Good day and welcome to the Superior Industries' Third Quarter 2018 Earnings Teleconference. Today's conference is being recorded. At this time, I would like to turn the conference over to Troy Ford. Sir, please go ahead..

Thank you. Good morning, everyone, and welcome to our third 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 CEO; as well as Matti Masanovich, our recently appointed Executive Vice President and CFO.

I will start on Slide 2 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 third quarter 2018 earnings press release and in the Appendix of this presentation.

As a reminder, comparative results for the third quarter of 2018 were impacted by the inclusion of one additional calendar week of North American operations in the third quarter of 2017, as a result of realignment of fiscal period to calendar quarters in 2017. 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 first begin by welcoming Matti. Matti is an accomplished executive with significant experience in the automotive industry. We're excited to have him join the Superior team.

With that, let me provide an overview of our third quarter 2018 results, starting on Slide 3 of the presentation. For the third quarter, net sales increased 5% year-over-year to $348 million and we shipped over 4.7 million units.

Value-added sales were $179 million with value-added sales per wheel increasing $0.40 to nearly $38, while adjusted EBITDA was $31 million.

Our results in the quarter were impacted by a number of factors including reduced European OEM production levels associated with the implementation of the Worldwide Harmonized Light Vehicle Test Procedure or WLTP, softer production schedules from our OEM customers in the United Kingdom, lower aftermarket volumes, and rising energy prices in Mexico.

In the second and third quarter of 2018, the number of launches on a year-over-year basis substantially increased, while in large part costs associated with these launches were in line with our expectations, there were a few that experienced slightly higher launch costs due to the complexity of the designs and finishes and some late engineering changes.

We expect shipment volumes to increase in the fourth quarter compared to the third quarter but to remain below the level of the fourth quarter of 2017. Turning to Slide 4, Superior's North American shipments were flat for the third quarter of 2018 compared to the third quarter of 2017 versus the North American light vehicle production of 2% growth.

Market growth in North America was driven largely by a few OEMs where we have limited to zero sales. Superior's OEM shipments for Europe for the third quarter of 2018 outperformed Western European light vehicle production for the same period on a year-over-year basis driven in particular by our programs with BMW and Mercedes.

That said, as I mentioned earlier, our volumes in the regions were heavily impacted by WLTP which reduced OEM production levels during the quarter as well as lower volumes from OEM customers in the UK. We also saw lower aftermarket volumes in Q3 compared to last year due to WLTP.

With respect to the global trade environment, it continues to remain fluid, but I'll make a few comments regarding the latest developments. First, as it relates to tariffs imposed on aluminum imported into the United States, we have price adjustment mechanisms with our customers based on indexed prices.

Therefore these price changes in aluminum are passed through to our customers. Second, on October 1st, the United States, Mexico, and Canada, agreed to the USMCA which will replace NAFTA. We are clearly pleased to see this development and remain optimistic as the agreement moves through the ratification process.

Overall we believe the increase in the North American content requirement from 62.5% to 75% is a slight positive for us. And finally, on September 24th, a 10% tariff was placed on wheels coming out of China into the United States, with that tariff scheduled to increase to 25% on January 1, 2019.

We are maintaining an active dialogue with our North American customers as they explore opportunities within North America to mitigate this risk.

That said, today we believe that the 10% tariff has had no significant benefit for us, but we are currently bidding on a number of programs that our customers are considering to transition to North America due to the possibility of an increased tariff on January 1st. And with that, let me turn the call over to Matti for a view of the financials..

Thanks, Don. I'm thrilled to be part of the Superior team. Turning to Slide 5 let's take a closer look at sales for the quarter. Net sales for the third quarter of 2018 were $348 million, an increase of approximately $17 million from the prior year period.

The increase during the quarter was driven largely by higher aluminum prices, offset by lower volumes which was due in part to an extra week of operations in North America in the third quarter of 2017, and lower volumes in Europe that Don mentioned.

Turning to Slide 6, adjusted EBITDA for the third quarter of 2018 was $31 million compared to adjusted EBITDA of $43 million in the third quarter of 2017, a decrease of approximately $12 million.

The decrease in adjusted EBITDA was driven primarily by lower volumes in both regions, higher energy costs in Mexico, and slightly higher costs related to the launch of new wheel programs. Our 2018 year-to-date sales performance can be seen on Slide 7.

Net sales were $1.1 billion for the first nine months of 2018, an increase of $377 million from the same period last year. The increase was driven by the inclusion of an additional five months of sales from our European operations in 2018 and higher aluminum prices.

As you can see on Slide 8, adjusted EBITDA year-to-date 2018 was $140 million compared to $91 million for the same year-to-date period in 2017.

The increase in adjusted EBITDA was primarily driven by the inclusion of an additional five months of our European operations in 2018 and partially offset by higher energy costs in Mexico and higher launch costs in the third quarter of 2018. Turning to the cash flow slide on Slide 9.

For the third quarter of 2018, cash provided by operating activities was $33.5 million compared to $27.3 million for the same period last year.

The improvement was driven by the utilization of the company's accounts receivable securitization program which was used to offset the purchase of shares for minority holders during the quarter related to the acquisition of its European operations.

Capital expenditures were $17.4 million during the third quarter of 2018 which supported both growth initiatives including the enhancement of Superior's product portfolio of technologies as well as continued maintenance expenditures. During the third quarter, we paid $2.3 million in common dividends and $3.9 million in preferred dividends.

Also during the third quarter we acquired an additional 447,821 shares of Superior Industries, Europe AG, formerly known as Uniwheels AG, from the remaining minority shareholders for a total purchase price of $33 million bringing Superior's total ownership position to 97.8%.

In terms of liquidity management at the end of the third quarter our total available liquidity was $185 million inclusive of cash on hand and the unused portions of our committed credit facilities in the U.S. and Europe.

As we ended the third quarter, we were carrying higher inventory finished goods balances in preparation for the aftermarket selling season in Europe and due to slower sales related to WLTP.

During the fourth quarter, we expect normal working capital improvements related to year-end customer shutdown and as we move through the aftermarket selling season both debt reduction and profitable investments in the business remain our top capital allocation priority in both the near and long-term.

Moving to Slide 10, I will review our 2018 outlook which we updated on October 24.

For full-year 2018, we expect unit shipments to be in the range of 20.85 million to 21.05 million units, net sales are expected to be in the range of $1.48 billion to $1.51 billion, while value-added sales are anticipated to be in a range of $790 million to $805 million. Adjusted EBITDA is expected to be in the range of $175 million to $180 million.

Our outlook for capital expenditures is expected to be approximately $85 million and cash flow from operations is anticipated to be in the range of $130 million to $145 million. Lastly, we anticipate our effective tax rate to be at or below zero due to further refinements and recently published regulations of the U.S. Tax Cut and Jobs Act for 2017.

With that, let me turn the call back to Don for his concluding comments..

Thanks, Matti. Overall, we're disappointed with our third quarter results.

That said, despite the factors that impacted the second half of 2018 we remain optimistic that we'll continue to benefit from the attractive tailwind in Europe and North America including increasing wheel diameters, a growing importance of light weighting, and a move towards more sophisticated designs and finishes.

Our launch activity in 2018 has been 30% above the level of 2017 which is a testament to our innovative technologies and capabilities that we are better serving our global customer base. That said, continued execution of our strategies while capturing additional efficiencies throughout our operation remains our top priority.

It is this focus that positions us to drive long-term sustainable growth and profitability for our shareholders. And with that, let me turn the call back over to Katie for questions..

Thank you, sir. [Operator Instructions]. Your first question comes from Chris Van Horn with B. Riley FBR..

Good morning, thanks for taking the call and welcome Matti..

Thank you..

Good morning, Chris..

Good morning. So could you just -- could you elaborate a little bit on the China, I mean I'm going to classify it as kind of a possible share grab for you, should these 25% tariffs go through.

Could you just remind us how much share China has if you can quantify it here domestically and when you look at the conversations you're having, are they more in the high value or higher diameter wheels or they more passenger car maybe smaller diameter wheel based?.

Yes. So market share just broadly 40% is what's imported from China into NAFTA. So you have the way it breaks down is 20% is manufactured in the U.S., 40% in Mexico, and 40% comes from China.

In terms of the types of wheels that we're quoting, there are certainly some programs and these are the easiest to transition that we make today and so it's just a shift of volume from China.

And then there are other programs that we're quoting that, I would say under your characterization as a share grab and those range from base 17-inch wheels to more complex 20-inch wheels. So it's across the spectrum..

Okay, great, thanks for that. Thanks for that color.

When we look at launch activity, do you have visibility of what that schedule or cadence could look like heading into 2019? And then how would you -- kind of learning what -- going up what you’ve learned on the launch cost side for this year, do you see -- did you see it kind of an easier path and you experienced this -- these past two quarters or do you still kind of take a conservative view that there's always going to be things that come up and how you kind of plan for that?.

I think it's an important question. And in terms of just the volume of launches we would expect next year to be somewhere 15% to 20% less in terms of launches.

And so I think the other important point here is if you were to go back a couple of years say 2016, the number of launches that we had problems with probably was double or triple the issues that we had this year. I mean really we're talking about eight or so programs out of 150, 160 launches.

So not a significant number and I would say that there were specific issues on half of those after the eight, four were late engineering changes, and then a couple in Europe that we had some issues with were very, very high-end wheels large in diameter for a premium customer.

So I think we're -- there's no question that we're getting better that we've room for improvement absolutely and I think that next year will be a better year for us..

And if I might add, I might add to that in history we would experience premium freight, premium freight and we will impact customers and request customers may be reduce volumes to us.

So we did not see this year is that phenomenon at all, we did have increased costs around rework, scrap, overtime, additional testing, et cetera but none of it was also customer facing or customers took notice of that and nor did we experience any expedited or premium freight.

So I think that the teams able to launch much more effectively than they have in the past..

Okay, great, great.

And then can you describe the effect of I think you mentioned WLTP somewhat affected the aftermarket, can you get into little more detail on maybe why or what the dynamics are there?.

Yes, the aftermarket in Europe again is a different animal than here it is than it is here in the United States in that. The aftermarket purchase is primarily a winter wheel purchase and so instead of just changing the tires, people in Europe tend to buy new wheels. And so they keep the tire wheel pairing together.

And so it does make sense that given the decline in new car sales, that the aftermarket also would experience a slight decline as well..

Got it, got it. Makes a lot of sense.

And then last one from me, for more of a macro perspective, the story with you all and it's been playing out is the shift to larger diameter more high-value, adding more light weighting and new technologies to the wheel process, when you look at your pipeline you've considered -- do you continue to see those more complex highly engineered wheels being a higher percentage of the business you're bidding for and if you can quantify it great but maybe just more of the trends you're seeing on that front?.

No question, it continues both in the quotes and the opportunities for the quotes.

I would say if we took -- let's take North America year-over-year 19-inch and above up six percentage points, Europe up six or seven percentage points, we expect that to continue as we look out during the planning horizon here past 2020 where we thought it was going to be 33-ish percent.

I think 2021 will be little bit higher than that, so it continues to grow. And what we're doing now is trying to balance the portfolio between high runners and the higher margin bigger wheels..

Thank you. Our next question comes from Gary Prestopino with Barrington Research..

Hey, Don I wasn't following what you were I got distracted here with the previous question when you were saying 19-inches higher wheels up 600 basis points, was that a year-over-year phenomenon?.

Yes..

So the wheel is up 600 basis points?.

As a percentage of the portfolio..

Okay, percentage of the portfolio, okay, great. Couple other questions here.

Number one just in general, if you hadn't had the impact from what was going on in Europe with softer production schedules, which I assume kind of hit you at the tail end of the quarter because when you guys released numbers in August, you gave guidance you hadn't changed your guidance, was really the bulk of the issue the European production that that had caused you to have to pre-announce and lower guidance?.

Yes, I mean certainly the way it breaks down is in terms of an EBITDA impact $5 million of the reduction year-over-year was due to volumes and that was primarily related to WLTP although Jaguar/Land Rover also reduced volume substantially in late August and September and actually closed their facility for a couple weeks in October.

So I don't think that's WLTP related but that also Jaguar/Land Rover is an important customer to us, so that also impacted us..

Right, okay.

So in terms of WLTP, what's your feel on what's going to happen going forward with the European OEMs and into 2019?.

Yes, I think we’ll see the same impact in the fourth quarter where we are seeing the same impact in the fourth quarter. I think that WLTP is going to be around right and so what has to happen on the OEM side is they have to get the cadence right to be able to certify these vehicles.

And so it will be in 2019 and 2020, but I think the planning and the product planning in terms of the different engine structures will be changed out and they'll be more used to getting the certification as they move forward. So I think that overall for 2019, it returns to let's say a more normalized production scenario for the European OEMs.

And so when as we look at production for 2019 we'll finalize our guidance and in mid-December and announce it in January but we would look at a return to kind of a low 1%, 2% growth rate in Europe for 2018..

Is this for both diesel and gas engines or just diesel?.

Both..

Okay.

So is the problem that that and I'm not altogether too off on this but is the problem that the OEMs has failed some kind of a test with their current engines, so then they have to go out and re-modify and that's why the production schedules are down or is it just the government intervention is just clogging up production?.

I think the emission scandal in Europe drove the government to ask the OEMs or mandate that they recertify all of their engine variants..

Okay. Okay.

And then last question is with this new tariff, that is going to be put on Chinese vehicles and you're talking with OEMs about taking some of that China production, do you have the capacity in North America to add production?.

Yes, we can -- we have and it's an important question.

So we don't have capacity at every level with every finish but the programs again as I mentioned in Chris's question are a wide variety of finishes, sizes, and so you have some that we could actually take over in mid-2019 that would probably be the quickest and then others that would begin in early 2020..

Okay.

Do you have capacity in Mexico, in Arkansas, or just Arkansas?.

We would expect to put these into Mexico..

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

Good morning, first question.

Can you provide a split, a regional split on wheel shipped and value-added sales?.

Yes, give me a moment..

They're looking that up.

Vahid, do you have another question?.

Yes, on the inventory side it looks like you built up inventory, you did build inventory from Q2 in the quarter and I wanted to get a sense of does the WLTP was taking place and you’re expecting a slower fourth quarter, how much of that inventory do you anticipate building off or why would you have the inventory build-up?.

Most of the inventory build-up is for the aftermarket selling season and for us this is really the first time in the last couple of years where we're going into the aftermarket selling season with a full complement of product, so we're really excited about that and that so far in October, we've had very, very solid sales.

So we're quite pleased with that, so it's not -- yes there is some on the OEM side. But from the perspective of the majority of it certainly is on the aftermarket side..

Okay. And then, next question I had --.

Vahid?.

Yes, when you are doing the Uniwheels acquisition in August when you’re picking up more shares that was at the beginning of August, correct?.

August, correct..

And were there any additional share purchases since the quarter closed?.

Less than a 1000..

So I'm just trying to get a sense of where you are liquidity wise, is that something I mean if you're expecting the WLTP in your softness to continue into 2019, are you going to continue to allocate cash to purchase more shares, is the dividend cut on the table, and if you could answer if converting preferred to common is being discussed?.

Yes, let's first in terms of the share purchases, the shares that we acquired were not at our option. So now that we've crossed the 95% threshold, we do have an option to essentially squeeze out the remaining shareholders. But they also have the option to put those shares to us.

So the shares that we bought in August and 800 or so shares we purchased after those are shares that were put to us, that's not part of the squeeze out process. And then, in terms of capital allocation, we routinely discussed that at the board level certainly as we prepare our long range plan and our budget for 2019.

Those topics will be for discussion at the board level -- at the board meeting in December..

Okay.

But you're confident that between now and the end of the first quarter, you will have enough cash to get through that?.

I'm absolutely confident there's no question..

Okay.

And then that was my final question, so just regional split on wheels?.

But to circle back on the regional splits, so value-added sales for the global for Q3 is $179 million, $92 million North America, and $87 million in Europe. And units, 4.7 million units on the globe, 2.6 million in North America and 2.1 million in Europe..

Thank you. Our next question comes from Michael Boam with Sona Asset Management..

Hi, a few questions if I can.

Firstly the extra week in 2017, what was that worth to you in EBITDA?.

I think we can say the number of wheels that we made but weekly EBITDA is not..

It's about 140,000 wheels..

Okay.

Secondly you drew on your ABL during the quarter, can you tell me how much was outstanding on that facility at the end of the quarter and how big the facility is please?.

Facility is a $160 million in North America and we've got a $30 million facility in Europe and we drew $19 million. $30 million Europe facility..

Is that included in your liquidity or not?.

Yes..

Okay.

In terms of production schedule disruption, coming back to the point in Europe, can you tell us kind of what you're seeing, is Q4 going to be worse from a production standpoint from Q3 because of the OEMs have come in or coming into the quarter with more inventory and needed to take additional downtime?.

No, our expectation is that Q4 will be up versus Q3 in terms of unit sales as well as value-added sales..

And is the quarter so far tracking to that or not?.

Yes, it is -- yes, it is tracking..

Okay.

Then going back to the question on the shares, you said 97.8%, how much will the incremental 2.2% cost you if it's all put back to you any given point in time?.

$20 million..

$20 million..

$20 million.

And then can you share with us if you haven’t already disclosed this, what your bank covenants if any are?.

We have. I get the fairly covenant light -- covenant light facilities but there is a covenant on if we take 35% drawn on the revolver then we have a 4.5 times LTM test at the end of any given quarter and that’s really the primary covenant net debt-to-EBITDA yes..

So I mean what I take from the call is Q4, well you say Q4 is going to be better than Q3.

2019 should really be back on track with possible tailwinds from Chinese volume not entering the market, fewer launches, is that fair or not?.

I don't think in our as we look at 2019 we’re counting on additional volumes from taking share from China, so that would just be upside to our view..

Okay.

But you are expecting a better year, yes?.

Absolutely, absolutely..

Thank you. [Operator Instructions]. Our next question comes from Olivier Monnoyeur with BNP..

Hi, thank you for taking my question, I have a few actually.

I would like to go back to the account receivable usage, you said the facility is $160 million in North America at the moment, usage is $90 million, is there any usage of the European one?.

There is a revolving credit facility for $160 million in North America and there is 30 million Euro revolving credit facility..

No, the accounts receivables fixed securitization program?.

Yes, so we have approximately $70 million availability under that program and we had about $50 million drawn on that in -- at the end of Q3..

All right. Is there as to -- sorry --.

I said that we utilized about $50 million of that $70 million. We do not include that $20 million in our availability of our liquidity calculations that we referred to earlier, the $185 million excludes that $20 million of availability..

All right, understood.

As you bring down the inventory level in the fourth quarter of the year, do you intend to reduce the usage of that securitization program or will it just accrue to the cash level?.

It’s kind of strategic because we pay different rate on it versus borrowing on the revolver. So and really just kind of depends where we end the year, we do fully expect though to unwind inventory positions by the end of the year is our normal seasonality and normal course..

On the guidance on the cash flow from operation, is that before or after interest payments?.

Yes, after interest payments are included..

Yes, included, so after payments..

Yes, after payments..

Okay, good.

And the last question, can you kick back the granularity around differences between North America and Europe as shipments, net sales, and value-added goods; you haven't for the past two quarters?.

Yes, certainly we can put that in the Appendix absolutely..

Thank you. At this time, I'm showing no further questions in the queue. I would now like to turn the call back over to Don Stebbins for closing remarks..

Thank you very much everybody and have a good day. Thank you..

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect..