Good day, everyone and welcome to the Superior Industries First Quarter 2017 Earnings Call. Today’s call is being recorded. I'd now like to turn the conference over to Kerry Shiba. Please go ahead..

Thank you, Laura, and good morning, everyone and welcome to our first quarter 2017 earnings call. During our discussion today, I'll be referring to our earnings presentation, which is available on the Investors Section of our Web site at www.supind.com. Joining me on the call today is Don Stebbins, our President and Chief Executive Officer.

I'll start as usual with the second slide of this presentation, where I’d 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'd 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 also will 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 first quarter 2017 earnings press release and in the appendix of this presentation. I'd now like to turn the call over to Don Stebbins, our President and CEO.

Don?.

Thanks, Kerry. Good morning, everyone and thank you for joining us today. In the first quarter of 2017 we shipped 2.8 million units and reported value-added sales of $95.5 million, which represents a 5% increase in value-added sales per unit compared to the same period last year.

Volumes were lower than the prior year due to the anticipated started production of certain new programs. First quarter adjusted EBITDA was $19.1 million or 20% of value-added sales. Adjusted EBITDA includes $7 million of acquisition related expenses.

During the quarter, we continued our investments in new manufacturing processes, targeting to more sophisticated finishes which our customers desire.

As part of our strategy to provide our customers with premium finishes, we continue to move forward with the construction of our physical, vapor deposition or PVD finishing facility that is located next to one of our existing facilities in Mexico. The addition of our PVD wheel finishing capability will be operational in mid 2018.

Turning to Slide 4, as you know on March 23 we announced the acquisition of UNIWHEELS AG through a tender offer for a 100% of the outstanding shares.

This accretive transaction creates one of the largest automotive aluminum wheel suppliers in the world with a diversified customer portfolio, globally competitive manufacturing footprint, and leading product technologies.

It also creates an expanded platform for growth and gives us the global scale we need to compete in this globally competitive industry. The subscription period to tender shares opened on April 12 following the recommendation from the UNIWHEELS management Board for investors to accept the offer and tender their shares.

A tender subscription period will close on May 22. We are excited about the opportunity this transaction creates to better serve our combined customer base. Europe is experiencing some of the same trends as North America, the shift to larger wheel diameters and more complex finishes as well as a drive for lighter weight designs.

Over the last five years, Europe has also benefited from the increasing penetration of aluminum wheels over steel wheels. From 35% to 46% in Central Europe and from 60% to 69% in Western Europe. As a point of reference, in NAFTA our penetration rates are running approximately 82%.

UNIWHEELS has a very strong customer relationships built on their reputation of excellent quality and innovative technology. Additionally, they have become well-known for their process excellence inside their facilities. UNIWHEELS has also had very strong financial performance.

It is grown organically at an 11% compound annual growth rate since 2013 with solid profitability. This diversifying transaction will reduce our customer concentration for the top two customers from 68% to 40% and the top three customers from 82% to less than 50%.

It also brings Audi and Mercedes and is our third and fourth largest customers, respectively. The combination also adds UNIWHEELS' leading European aftermarket business. In addition, UNIWHEELS' European manufacturing footprint complement Superior's North American operations nicely.

Together we will have nine plants and two administrative facilities and the annual manufacturing capacity of the combined company will be more than 22 million wheels. Additionally, both companies have a manufacturing facility that has been completed in the last two years. With that, I will now hand the call over back to Kerry..

Thanks, Tom. I will now provide a more detailed overview of our financial performance for the first quarter of 2017. Starting with Slide number 5, Superior's First quarter shipments were 2.8 million units.

The volume comparisons overall reflect the timing of the roll off and start up of certain programs, then at some cases the change in production of volume for certain vehicles. The current year was down 4% against the strong first quarter of last year.

The decline in the Ford F-Series truck partially reflects reduced production of the light-duty vehicle, as well as the roll off several programs for the heavy-duty F-250. As mentioned on prior calls, the decline for the Chrysler Town & Country was due to the vehicle going out of production.

The change for the Ford Fusion resulted from lower vehicle production as well as wheel style mix, while the difference for the Malibu also reflected lower vehicle production.

New customer programs in the current quarter included the Nissan Kicks and Subaru Impreza, while we also had nice growth on the Nissan Altima despite an overall decline in production of this vehicle. Other increases compared to the first quarter last year include the Toyota Highlander, Tacoma, and the Sienna.

While looking sequentially, our first quarter 2017 volume also were lower than what was a strong fourth quarter of last year. The largest decline was for the Chevy Malibu, which similar to the year-over-year comparison basically reflected a reduction in vehicle production.

The K2XX difference was trim line related, while lower shipments for the Ford Fiesta are due to our rolling off of the North American produced vehicle, although we still are supporting South American production. We did see unit shipment increases for several programs, including the Impreza, F-Series, Altima, Ram Truck, Sienna and the Lincoln MKV.

Turning to Slide number 6, let’s take a look at the first quarter year-over-year change in both net sales and value-added sales. As before, we segregate value-added sales and the amount of metal and up charges in the comparison, so you can readily see the difference between the GAAP and the non-GAAP measure.

Net sales were $174.2 million in the first quarter of 2017, which compares to net sales of $186.1 million in the prior year period. The benefit of favorable product mix contributed $2.6 million, but the negative impact of lower volume was much more pronounced at $10.9 million.

The amount of metal and up charges was down $5 million in total due to the lower volume, despite the unit price of aluminum being higher than in the prior year. Higher project development revenue is the primary item in the other column. Value-added sales were $95.5 million in the current year.

The decrease was $6.8 million or about 7% when compared to the first quarter of 2016. Again, despite a positive change in mix, the impact of lower unit volume was dominant. Turning to Slide number 7, our first quarter adjusted EBITDA was $19.1 million compared to $28.1 million in the prior year period.

As Don mentioned, the Q1 2017 amount removes $7 million of costs associated with UNIWHEELS transaction for comparability. $7 million included in SG&A in our GAAP income statement. As shown in the chart, the decline from last year was driven in large part by lower factory cost performance, the impact approximating $12.3 million.

Roughly one quarter of this impact was due to higher energy prices. We also incurred higher costs for labor maintenance and operating supplies this year relative to our sales volume. The increased project development cost reflected new program activity.

Partially offsetting these costs was a favorable currency impact due to lower value of the Mexican peso against the U.S dollar. Turning to Slide number 8, I'd like to finish with a few remarks on our cash flow and capital allocation.

For the first quarter of 2017, cash used by operating activities was $1.6 million, which compares to $16 million of operating cash flow generated in the first quarter of 2016. The change primarily reflects lower net income and higher working capital.

The primary driver of higher working capital was an increase in inventories, which partially reflects replenishment of safety stock level that were depleted in the second half of 2016 as we have discussed previously.

Capital expenditures also were higher at $16.8 million in the first quarter of 2017, which compares to $6.1 million in the prior year period. The $10.7 million increase was driven mostly by investments related to our new PVD finishing facility, which Don mentioned and which we’ve also discussed on prior calls.

As Don mentioned, this facility is scheduled to begin commercial production in the middle of 2018. Lastly, I'd like to highlight our capital allocation strategy and cash we’ve returned to our shareholders.

During the first quarter of this year, we returned $9.5 million to shareholders in total, which includes cash dividends of $4.5 million and the repurchase of approximately 216,000 shares of common stock for $5 million. Also with regards to capital allocation, I'd like to briefly reiterate comments we’ve made with respect to the UNIWHEELS transaction.

We would expect to have a net debt to adjusted EBITDA ratio of approximately 3.7x at closing, assuming 100% the UNIWHEEL shares are tendered. This ratio is adjusted to add back the $13 million of expedited freight we incurred in the second half of 2016, which is discussed on prior calls is now basically been eliminated.

A long-term target leverage ratio is approximately 2x net debt to EBITDA. There are of course a number of variables impacting our business including future investment opportunities, which may affect where our leverage ratio stands at any point in time.

Going forward, repayment of debt will be a top priority, while we continue to assess continued investment in the business. As previously discussed when we announced this transaction, we anticipate a reduction in our quarterly dividend from the current $0.18 per share to $0.09 per share in line with our objective of deleveraging.

We believe that changes in capital structure and capital allocation are appropriate in support of this strategic importance and transformative nature of the UNIWHEELS acquisition.

We are confident these steps when taken together provide the right balance to achieve growth and the value of the Company, while achieving a stronger, more balanced and better diversified platforms for the future.

Turning to Slide number 9, let me take a moment to walk you through our 2017 financial outlook, which we originally provided on January 11 and reiterated on March 2. This outlook excludes any impact from the pending acquisition of UNIWHEELS because of the contingent nature of the transaction.

We continue to expect our shipment volume to be in the range of 12 to 12.25 million units, which also reflects our assumption for 2017 North American vehicle production to decline approximately 1% to 17.6 million units. This assumption implies that our market share remain stable when compared to 2016.

As a result, we anticipate value-added sales to be in the range of 400 million to 410 million, which reflects the benefit from a continued favorable shift in 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 higher price of aluminum, which as you know is pass-through to our customer. We expect 2017 adjusted EBITDA to be in the range of $97 million to $105 million. This represents an increase of 10% to 19% when compared to 2016.

Our outlook 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 capital expenditures to be approximately $50 million, which is higher than it was last year. This is primarily due to the new PVD finishing project that we previously discussed.

We also anticipate working capital will be in net use of funds and then our effective tax rate will be in the range of 25% to 28%. Again without consideration given to the acquisition, we expect to return approximately $18 million in cash to our shareholders in the form of dividends, which would be in line with 2016.

In conclusion, this is an exciting time for Superior. We’ve transferred our business over the last several years and remain confident in our long-term strategy. We continue to strengthen our manufacturing platform, drive industry leading wheel innovation, and further enhance our global competitiveness.

The acquisition of UNIWHEEL is a significant step towards our long-term mission to be a global leader in the aluminum wheel industry. And with that, I'd now like to turn the call back over to Laura to open it up for questions..

Thank you. [Operator Instructions] We will turn first to Vahid Khorsand with BWS Financial..

Hi, guys. Thanks for taking the question. First question, it looks like value-added sales per wheel this quarter was $1.40 something higher than last year first quarter. But looking at slide 5, your -- I guess, your market share looking at it that way was down 2%.

Is there a correlation between the two, meaning if you had maybe not -- if you had reduced prices maybe from that what the recharges this quarter is going to capture more of the production?.

Well, I think the increase value-added sales was consistent with what we've -- we talked about in the past, which is that we are focused on upgrading not just value and content in the wheels, but associated revenues that are in and earnings that go along with that.

So volume versus earnings has been a trade-off that we're always -- we’ve always been focused on being willing to abdicate share in return for better returns..

So is that $33.60 per wheel, is that like a good number to go with for the rest of the year? Is that where you’re comfortable with or anything it's going to -- you made that lower?.

You know I think as we get through the year, we have still have significant mix change coming in the back half of the year as we launched additional larger wheel, more premium finish product..

Okay. Fair enough. And then, just looking at guidance, it looks like you will need another -- little bit over 9 million wheels to hit your goal for the year.

How does that look right now?.

Yes, I think the markets is essentially stable. We’ve seen in the first quarter essentially some slight softening of the schedule over the last couple of weeks that has stabilized. So our expectation for the remainder of the year is that it will be -- allow us to be right in that range of 12 million to 12.25 million units..

So even 3 million wheels a quarter is feasible given the market conditions?.

Yes, I think what you're going to see and what we’ve forecasted is that in terms of the number of units its slightly weighted more to the back half of the year to the -- than to the front probably 49% in the first half of this year and 51% in the back half, which was exactly flipped from what it was last year.

And so, there's -- that the macroeconomic factors certainly play an important role in that, but also in terms you got to take a look at where the launch is set. So we’ve got 10 launches in the second quarter. We got an additional 11 launches in the third quarter. So for us, that certainly bodes well in terms of the production schedule..

Okay. Thank you..

We will turn next to Michael Ward with Seaport Global..

Thank you. Good morning.

Don, can you give any color on the timing and how the unit trends or the UNIWHEEL transaction would work? So if 75% of the people tender their shares by the 22nd, will we see the numbers consolidated like for the month of June?.

That would be correct, yes. The tender will close on the 22nd few days later, let's call it five days, the money will flow [technical difficulty]. So the transaction would close prior to June 1. And so for the remainder period of the year we have seven months of UNIWHEELS' consolidated into the Superior numbers..

Okay.

And so the owner -- 61% is done, is there any indication on the remaining, if there's any pushback from investors at all or is there any reason why you wouldn't expect to not get at least 75% by the 22nd?.

Our expectation is that we will achieve the 75% on the 22nd. The view is that many of the shareholders will wait to tender their shares in the last few days. The reason being that in Poland the way it works is once you tender your shares you do not have the ability to pull those back unless there is some adjustment in the price..

Okay..

So, people normally wait till the last few days to tender their shares. I think if you take a look at where the shares have traded essentially since the offer has been made, there's only a very limited number of shares that have traded above the 20 -- the 236.07 tender offer price.

So, I think our reading of that along with the conversations that we’ve had with the UNIWHEELS and investors would indicate that there's a like -- high likelihood that will achieve the 75%..

Perfect. Thanks, Don..

Welcome..

Mike, obviously depending on what share we get while we consolidate as you had questioned will be some amount of minority interest as we backed out also..

Okay. Got it.

And that could continue for a year or so, whatever the remaining shares are still out there, right?.

Yes, that’s correct..

Okay. Thanks again..

Next we will go to Brian Sponheimer with Gabelli..

Hi. Good morning, guys..

Hi, Brian..

Just regarding to the UNIWHEELS acquisition, does it create any flexibility about where you source for the U.S market and would there be any -- would there be the possibility of bringing any wheels from Poland to the U.S or this trip to Europe for Europe?.

I think it's substantially Europe for Europe. But it does allow, I think some opportunity to shift from Poland. I don't think that's a significant cost equation, positive cost equation, but it presents that opportunity. I think what we’re looking at is the ability to win additional business with the German OEs here in NAFTA and produce it here.

Certainly you could for a short period of time probably shift from Poland or Germany, but realistically for a longer period of time it does not make sense..

What -- will it be your goal from the timeframe perspective to have those conversations with, let's say BMW or Mercedes about getting some SUV business for NAFTA now that the relationship is really established?.

Yes, I think an important point here that needs to be emphasized is even though we talk as if the deal is complete or will be complete from the competitive landscape and from the customer profile and the legal regulatory environment, UNIWHEELS competes with us today.

And so, as we look at a BMW quote or Mercedes quote, it has if we’re going toe to toe with UNIWHEELS and Renault and BORBET and so there is no conversation with UNIWHEELS on those types of issues nor do we discuss that with the customer.

So, our objective would be on May 22 when the tender closes and that we know we’ve got 75% to sit down with the German customer base and have that dialogue just as you outlined..

That’s fair.

Just moving on to the PVD facility, what’s your opinion as to how long it's going to take to really lever that facility from a utilization standpoint? And what do you believe the profit impact will be once with that capacity?.

Yes, I think -- so we start the process on some of the GM programs in mid-2018, by the end of '19 will be fully up and running. And again that sits from our perspective. It's a significant profitability impacted capturing, so to speak, the outsourced margin that we pay today.

And so, it's from -- again as we looked at the investment not only does it allow us to assist our customer in providing differentiate product to the marketplace, but also it has a positive financial impact for us..

All right. Terrific. Well, I will get back in line or pass it on. Thanks, guys..

Thanks, Brian..

[Operator Instructions] We will turn now to Jimmy Baker with B. Riley & Company..

Thanks. Good morning, Don. Good morning, Kerry..

Hi..

Just wanted to follow-up on the response to an earlier question about value-added sales per wheel.

So if I understood your response correctly, Don, it sounds like the mix would actually get better as we move through the year and your -- but if you look at your Q1 value-added sales per wheel, at least by our math, it's tracking above what's implied in the full-year guidance.

So is there some offset beyond mix that would present pressure to that value-added sales per wheel as we move later into the year?.

Quite honestly, Jimmy, I think the second and third quarters may run a little bit lighter than where we were at the first quarter and it's in the fourth quarter where we would expect the mix to harden up again, if you will.

So there will be a little bit of ebb and flow with the year goes on which is again primarily just reflective of some of the fall off and ramp up of programs at the detailed level as usual. Directionally though again the fourth quarter where we have some new programs started, that should have an impact on it..

Okay, got it.

And then is it fair to say that Q4 uptick presents sort of a run rate basis to look at '18 or is your mix shifting again materially in '18 that would change that?.

It should provide pretty good indicator..

Yes..

Okay. Okay.

And then just looking at the headwinds to gross margin in the quarter, I guess, first can you just talk about if this performance was kind of in line with your expectations? And then what can you share about the timing of the shipments quarterly cadence of gross margin improvement as we move through the balance of the year?.

I'd say that inside some of our facilities we continue to struggle with some of the, let's call it the normal manufacturing cadence of some of the larger wheels, the more complex wheels and some of our equipment. And so, the performance was not as we expected it to be in the first quarter.

If you break down some of the costs, the significant cost, 35% probably are labor-related. So more people in the facilities to ensure that we match the schedules. About 25% of that increased cost was energy, both natural gas and electricity, and then 30% of that cost was maintenance and supply.

So non-capitalized repair of equipment that type of product. So, again not as worse, we’re clearly disappointed with the performance. We continue to work -- improve the efficiency inside each one of our facilities and we still have ways to go to nail that, so to speak..

Okay.

Just the -- just one last follow-up, the increased energy costs, is that a function of you, consuming more energy as you’re -- still working through some inefficiencies or is that actually the price of energy that's impacting it?.

The price of energy.

So what we'd expect for the year is energy will be a headwind for the remainder of the year, whereas our expectation is that we will thin out the labor and that will normalize similarly in terms of the maintenance repair, supplies that will also normalize, but the energy costs will be a headwind as we go through the rest of the year..

Okay. Understood. Thanks very much..

And gentlemen, at this point there are no further questions in the queue. I will turn the conference back over to you..

Okay. Thank you very much. Appreciate your time today and have a good day. Thank you..

With that, we will conclude today's conference. Thank you everyone for your participation..