Good day and welcome to the Superior Industries’ second quarter 2018 earnings teleconference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Troy Ford. Please go ahead, sir..

Thank you. Good morning, everyone, and welcome to our second quarter 2018 earnings call. During our discussion today, we will 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 are Don Stebbins, our President and Chief Executive Officer, as well as Mike Elia, the interim leader of Superior's global finance and accounting team.

I will start on slide two 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 publicly update any forward-looking statements. Specific conditions, issues and unknown factors 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, including our annual report on Form 10-K for the year ended December 31, 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 also will be discussing or providing certain non-GAAP financial measures today, including value-added sales and adjusted EBITDA. These non-GAAP financial measures exclude 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 second quarter 2018 earnings press release and in the appendix of this presentation.

Finally, I would like to note that Superior's financial results for the second quarter of 2017 includes one-month of the consolidated European operations while the second quarter of 2018 includes three consolidated months. I now would like to turn the call over to Don Stebbins, our President and CEO.

Don?.

Thanks, Troy. Good morning, everyone, and thank you for joining us today. Let me begin by introducing Mike, our current leader of the finance and accounting functions here at Superior. Mike is an experienced and tested C-suite executive, director and advisor and we welcome him as we continue our search for a permanent CFO.

Moving to our results for the quarter, starting with slide three of the presentation, we continue the momentum we experienced in the first quarter this year. We again delivered all-time records across many of our key metrics. Net sales for the quarter reached $389 million with over 5.6 million units shipped.

Value-added sales increased 57%, more than $204 million. And value-added sales per wheel increased 7% to almost $37. Additionally, we reported record adjusted EBITDA of $57.2 million, a 94% increase year-over-year.

Our results in the quarter were driven primarily by the addition of our European operations, strong unit shipment levels, and solid operating performance in both regions.

To date, we have also actioned an annualized run rate of $15 million in synergies as we continue to make significant progress on our integration, achieving our 2020 objective substantially ahead of schedule. We are optimistic about our ongoing efforts to further improve our overall efficiencies.

Based on our performance during the first half of the year, as well as our current view for the remainder of 2018, we have revised upwards various aspects of our 2018 outlook, which I will speak to in a moment. Turning to slide four, both regions delivered overall market outperformance in terms of unit shipments.

North America light vehicle production for the second quarter of 2018 was down roughly 1.7% compared to the second quarter of 2017, while our North America shipments increased 3.7% year-over-year. The better-than-market performance was driven by our strong participation on truck platforms, which outperform the overall market.

Western Europe light vehicle production increased 4.5% for the second quarter of 2018 on a year-over-year basis and Superior's European OEM shipments for the second quarter of 2018 increased 5.6% compared to the same period last year.

Growth in our European operations during the quarter was driven by our support of new vehicle launches, as well as higher volumes for current models. Importantly, we continue to see strong growth on premium SUV models and volume increases for wheels 19 inches and above. Let me provide some quick thoughts on the global trade environment.

First, as it relates to NAFTA, as you all know, the overall situation continues to remain fluid. We continue to monitor the relevant changes that are under consideration. And based upon recent favorable comments, we continue to believe that NAFTA will remain in place, but in an updated form.

Second, the administration is currently reviewing import tariffs on products from China, which includes aluminum wheels. At this point, it is too early to speculate on the final outcome. And third, as it relates to tariffs imposed on aluminum, we have price adjustment mechanisms with our customers based on index prices.

Therefore, these price changes in aluminum are generally passed through to our customers. Let's take a closer look at sales for the quarter on slide five. Net sales for the second quarter of 2018 were $389 million, an increase of $148.3 million from the prior period. $123 million of this increase was due to the addition of our European operations.

In addition, net sales were positively impacted by an increase in aluminum prices and favorable mix in both regions.

Turning to slide, adjusted EBITDA for the second quarter of 2018 was $57.2 million compared to adjusted EBITDA of $29.5 million in the second quarter of 2017, an increase of approximately $28 million primarily driven by $25.9 million from the addition of our European operations as well as the positive impacts of mix and favorable operating performance.

Year-to-date for 2018 sales performance can be seen on slide seven. Net sales were $775 million for the first half of 2018, an increase of $360 million from the same period last year. Again, this increase was driven by the inclusion of our European operations.

Net sales were also impacted by increases in aluminum prices and favorable mix in both regions.

As you can see on slide eight, adjusted EBITDA year-to-date 2018 was $109.4 million compared to $48.6 million for the same period in 2017, driven largely by the addition of our European operations, as well as the positive impact of higher volumes, favorable mix and improved year-over-year operational performance. Turning to cash flow on slide nine.

For the second quarter of 2018, cash generated from operating activities was $16.4 million compared to cash used by operating activities of $8.5 million for the same period last year.

We continue to identify initiatives to enhance cash generation opportunities from working capital management and global tax planning and these efforts have proven effective so far in 2018.

Capital expenditures were $15.3 million during the second quarter of 2018, which supported both growth initiatives, including the enhancement of Superior's portfolio of products and technologies as well as continued maintenance expenditures. During the second quarter, we paid $2.2 million in common dividends and $3.9 million in preferred dividends.

In terms of liquidity management, our US and European revolvers remain undrawn and we have significant borrowing capacity. At the end of the second quarter, our total available borrowing capacity was $192 million. We also completed the repricing of our $385 million term loan, which reduced the interest rate spread by 50 basis points.

The lower interest rate resulting from the amendment is expected to reduce our annual interest expense by approximately $2 million. Also, to note, yesterday, we purchased an additional 3.6% of the minority ownership in Superior Industries Europe AG, formally known as Uniwheels for €28.5 million, bringing our total ownership to 97.8%.

The purchase was consummated with cash on hand, as well as borrowings underneath our revolving credit facility. Now, let me provide a review of the revised outlook on slide 10.

Based on our performance during the first half of this year, we are revising our full-year 2018 outlook for net sales, adjusted EBITDA and our effective tax rate, while maintaining our outlook for unit volume, value-added sales, capital expenditures and cash flow.

For 2018, we expect North American light vehicle production to be down slightly from last year and moderate production growth in Western Europe. This is based on IHS' latest forecast of 17.2 million units for North America and 14.8 million units for Western Europe.

I would like to make a note of a couple items regarding our second half expectations for volumes. First, we anticipate unit volumes to be down from the first half of 2018. This is driven by a few factors, including normal seasonality, the roll-off of certain programs, and the impact of customer take rates.

We continue to experience the strong launch volumes in both regions that we discussed last quarter, which should continue our momentum into 2019. Additionally, with respect to the third and fourth quarter, we currently expect, as is normal, volume to be weighted towards the fourth quarter.

For the full year 2018, we continue to expect unit shipments to be in the range of 21.25 million units to 21.6 million units. We expect net sales to be in the range of $1.52 billion to $1.56 billion compared to $1.4 billion to $1.5 billion, primarily driven by higher aluminum prices.

We continue to expect value-added sales to be in the range of $805 million to $835 million. We have increased our 2018 adjusted EBITDA expectations to be in the range of $190 million to $205 million versus $185 million to $200 million.

Again, given the number of launches in late Q2 and throughout Q3 as well as typical seasonality, we would expect adjusted EBITDA to be down sequentially in the third quarter with a significant step up in Q4. Our outlook for capital expenditures remains unchanged and is expected to be approximately $95 million.

Cash flow from operations is still expected to be between $160 million and $180 million. And lastly, we anticipate our effective tax rate to be between 25% and 29% compared to the previous outlook of 10% to 15% due to provisions under the US Tax Cuts and Job Act of 2017. We are currently evaluating strategies to reduce this rate.

We do not anticipate this change to impact our cash taxes for 2018, which we continue to expect to be less than $5 million globally. In conclusion, overall, we were encouraged by our second quarter.

We continue to position our business for success by differentiating ourselves through innovative technologies and capabilities to better serve our global customer base.

We believe we are in position to benefit from the attractive tailwinds in Europe and North America, including increasing wheel diameters, the growing importance of light-weighting and the move towards more sophisticated designs and finishes.

While we are optimistic as we look forward for the remainder of the year, we realize there is significant work ahead. Our priority remains continued execution of our portfolio, while capturing additional efficiencies throughout our operations.

And we believe we are well-positioned to drive long-term sustainable growth and profitability for our shareholders. And with that, I'll turn it back to Brittany for questions..

Thank you. [Operator Instructions]. Our first question comes from Vahid Khorshand with BWS Financial..

Good morning.

First question, what kind of trends are you seeing on a per unit basis? And if you could kind of like give us some details on what that means in North America and Europe?.

So, in terms of the value-added sales per unit, North America is down. This quarter, we've had two consecutive down quarters, primarily based on the take rates on the 17-inch models. Equinox has been large take rates, Sentra, Malibu, all have been very, very successful for us, but at the lower value and range.

We would certainly expect that to change through the launch year of a number of different products in North America. T1XX, the Avalon has a new wheel this past quarter, the Edge. And then in Europe, I would say more stable value-added sales per wheel.

And I would – as we look forward, that too is going to increase as they phase out of Mercedes A class and the Suzuki and some PSA wheels and we'll be adding an Audi Q8 wheel, A6 wheel and some Mercedes AMG wheels. So, overall, year-over-year, I think value-added sales is going to increase somewhere in the 4% to 5% range.

And then, as we look to 2019, there'll be be even greater than that because of the products that we're launching. In Q2, Q3 of this year, we'll be at fully ramp volumes..

Okay, thank you. And then, in terms of – sorry about that. In terms of the tariffs, I believe in sort of the prior presentation, you were talking about the aluminum tariffs on – or European aluminum wheel tariffs on Chinese.

Does that plan impact in your European productions in North America?.

No. So, there's a EU tariff on wheels coming from China into Europe. Does not play meaningfully in any North America context. But I would say that we do ship some wheels from Europe into North America, but not because of a tariff issue, because of a capability and capacity issue..

Okay. And then, my final question, on the last call, you said you have 30 launches in Q2 and then 9 launches in Q3.

Is that still on track?.

Yeah, those are the North America numbers and those absolutely have been going through – I would caution everybody that's when the start of the launch is. Some of those launches hit their peak volume in October and November. So, yes, absolutely. Those are the numbers that we stated and are on track to push it [ph]..

Okay, thank you..

Welcome..

Our next question comes from Richard Phelan with Deutsche Bank..

Hi. It's Richard Phelan at Deutsche Bank. Actually, two questions. One is a follow-up on the launches.

Just at the group level, so both North America and Europe, what was the total launches that were launched – completed in Q2? I'm just wondering if maybe there were some deferrals into Q3 compared to the earlier guidance, which might have contributed to the stronger-than-expected performance in Q2..

Again, I think it's important to note that even though the launch may have started in early June, a Q2 piece, I think our guidance reflects that the majority of these 30 launches in North America, something close equivalent to that in Europe, are dragged out, so to speak.

We may be launching, but it's really at a level that is 10% to 20% of the total volume as expected at peak. And the peak can be attained somewhere in August, September, October for many of these launches. So, it's not a deferral. It's just the ramp up as they begin..

Got it. And the second question is just related around the purchase of the Uniwheel share for €28.5 million completed after the period close. I presume that was funded with a drawdown of the revolver. And then, does that purchase in any way change the strategy as far as implementing the domination profit and loss transfer agreement.

Does it trigger a requirement to purchase more shares or anything because of the size?.

So, it was funded under the revolver where we use cash that we had on hand as well as funding under the revolver. The purchase does not trigger, does not impact the DPLTA at all, doesn't trigger anything mandatory from our perspective. It does provide us the opportunity to squeeze out the remaining shares if we choose.

And we've not made that decision yet..

So, based on the same price, which I calculate at roughly €0.63, €0.64 per share in terms of that that July/August purchase, the remaining squeeze out at the same price would be about $17.5 million or so.

And so, the decision for you at this point is to spend that money in the near term rather than pay the preferred shares, which is about $900,000 per year beginning in 2019.

Is that the right analysis to think about?.

The math is correct, that we paid to €62.18 for those shares. When you translate that to a US dollar will be somewhere in the $18-$20 million range. And then, you're absolutely correct that it is a use of capital.

Do we want to invest more in the business? Do we want to buy these shares, et cetera, et cetera, whatever options that we have versus paying the mandatory dividend that we have on the minority shares..

Okay.

But at least – to be clear, you have the option of affecting the squeeze out for the remaining balance all at once rather than sort of smaller secondary purchases?.

Correct. What has changed by going over the 95% threshold is that we now have that option to squeeze out. The shareholders always have the option to tender the shares to us..

And just one thing to note, Richard, on the acquisition price of those shares, it was that the – the €62.18 per share plus the accrued required dividends. And so, if we looked at future squeeze-out price, it would be the same. It would be the tender price of €62.18 per share, plus accrued minority dividends up until that point in time..

Great. Thank you for the clarification..

The next question comes from Christopher Van Horn with B. Riley FBR..

Good morning. Thanks for taking the call. And congrats on the quarter..

Thank you..

I was hoping to – you mentioned product mix as a contributor during the quarter, and I was hoping we could maybe break that down a little bit.

Was it aftermarket mix? Was it the larger wheels? Was it new technologies that you're putting on the wheels? Anything standout when you think about the mix?.

Yeah. It was not aftermarket related. So, it's more internal in terms of – and we talked about this that we are moving towards more sophisticated finishes on these wheels, and so the Avalon, for instance, is a five axes milled wheel that we've talked about. We've got pad printing launched in in Europe now. That's selling very well.

So, those types of things, combined with the larger wheels, are driving that. And, again, when you look at the value-added sales, you may not see it because of the lower – also, especially North America has been quite strong, but as you move into the third and the fourth quarter, I think you'll see that start to reflect the changes in the finishes..

Okay, great. And then, with the launch cadence, is is fair to assume it's mostly in the larger rim sizes? I guess kind of an update on what you're seeing of adoption of these kind of 19-inch plus wheel sizes.

And do you – have you – I'm sure you have, but when you think about the launch cost of some of these new launches, do you foresee anything that might be somewhat of a headwind or do you feel pretty confident given the launch schedule you've seen in the first half that you've got the launch costs in hand?.

Yeah. I think there is – we're always concerned about the launches until you're all the way through. That's just the way we are. And so, although for the majority of the launches, everything seems to be going fine. The concern is around a few launches that had some late changes on them. So, not as much time to prepare. So, we're going through that.

I think we've captured those types of things in our guidance. So, we think we're comfortable. Again, I would say that, yes, we've kicked off those 30 launches in North America, but, again, many of them don't reach peak volumes until some in the fourth quarter.

So, we remain, shall we say, vigilant in terms of managing the launch and watching on a daily basis each one of the production of each one of those wheels..

Got it. And then, final for me. Obviously, the North American operational improvement just continues to beat expectations.

I just was hoping to maybe get a status update on what you're seeing there and maybe some other levers that you're looking for in the back half in 2019 to continue that progress?.

Yeah. I would say, again, a couple of statistics. If you look at the first half of 2018 versus full-year 2017, scrap has improved 140 basis points, wheels per hours up 5%, PPM is 55%, 56% improved. So, clearly, doing better. When we look at, let's call it, the standard deviation of the wheels made every day, that's narrowed dramatically as well.

So, it's a more stable environment for us. All of those contribute to better financial performance. What I would say is we expect that to continue. I think we will not have as impressive numbers in the third quarter based upon the ramps of the launches, but, again, I think that's normal and built into our guidance.

In terms of further upside, we continue to integrate the two companies together. And I would expect that to generate further savings as well..

Great. Thanks so much for the time..

Thanks, Chris..

Thank you, ladies and gentlemen. This concludes today's Superior Industries second quarter 2018 earnings teleconference. You may now disconnect..

Okay. Thank you, Brittany..

You're very welcome..