thing on the inventory, I think we have mentioned this before, we create a lot of chips in our machining process, we take a raw casting and finish the wheels just the natural byproduct if you will from our process, but chips are because our again recyclable aluminum we put them back in the melt furnace.

But the type of furnace that you need to melt chips is distinct and different from other melt furnaces and is focused especially on handling the material in that form. We lost a chip melter during the year for a while and it was in our largest plant.

And so we also built up an accumulation of chips, which is adding roughly $10 million worth of value to that inventory number that we have all equipment in place to melt those down overtime, but it will take some time to burden that off. One other thing going back to your question earlier, I had some time to look at the detail on new programs.

One that’s more significant for us in 2017 is the Equinox from what I have been seeing, I don’t recall it being on that program. That’s a conquest and it’s a really nice win for us..

Okay, understood. Very helpful Kerry. Thanks a lot Don, I will pass it on..

Thanks..

We will go next to Brian Sponheimer with Gabelli..

Hi, good morning Don, good morning Kerry..

Good morning Brian..

Hey Brian..

Just a couple here Don. Just conceptually you have been through a couple of years now and you inherited the company with lot of cash in the balance sheet and for the most part you are still in a pretty significant net cash position. Given the improvements that you made to the profitability of the business.

Any change in how we should be thinking about capital deployment over the next couple of years..

No, I think we have been pretty consistent in the focus, you know pay the dividend, be proactive in the share repurchase and we continue to look at M&A opportunities around the world. And so I think that’s exactly how we look at it.

We still have I think from my perspective an extraordinary amount of work to do to really gain the efficiencies that are available to us in the facilities. Many of those items are not big CapEx dollars, but we will continue to invest in ourselves as well. So no real change..

Okay, I mean there is no leverage target that you eventually want to get to whether its net cash neutral or even the return on leverage..

No. again I think it depends on what is in front of us.

Clearly, if there was an acquisition candidate depending on the cash flow dynamics of that business that we would acquire, we would evaluate the appropriate leverage, but again we understand clearly that at this point in time where one product business in one region of the world in an industry that’s relatively capital incentive and cyclical.

So we will continue to prudently leverage the company..

Brian, just to look back over the prices then here and you have known us for a long time now. You kind of recall the sequence and it was fixed to base business, let’s get into improving the profitability of our business, let’s get the new plant and new capacity into place, but improve the earnings generation.

At that time, before Don accumulated a very large amount of cash, we did pay for the new cash or plant in cash, but then that’s where we started to embark on rebalancing our capital allocation with some share repurchases at that stage.

The whole time as we have talk about capital structure, I think we have consistently looked at that as we get into the next phase of the company as Don offered and now that we have had time to focus on the internal and the organic and we think about other growth avenues for the company whether it be through additional organic investments like PVD for example, which is not an insignificant project or M&A as we have talked about with you before.

We would like to grow into a more balanced capital structure rather than kind of you will recap company along the way, because we still think we have the lot of opportunities out there in front of us?.

Sure.

I guess along those lines, just from an M&A perspective, what would be attractive within automotive or outside where you can leverage some of your capabilities and understandings of aluminum?.

Yes, so clearly, our strength is in aluminum wheels and again so if were able to broaden the geography, broaden the customer base, I think that would be very, very helpful to us and to our shareholders?.

All right, thanks, guys..

Thank you..

Our next question comes from Vahid Khorsand with BWS Financial..

Hi, could you provide a more detailed update on your overseas joint ventures?.

So in terms of the joint venture in India, I would classify our holdings there as we are a passive investor in that and that’s essentially what our oversea holdings we have got.

As I mentioned, we have a relationship, but it’s not on a financial one in China, it’s a Tier-2 relationship, it’s an outside service providers as we would call it in terms of shipping in wheels to us on a weekly basis, but we manage that as we do with any of our outside service providers whether it’s wheels from them or finishes from other guys..

The investment Vahid in India is quite modest, and again today it’s a passive investment, it’s just an option of look in that part of the world, the market at this stage is continue not be attractive to us.

Really the newest of course modest from a financial perspective, but important to us from a service perspective was the polishing venture that we have added in Mexico, Don has talked about this before and mentioned it in the introduction today.

But we have a partner who has been polishing wheels for us in the past that it was located up here in the U.S. with all of our capacity and our demand for polished wheels moving to our production sources in Mexico, it made sense that you move the venture to be close to us, I mean it’s very cooperative in taking a step to do that.

And then in Asia, again we keep a screen out there and embark people on periodically, just haven’t found the right thing yet..

Okay.

And in terms of product maintenance, are you seeing a uptick in demand for the larger wheels for your passenger wheels on Chrysler as well?.

Yes, yes, the dynamic of larger wheels and how they differentiate our customers product and how they look on the car crossover, SUV and pickup clearly its showing higher take rates on the passenger car and so probably the best example of that is the Malibu, where going into the sale of that vehicle our expectations were quite modest in terms of the take rate of the 19 inch wheel.

So they had a 16 inch to 17 inch to 18 inch and the 19 inch diameter wheels options for the Malibu and the take rate on the 19 has been extraordinary. So and I think you know we see that on bids now from all our customers kind of where was 16 inch, 17 inch and we seen 18 inch and where was 18 inch, we see 19 inch and plus and even some points.

Okay, and my last question some of your customers have had meetings with the White House and I was wondering if any of those comments had funneled its way back to you guys and if you could hear that?.

Yes, I think the comments that have come are consistent with what has been reported in the press. In that they felt that the president listened very intently to what they had to say and that he asked some really good questions. So that’s about all that we have heard..

Okay, thanks..

[Operator Instructions] It appears there are no additional questions at this time sir..

Thank you very much Lauran and I appreciate everybody’s attention today. Thank you..

Thank you everybody. Bye-bye..

This concludes today’s conference. Thank you for your participation, you may now disconnect..