Good day and welcome to the Superior Industries Third Quarter 2017 Earnings Teleconference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Nadeem Moiz. Please go ahead..

Thank you and good morning everyone and welcome to our third 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 website at www.supind.com. Joining me on the call today is Don Stebbins, our President and Chief Executive Officer.

I'll start on Slide 2, 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 unknown factors 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 unknown factors 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, including our Annual Report on Form 10-K for the year-ended December 31, 2016, and our Form 10-Q for the quarter ended June 25, 2017, 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, adjusted EBITDA, and adjusted EBITDA as a percentage of value-added sales. These non-GAAP financial measures excludes the impact of certain items and therefore have not been calculated in accordance with GAAP.

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 third quarter 2017 earnings press release and in the Appendix of this presentation.

In addition, in line with our integration of our European operation, which maintains a calendar quarter, and year-end close, the third quarter end date of our North American operation was adjusted to October 1, 2017, from September 24, 2017, resulting in 14 weeks for the third quarter of 2017.

Due to our convention of 13 weeks quarters, this additional week would have otherwise fallen in the fourth quarter of 2017. Going forward, we will have a calendar quarter and year-end close. I now would like to turn the call over to Don Stebbins, our President and CEO.

Don?.

the expansion of our customer relationships, operational enhancements, and leveraging our increased scale. We have a unique opportunity to leverage long-term relationships with our global customers, and in particular, those that have been established by UNIWHEELS, as we work closely with our European OEMs to support their objectives in North America.

We're also excited and I believe our customers are as well, about the technologies our North American and European teams have developed that can help our customers address their needs in the marketplace and allow them to bring differentiated real style to the market, while meeting fuel efficiency and carbon emission requirements through new wheel innovations.

Additionally, we are also exploring distribution channels for our European aftermarket brands in North America.

Second, our European and North American businesses continue to evaluate their operations to identify and implement best-in-class manufacturing processes across the business, while also combining our engineering and research and development resources.

Our goal is to drive operational excellence and continuous improvement throughout the organization and we have made progress in identifying activities that will allow us to leverage and share the expertise across our European and North American operations.

And finally, our increased scale should continue to drive supply chain and corporate synergy opportunities. To-date on a combined basis, we have actually more than $5 million in run rate synergies, and as a result, we remain confident in our ability to achieve annual run rate synergies of $15 million by 2020.

Moving on to Slide 5, we have a number of key priorities that are positioned to clearly to drive long-term success.

While the overall production in the marketplace in North America has softened compared to last year, our company is significantly stronger today, substantially more diversified, and providing our customers with a broader range of innovative products.

As we have discussed in the past, there are a number of secular trends that continue to create opportunity for Superior. The move to larger diameter wheels with differentiated finishes as well as lighter weight and more fuel efficient designs are driving conversations with customers and providing expansion opportunities for our partnerships.

Our North American customers have been excited to see our European technologies, while our European customers have been excited to see our North American product offerings. We are staying ahead of these trends with possible investments in new and enhanced technologies.

As an update, our state-of-the-art PVD facility continues to be on track and on budget and we expect the launch of this technology in 2018 which will establish our suite the first wheel of supplier in all markets to bring this capability in-house.

This capability has also been shown to our European customers and many have been interested to learn more. As I mentioned enhancing our operations is mission critical to ensuring a strong foundation for Superior over the long-term.

These activities are centered not only on driving earnings growth and margin expansion, but also having the right team in place to deliver innovative wheels and win new programs. Also important to note is our focus on optimizing our capital structure to support the growth of our business and further investment in new and enhanced technologies.

As such, cash flow generation and debt reduction are key priorities. Looking ahead, I believe we are in an excellent position to drive long-term, sustainable growth and profitability, as we capitalize on the tremendous potential for our transforming organization. With that, I'll now hand the call over to Nadeem..

Thank you, Don. I'll now provide a more detailed overview of our financial performance for the third quarter 2017. Starting with Slide 6, Superior's North American shipments were down approximately 4% during the quarter over last year in-line with North American production level.

The year-over-year shipments in Europe were increased due to the ramp up of our newest facility in Poland comparing favorably to European production levels resulting in increased market share.

On Slide 7, you can see our third quarter 2017 financial summary; total unit shipments for the quarter were 5 million, up from 2.9 million units last year with North America and Europe contributing 2.8 million and 2.2 million units respectively.

For the third quarter of 2017 net sales increased to $331.4 million from $175.4 million in the same period last year. Value-added sales for the third quarter of 2017 increased to $187.4 million compared with $98.8 million in the prior year period.

For the third quarter of 2017, net income was $2.6 million after accounting for dividends and accretion related to preferred shares, we had a loss of $0.22 per diluted share.

Net income for the third quarter of 2017 included acquisition-related expenses of $5.1 million or $0.20 per diluted share and the change in the fair value of the preferred equity conversion option. This conversion option will be revalued on a quarterly basis. Now let's take a closer look at sales for the quarter on Slide 8.

Net sales for the third quarter of 2017 were $331.4 million compared to net sales of $175.6 million in the third quarter of 2016, an increase of $155.8 million. $151.3 million of this increase was due to the addition of our European operations and $4.5 million came from North America.

The increase in North America was primarily driven by higher aluminum pricing offset by negative volume and mix of $1.4 million. Our North American mix was favorable as value-added sales per wheel increased; however our volumes were down in-line with the industry.

Turning to Slide 9, adjusted EBITDA for third quarter of 2017 was $43 million compared to adjusted EBITDA of $13.8 million in the third quarter of 2016, an increase of $29.2 million. $24.7 million came from Europe and $4.5 million came from North America.

Again the increase in North America was driven in large part by improved mix, a positive FX position, partially offset by lower volumes and elevated costs.

The increased cost of $1.5 million for North America was due to higher labor, maintenance, utility expenses of approximately $8 million, partially offset by lower expedited freight, lower SG&A, and corporate initiatives.

As we discussed last quarter, the continued transformation of our product portfolio to larger, more sophisticated wheel designs has impacted our overall operating efficiency. However as Don highlighted, we have been actively addressing these costs and continue to make operational improvements. On Slide 10, let me walk you through the cash flow.

For the third quarter 2017 cash generated by operating activities was $27.2 million. This includes one-time costs related to the acquisition and interest expenses. Capital expenditures were $26.8 million during the third quarter of 2017 which includes CapEx for our European operations for the third quarter.

During the third quarter of this year, we returned $4.4 million to shareholders through cash dividends. Important to note is that we completed a purchase of additional UNIWHEELS shares for $10.5 million during the quarter bringing our total ownership to 93.5% and repaid the European term loan.

In terms of liquidity management, we currently have ample available borrowing capacity under our U.S. and European revolvers. As of the end of the third quarter, we had less than $2 million drawn on the roughly $195 million available under our U.S. and European credit lines.

Our long-term target leverage ratio is approximately two times net debt to EBITDA by 2020. Going forward, balancing repayment of debt and continued investment in the business will be our top priorities for the use of our free cash flow.

We are confident these steps when taken together provides a right balance to achieve growth in the value of the company while achieving a stronger, more balanced, and better diversified platform for the future. And lastly on Slide 11, let me take a moment to walk you through our full-year 2017 guidance which we reaffirm today.

As a reminder, this outlook includes our European operations on a consolidated basis for June through December in accordance with GAAP as well as our current expectations for our North American operations. We expect net sales to be in the range of $1,095 million to $1,115 million driven by unit shipments of $16.9 million to $17.2 million.

This assumption implies continued overhaul production growth in Europe and lower North American production relative to last year. In terms of value-added sales, we anticipate a range of $595 million to $615 million. We expect 2017 adjusted EBITDA to be in the range of $135 million to $145 million.

Capital expenditures are expected to be approximately $85 million a portion of this relates to near finishing capability. Working capital is expected to be a net source of fund. And we also anticipate our effective tax rate will be a net benefit for 2017 due to the transaction cost in jurisdictions in which our income is taxable.

Interest expense is expected to be absolutely $40 million for 2017. And with that, I would now like to turn the call back over to the operator to open up for questions..

Thank you. [Operator Instructions]. And we'll take the first question from the line of Chris Van Horn with B. Riley FBR. Please go ahead..

Good morning guys. Thanks for taking my call..

Good morning, Chris..

Good morning, Chris.

How are you?.

Good. So just a question on the margins in North America looks like really good expansion there. I was hoping to maybe get some additional color and was it primary mix or volumes or both or some of the cost cuttings that you're seeing just some additional color there..

Yes, absolutely. So look it's a little bit of all the above. As you saw in the bridge -- on the EBITDA Bridge mix was favorable and we continued to transition the product portfolio to increased finishes and bigger diameter wheels. And so that's translating into mix that's obviously favorable.

FX was a very big positive this quarter you saw that on the bridge I covered. Part of that is our FX hedging plan and part of that is, part of the structure we put in place, part of the transaction, so that's a bit a one-time in there. And we continue to make progress on the costs not fully there yet, but definitely making progress..

Okay, great. Thanks for the color.

And then I just have a question about aftermarket sales during the quarter, any commentary you can give there did you see some good growth in that category, if you would like to breakout the revenues that would be great but just some color on the aftermarket side?.

Yes. So Chris look aftermarket is an important piece of the business, as you know.

It is a third and fourth quarter, it's a seasonal business in North America -- in Europe and third and fourth quarter are the, sure the higher selling seasons, in particular as the highest exchange for winter and things like that, that's where we see increased aftermarket sales in Europe. So it's a bit seasonal.

So it was definitely strong in third quarter and we saw -- we would expect to see some sort of similar pattern in fourth quarter..

Okay, great. And then final from me, you talked about more distribution possibly in the U.S.

on the aftermarket side from UNIWHEELS, how -- what's your initial plan there, is it hiring more sales people, is it may be acquiring your distribution business, what's your thought on that?.

Yes, haven't decided that yet, Chris, still all of those options are under review at this stage..

Okay, okay. Great. Thanks for the time guys..

Perfect..

We'll now take the next question from the line of Vahid Khorshand with BWS Financial. Please go ahead..

Hi thanks for taking the question.

First question though, I don't think I heard you give an update on the PVD plan, so if you don't mind can you give us an update on that?.

Yes. On track, on budget, plan to launch in 2018. So we're doing the trial run at this stage again on track, so look forward to a good launch in 2018 -- mid-2018..

Okay, thank you.

And then second question in regards to the North American market, if you're seeing some softness in the shipments are you getting any pushback on the pricing?.

We have -- again I think the way the market works here is we're negotiating our productivity commitments for 2018. I would say those are in the normal balance so what's traditionally happened. So we will go through that progress in the next few months, get that settled, so it I certainly don't tie that to softness in the marketplace, no..

Okay.

And then, my last question you've spoken before about some of these European manufacturers and any contracts you could land in North American markets any updates on those?.

Not quite yet, not quite yet. So we still -- we're still as I mentioned in my remarks working very closely with them to support their North American operations and in the bidding process, we're in the bidding process on a number of programs.

So I would expect us to update the market on that in January at the conference -- the Auto Conference here in Michigan..

We'll now take the next question from the line of Matthew Paige with Gabelli. Please go ahead..

Good morning.

Could you speak to the mix of products that they sell to Europe, is there a similar trend in terms of moving towards a higher mix product there?.

Yes, absolutely that the trends are the same, larger wheel diameters, more complex designs, more sophisticated finishes absolutely. And it's one of the significant advantages that that UNIWHEELS has is they've got a brand new facility now that we've talked about in terms of being ramped up and launched this past year as a state-of-the-art paint line.

So when you look at the combination of the two companies, we have our paint line here in Mexico which is essentially two-years-old and then the UNIWHEELS paint line which is one-year-old. So in both region, we have state-of-the-art paint facilities..

Great.

And then in regards to the UNIWHEELS minority interest, do you have any plans to squeeze out the remaining ownership there?.

Yes. So where we're in that process is we expect to have the shares delisted by mid-December, and then we expect to have the domination profit/loss transfer agreement in place by the end of January. And then at that point in time we will evaluate the squeeze out of the minority shares..

Great.

And then, in regards to your current NOL position, can you just remind us if there's no federal there, the state NOLs that you currently have in U.S.?.

Yes, the NOLs that you're referring to are in Europe and it's around our post-tax credit that we have there on the balance sheet it's approximately $35 million you'll see that in the Q and so that's really what you're referring to and yes and goes all around the economic zone that facilities are in..

All right.

And the last question from me, I was just curious to get your current view on how NAFTA negotiations have progressed obviously much of your Mexican production is sold to customers in Mexico but do you envision any scenario or trade relationships dictates maybe future plant locations?.

Yes I think it's hard to really definitively say given the solidity of the discussions and what we hear out of them. I think it's important to level settle little bit in that. We've started with the discussion eight, nine months ago of a significant border tax and now we moved all the way to the other end of kind of redoing NAFTA and tweaking NAFTA.

So I think we have to wait and see exactly how that comes out. I think it's important to also understand the market dynamic where significant majority of the wheels that are used in U.S. assembly facilities come from outside of the U.S. either from Mexico or Asia.

So we need to work whatever the decisions are that come through on NAFTA we absolutely expect to have to work with our customers on getting through that decision..

Right. Well I appreciate you taking my questions and thanks for the color..

You bet..

Thank you..

We will now take the next question from the line of Bo Hunt with Eaton Vance. Please go ahead..

Hi guys. Just one question apologize if you already addressed this. The scrap rates at your North American facilities, what were scrap rates in the third quarter and how is that developed so far in the fourth quarter? That's it for me, thanks..

Yes. So we don’t report out scrap rates every quarter. I would say that they still remain high and that's a significant driver that's Nadeem walked through increased labor cost, increased energy costs, and increased other material costs this past quarter, it's certainly a result of higher scrap rates.

So we are seeing improvement in the base scrap rate. I would say we're launching new products better but we have a long way to go on both existing and launch products in terms of the scrap rates..

Okay.

In terms of buying your feed, the trend is towards improving scrap rates, but still pretty big delta to close with the European facilities?.

Yes, absolutely, absolutely significant difference, significant difference.

And importantly the European team has been here, we have developed an exchange program where some of our guys in North America will go to visit our guys in Europe to learn from them and see how they do things there and then reciprocal visits to make sure that processes are taking hold here in North America..

We'll take our next question from the line of Alex Nordhagen with JPMorgan. Please go ahead..

All right, thanks for taking my questions.

Just two really from me, one is on the FX impact on your North American EBITDA adjustment, what exactly is that coming from?.

Two -- I'll give you the high level and if you need to go deeper, Nadeem can do it. But there is really two, two pieces. One is the hedge program that we put in place and continue to have in place we put in place probably a couple of years ago started to hedge peso-dollar and now we're starting to hedge zloty-euro.

And then in terms -- and that represents a little more than half of that delta in the quarter. And then the remainder of it's a structural issue in terms of buying UNIWHEELS the transaction nature we've had a little bit less than $2 million of benefit on that. So I would think of that as more of a one-time in nature..

Okay, great thanks.

And then on the -- this accounting the calendar difference of 13 to 14 weeks, so I'm clear in your North American numbers you've got 14 weeks Q3 this year and 13 weeks for last year; is that right?.

That's correct. That's correct..

Then if you are looking at your unit shipments were down like 4% or in the reported numbers if you weren't factored in the extra week they're more down like 10% in North America if you were doing like-for-like..

Yes. And so as we went through the slides what we showed on Slide 6 we've adjusted the North American production numbers it's put in number one. So if you were to adjust sort of normalize it it's roughly the same is 4.2% North America down. If you adjust that and we're down 4.1% so it's relatively in-line with the market down.

And so that's the way we're thinking about it..

Okay, all right I see that. Apologizes I missed that one..

Yes..

And then in Q4 then we're going to have the offset effect.

Are you going to do -- can you restate them or will you just do the adjustment again?.

Yes, the Q4 should be -- should be fine it's just that this year in 2017 just the way our calendars always work, we had an extra week and so that ended up coming through Q3. And so we've tried to normalize some of that effect here but in Q4 we should be fine..

Okay, great. Thanks a lot..

And this really lines up with all our duration activity, everything is line up U.S. and Europe now..

Ladies and gentlemen this will conclude the Q&A as well as today's conference call. Thanks for your participation and you may now disconnect your lines..

Thank you..

Thank you..