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Edited Transcript of SHLO earnings conference call or presentation 5-Sep-19 1:00pm GMT

Q3 2019 Shiloh Industries Inc Earnings Call

VALLEY CITY Oct 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Shiloh Industries Inc earnings conference call or presentation Thursday, September 5, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lillian Etzkorn

Shiloh Industries, Inc. - Senior VP & CFO

* Ramzi Y. Hermiz

Shiloh Industries, Inc. - President, CEO & Director

* Scot S. Bowie

Shiloh Industries, Inc. - VP, Corporate Controller & Principal Accounting Officer

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Conference Call Participants

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* Alan W. Weber

Robotti & Company Advisors, LLC - Research Associate

* John Joseph Murphy

BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst

* George Gaspar

- Private Investor

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Shiloh Industries' Third Quarter 2019 Results Conference Call. Today's call is being recorded and will be -- and we will be conducting a question-and-answer session immediately following management's prepared remarks.

I'd now like to turn the call over to Mr. Scot Bowie, Vice President, Corporate Controller of the company. Please go ahead, sir.

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Scot S. Bowie, Shiloh Industries, Inc. - VP, Corporate Controller & Principal Accounting Officer [2]

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Good day. Thank you, operator, and thank you for participating in Shiloh Industries' Third Quarter 2019 Results Conference Call. I'm joined on today's call by Ramzi Hermiz, our President and Chief Executive Officer; and Lillian Etzkorn, our Senior Vice President and Chief Financial Officer.

I will begin by reviewing our legal disclosure regarding forward-looking statement. I would like to remind all participants that certain statements made during this conference call may constitute forward-looking statements. Although such statements reflect our current reasonable judgment regarding the direction of our business, actual results might differ materially from those in the forward-looking statements. You can find information concerning why the actual results might differ from our statements made today and in our filings with the SEC.

Our earnings press release was issued today and has been posted to our website at www.shiloh.com on our Investor Relations page. The earnings release contains reconciliations of certain non-GAAP numbers presented on this call today, including adjusted EBITDA, adjusted EBITDA margin and adjusted earnings per share. Our Form 10-Q will be filed later today with the SEC.

A replay of today's call will be available, and instructions for a replay are included in today's press release.

I will now turn the call over to Ramzi Hermiz, our President and Chief Executive Officer.

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [3]

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Thank you, Scot. I would like to welcome everyone who is participating on today's call. I will begin with some highlights for the quarter, discuss current market trends, progress in our launches and provide an update on some of our important initiatives. Lillian will then walk you through our financials in greater detail and discuss our outlook.

Overall, I am pleased with Shiloh's performance throughout the year and our ability to execute on our plan. We continue to make solid progress on a number of key initiatives that will position the company to grow profitably and improve the capabilities of our organization over the longer term. We continued the rollout of our major product launches; won new business, including a very sizable engagement with FCA; and strengthened the organization through investments in technology and systems. We also took proactive restructuring actions to optimize our assets with market opportunities.

Shiloh made significant gains expanding its global capabilities. I just returned from China where I met with partners and visited our Nantong site. We are excited about this new facility and the launch. China is an important growth opportunity as we continue to expand our global capabilities.

During the quarter, we outperformed the market in China with revenue equivalent to prior year compared to the market, which was down over 15%. With additional launches planned in China during the fourth quarter, we expect to significantly outperform the market again and deliver year-over-year growth.

On a year-to-date basis, adjusted for certain factors in the third quarter, which Lillian will discuss, we performed in line with the North American market, with Shiloh down 1.5% versus the market down 0.9%. And significantly outperformed in Europe, with Shiloh up 9.4% versus the market down 5.2%. And in China, with Shiloh up 16.1% versus the market down 14.6%. Overall, we grew on an adjusted basis by 1% year-to-date, while the global market production declined by 8.1%.

As discussed on prior calls, 2019 is a busy year with major product launches. This launch activity demonstrates our ability to win higher value-add business with reoccurring revenue streams across the global enterprise. Our program schedules remain on track as we look out at the balance of the year.

During the quarter, we completed several significant customer launch milestones across our key regions. Many major launches are now increasing in production volumes. We are executing on our plan in our Nantong facility on time and which is now moving into full production. As I mentioned earlier, we continue to see increasing opportunities for our lightweighting technologies in China.

In Europe, customer deliverables are on track. We have additional launch activity planned for the fourth quarter and are pleased with our progress.

In North America, we are very excited about the upcoming launch that leverages Shiloh proprietary ThinTech technology and a highly anticipated new sports car program. We engineered a solution that reduced the number of components on this vehicle from roughly 60 to 17. This dramatic reduction allowed for significant cost reductions, assembly simplification, complexity reduction and an overall wage savings of nearly 35%.

Year-to-date, our new wins totaled over $475 million, with $175 million occurring during the third quarter for customers such as BMW, FCA, Ford, General Motors, PACCAR and SGM. We are proud of the progress that we have made during the year, and this quarter included a $140 million win with FCA for a high-volume vehicle in North America that will utilize our proprietary curvilinear, laser-welded technology. This win continues to emphasize Shiloh's leading market position in curvilinear technology. After this launch, we will have over 60% market share in curvilinear, laser-welded door inners.

In China, we received a new award for ShilohCore dash panel to be used on a new vehicle platform. This $25 million business award from SGM highlights the continued success and benefits of ShilohCore and is a credit to our global relationship with General Motors. This positive development highlights the momentum that we have with this proprietary product and will be a catalyst for continued growth.

We continued to execute our restructuring plan during the quarter by reducing fixed costs and streamlining our business. We are analyzing industry trends and working closely with our customers to understand their production, strategies and product plans that we optimally align our global operations. While restructuring efforts continued in North America, we have expanded actions to include Europe.

Since we began this initiative, we have consolidated manufacturing sites, made geographical shifts to place production closer to customer facilities, centralized departments and optimized our product portfolio. These actions line up well with our ongoing strategy to create a more flexible structure that enables us to adapt to the variability of our customers and market demand. We believe that we are well positioned to manage current industry conditions and be flexible to respond with additional actions across the region as required.

During the quarter, we continued to invest in technology and systems to improve operational and supply chain efficiency and create competitive advantages through digital transformation. This transformation includes system consolidation and process simplification, which will deliver improved -- improvements in operations, capacity planning and customer support, along with improved efficiency of business satisfaction. We flawlessly launched our first site under this new system and continue to roll out across North America manufacturing footprint.

To recap, we continue to execute our strategy, which is allowing us to navigate current market conditions, take advantage of our disruptive lightweighting technologies and build our global capabilities to position Shiloh for success. From an operational perspective, our launches and restructuring initiatives are progressing and positioning us for improved profitability that will help drive future growth. We are strengthening our customer relationships and actively engaging new prospects with our suite of differentiated products as our sales team continues to gain traction in the market with new wins.

With that, I will hand it over to Lillian to address the financials in more detail.

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Lillian Etzkorn, Shiloh Industries, Inc. - Senior VP & CFO [4]

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Thank you, Ramzi. Revenue in the quarter was $263.4 million compared to $294.9 million in the third quarter of 2018. In bridging the year-over-year change for certain items, $12 million was from onetime sales in Q3 of 2018 for solving a supply issue for certain customers, $6 million was from a closed facility and $4 million was from currency translation. Importantly, we believe that our performance was consistent with our customers' core production trends, and we see continued growth opportunity globally.

Gross profit was $23.6 million in the third quarter compared to $32.9 million in the third quarter of 2018. Gross margin of 9% compared to 11.2% in the year ago quarter. The bridge is made up with profit associated with the onetime revenue and launch costs. As mentioned earlier, many of our launches for 2019 are behind us.

For the quarter, net loss was $2.7 million compared to a net income of $11.1 million in the third quarter of 2018. Profitability was impacted by higher margin onetime revenue in the year ago quarter as well as higher launch costs and interest expense.

Loss per share was $0.11 compared to earnings per share of $0.47 a year ago. Adjusted earnings per share was $0.04 compared to $0.22 in the prior year period.

Adjusted EBITDA was $17.3 million for the third quarter for an adjusted EBITDA margin of 6.6%.

We remain focused on our product strategy while pursuing opportunities for operational improvement and asset optimization. Our restructuring activities remain on plan, and we have incurred approximately $3.9 million of cost during the quarter, primarily for employee-related severance costs and professional fees. Our actions this quarter expanded across the organization, including Europe.

As we look forward, we will assess market conditions, customer actions and other factors, and we will continue to proactively align our operations and business structure.

As of July 31, 2019, cash and cash equivalents were $11.9 million. Cash generated from operating activities for the quarter was $11.6 million, and we invested $15.4 million in capital equipment.

Net borrowings under our revolving line of credit were $246.7 million, an increase of $3.4 million compared to fiscal year-end 2018.

The leverage ratio was 3.5x on a net debt to trailing 12-month adjusted EBITDA basis. Longer term, we continue to target leverage in the mid-2s while maintaining investments to grow the business.

Turning to our outlook for the remainder of 2019. The end market assessment and current industry forecast for full year volume are expected to be down slightly year-over-year and down during our fourth quarter. We expect the fourth quarter to be a normal seasonally strong period for Shiloh and to be aided by the continued ramp-up of volumes for new product launches that should be running at higher levels.

We are reiterating our 2019 revenue guidance of approximately $1 billion to $1.15 billion. Given our results year-to-date and our confidence in the outlook, we are raising the midpoint of our adjusted EBITDA guidance range. We are tightening the range to $67 million to $70 million from the prior range of $65 million to $70 million. This is the second consecutive quarter that we have raised the midpoint of guidance. Despite some broader challenges in the industry, Shiloh has been able to effectively manage through this environment and execute according to our plan.

I will now turn the call back to Ramzi for some summary remarks.

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [5]

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Thank you, Lillian. Overall, I am pleased with Shiloh's progress throughout the year. During the third quarter, we continued the rollout of our major product launches, won new business, strengthened the organization through investments in technology and systems, and continued to execute restructuring efforts to optimize our assets. All of these efforts help position the company for success in the future. As we enter the fourth quarter, we are well positioned and remain on track to achieve our full year guidance.

With that, operator, we are now ready to go to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of John Murphy with Bank of America Merrill Lynch.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [2]

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Just to -- first question on the new business wins year-to-date and $475 million is pretty strong. I'm just curious if you can give us sort of time frame of that business rolling on. And if we think about this growth over market, how much growth over market does this new business support?

And maybe also sort of second to that is the quoting activity for you sounded like it's relatively strong, it's kind of sounds like from other suppliers, particularly around powertrain has kind of bounced around a bit and become a little bit more volatile. Just curious if you can comment on sort of the quoting activity in addition to sort of the prior question, just to understand really what kind of activity is out there for you, and how much more opportunity is there in the near term? Because some of it sounds like it's gotten a little bit more volatile for other suppliers.

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [3]

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John, when you look at the new business opportunities, first, let's -- I'll break the question up in a couple of different sections. One, if you look at our opportunity in vehicles, roughly about $1,500 worth of content per vehicle when you look at Shiloh's portfolio. So we have a good opportunity both in the chassis side and the body as well as in the powertrain.

So when you look at the activity, we still see very strong activity or opportunities when you look at the lightweighting technologies both from an EV side as well as an internal combustion engine, when you look at the structure and what people are trying to go after. So (technical difficulty) aspect, the technology is sought, and we see opportunities there.

When you look at some of the volatility, we are seeing programs being pushed out from a standpoint of the sourcing decisions where if somebody who may be originally had said, I'm going to make that sourcing decision in July, now they're saying, I'm going make it in October. So we are seeing some delay in the decision of the product portfolio of the customers. So as they reevaluate their product plans, that is having some impact on the amount of activity out there.

But again, because of the content opportunities, we are -- and really some of the lightweighting opportunities and the ability to offset some of the impact of tariffs and the trade discussions, we're actually getting some mid-cycle opportunities versus waiting for their complete model changeover. Because as we've highlighted before, we can offset up to 60% of the impact of tariffs through our lightweighting technologies.

And then back to kind of the original part of your question is, when do we see some of these new business wins hitting? Each part of our business has a slightly different cadence. When you look at some of the activities in the laser welding on the body side, they get launched maybe 12 to 18 months out from the standpoint of business award; where you have some of the very structural components or powertrain components, they maybe 24 to 30 months out from sourcing. So you do see a different timing of when to expect. So in some cases, these will hit -- these awards that we just talked about winning, will hit in 2022 time frame or end 2021 for production in 2022 and 2023. So again, it's filling up that pipeline for us going forward.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [4]

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Okay. That's great. I mean the -- and you've kind of sort of answered my second question around tariffs. But I mean as far as what's going on -- I'm wondering if you can give me an update from what you're seeing? And also, has that been any sort of -- has that been disruptive at all in cap allocation across the value chain, particularly with your automaker customers? Have you seen these kinds of delays? I mean is that -- are you seeing people hit pause right now as far as decisions around cap allocation or capacity allocation, I should say?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [5]

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We have -- with some of the customers, we have seen decisions being made to either leave a vehicle in a certain region, where they may have had plans to move it. We've seen some stability in that side and some decisions made. And we've worked with them based off of capacity, where we need to have that capacity. We've really pushed for an in-market/for-market strategy. And again, as we define in-market/for-market as raw material, through the production into the -- shipment to the end customer. So that really has eliminated most of the cross-border risk for Shiloh. Purposefully designed that way. So again, China for China, U.S. for U.S., Mexico for Mexico, Europe for Europe. And that's a vertically integrated supply chain. And -- so we feel comfortable with that. So that decision-making hasn't really impacted our business at this point from a tariff side.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [6]

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Okay. And then just lastly, I mean it sounds like the restructuring is now spreading to Europe. I'm just curious why you're kind of starting that now? I mean is there something going on in the European market that's kind of leading you to want to hustle up on that and get some restructuring done now? Or is this more just sort of a timing issue with you kind of got good line of sight on what's going on in North America, and now you're kind of spreading the program to Europe?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [7]

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I'd say a little bit of both. When you look at where the European market has been this year, you look at some of the customers and their direct impact, their volume is down. There is -- you had -- earlier you had WLTP, now you have RDE or Real Driving Emissions testing that really complements WLTP. But it is part of -- Europe is defining their portfolio.

And I think when you look at the overall softness or uncertainty, it's more prudent for us to take some actions. As you know, when we made some recent acquisitions, the idea was to bring on backup of capacity for some of our operations, especially critical; [ones] in the magnesium structure business, we wanted to make sure we had really alternative manufacturing sites for that type of product. And we -- as we look at that, we are looking at how best to align human resources, capital resources and the business opportunities in front of us.

We still -- as we mentioned earlier, in quarter 1, we won a $200 million total annual package with -- for structural components in aluminum, which is one of the acquisitions that we bought was aluminum capacity, [wanted to] bring us technology, bring us a product range as well as bring us some capacity. So we're aligning those resources and that capacity with what we see the market looking at.

So some of it is, if you recall in 2018 when we spoke of the North American market uncertainty, Shiloh thought it was prudent to be -- take an aggressive and a proactive approach and not wait and see but really take the opportunity to address cost structure. We're really doing the same thing from a European side. It's better to get an early jump on these things, and again, tighten where we can. So that's really -- so that's what we're looking at Europe.

Obviously, China is now part of that discussion as we're launching in China. And as I -- as we commented in prepared remarks, China is growing for us. I mean we're outperforming the market. We know we're going to significantly outperform the market because we're just going into production, we're just going into launch. And we're ready with our ShilohCore technology and our magnesium structure, IP structure, cross-car beams, that's where we're seeing strong demand on that product portfolio. We're on the right mix and is a purposeful design on the mix. And so as we go into quarter 4 and starting launch, this is why we're very confident we're going to be outperforming the China market with those launches.

I was just -- as I said, I was just in Nantong. I was just in our facility. One -- first off, we have an outstanding team and a leadership team as well as the people on the floor. And looking at the plant, we're ready to go. We're excited about the ramp-up, which is going to be occurring now. So our position is different in each one of the regions. But China -- I know a lot of people are feeling negative impacts on China. For Shiloh, it is clearly and -- it still continues to remain a strong opportunity for growth.

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Operator [8]

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Our next question comes from the line of Alan Weber with Robotti Advisors.

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Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [9]

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A few questions. One is, Ramzi, can you talk about -- I guess I'm a little confused, as you look out towards the, say, next year, when -- with all of the new launches kind of starting into the production, when do you see revenues to be flat or actually grow? Can you just explain that? Because we look at this quarter, the revenues were down.

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [10]

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When you look -- and Lillian went into some detail on the revenue. When you take out certain onetime revenue from last year and the impact of currency -- and last year, if you recall, in quarter 3, a little bit in quarter 4, one of our competitors or an alternative supplier to our customers had a supply disruption, and Shiloh stepped in to meet that demand. It impacted a number of major OEMs, and Shiloh was able to take over those tools from that supplier to make sure that the OEMs did not disrupt the production.

And so you see that -- so you -- that was onetime revenue that was in quarter 3 and a little bit in quarter 4. And so that was really nonrepeat revenue. So you pull that, you pull currency out. Overall -- year-to-date, we've outperformed on the market. We're up about 1%, the market's down globally about 8%. So we are outperforming the market on the revenue side as we look at this year-to-date.

To your question on -- or expanding your question on the launches, if you look at the launches that -- the business that we're putting into production, it's roughly about total contract value over $700 million of revenue. That's what we're launching annualized -- or total contract value. So if you say annually, call it in the range of $100 million to $150 million of annual business, which is where we're replacing some of our own product with new technology, we're putting in new technology or these are new opportunities of first-time content in a vehicle.

And so when you look at that, we feel that that will more than replace the products that it's displacing. So we feel that that growth and volume launch. So if you think about we're launching right now, we are up -- year-to-date, we're up 1%, the market's down 8%, and we're just going into launch.

So while we're not yet predicting or providing guidance on 2020 as our customers and the industry is trying to figure out what that total opportunity is, we feel that we still can meet what the market's doing or outperform the market with some of these launches that are ongoing.

So we feel robust and confident on it, but there is still this uncertainty that we're working on. We're still sunsetting some of the old business. As you -- as we talked about, we closed and restructured a couple of facilities. Some of that revenue we did transfer, a lot it we just let go or did not want the replacement -- we did not want the replacement business. So there was -- but in the quarter, there was about $5 million impact. So it wasn't -- it really wasn't significant.

If you look at currency year-to-date, currency year-to-date basically around $16 million or almost 2% of revenue year-to-date. So I mean currency is still -- and that's translation, so the volume is still there, it's just translation. So that does have some impact in that math. So that plus 1% includes -- if you take currency out of that, you could say it's plus 3%.

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Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [11]

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Okay. All right. And I guess on prior calls, you've talked about exiting 2020 at 10% plus double-digit EBITDA margin. Can you just talk about your thought process in that today?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [12]

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Yes. It -- as we talked about last -- even in the last call, I think you asked the question last quarter as well; we see that 2020 -- we've always said 2020, 2021. I mean that's our objective. We see a path to that, Alan. Again, some of it is trying to -- we need to determine what's market -- what's the market going to look like, what's that market uncertainty that we have to quantify, and we're still trying to evaluate what that means.

When you look at what we're -- our focus on operational efficiency, you look at the new product mix that's coming onboard. One, we have to launch it successfully, and as we know, this year, there is a significant amount of launch expense that's built-in to the plan. We do see -- we see how we can get it done. We have to execute on the operational front. We need to continue to manage cost, which we are doing. So there's a path with mix and with -- I'll say, with our current volume assumptions as we look in that 2020, 2021 period to get there. It's going to -- it's still going to take a lot of work.

The market uncertainty, demand uncertainly can have an impact. While we feel confident that USMCA, the replacement to NAFTA is going to move forward; we are -- as an industry, we feel confident that that's moving forward. We obviously see continued uncertainty built around China. While it hasn't had -- as to John Murphy's question earlier about trade, we don't -- for our products, Shiloh direct in-market/for-market, we don't see that. That's not creating uncertainty.

But a lot of our customers, if you think of some of the German OEMs who are here in the U.S. who export their SUVs globally, that potentially has a risk: what will be that impact for them, which obviously can have an impact on us.

So we're trying to evaluate some of those as we make those decisions. But when we look at it, there is a path to do it. In this case, to hit that EBITDA margin target. There is a path to do it. There's still a lot of work that needs to be done. As we mentioned, we're doing some restructuring that's going to make sure that our footprint is aligned with that market uncertainty. We are trying to -- and the team is doing a good job -- to build Shiloh as, I'll say, more of a variable cost company, so we can flex with that volume and make sure that we can stay ahead of it. So there's going to be a lot of things that have to happen over the next 12 to 18 months. We have plans to do that. We have to execute those objectives (multiple speakers) new products, new launch.

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Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [13]

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And if you look out to next year, what do you expect capital spending to be? And do you expect to be -- do you expect your cash flow to kind of exceed your capital spending for the next year?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [14]

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Capital, we still feel comfortable that we will operate within that 5% to 6% type of range. When you look at that, that's inclusive of both new business wins, productivity capital or operational to improve [outbacks], maintenance capital. Also in that is our launch for our new systems that we're putting in place for the business. And we feel still comfortable that we can operate within that 5% to 6% range. Obviously, as Lillian said, we're targeting to continue to focus on reducing our leverage, and so activity will be to continue to pay down that debt as well.

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Operator [15]

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Our next question comes from the line of [George Gaspar], who is a private investor.

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George Gaspar, - Private Investor [16]

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Just to highlight again, I know you've been through a lot of launches. In the last quarter, I believe you were talking about 17 launches that you were in motion for. Where are you net-wise right now? How many launches have you started this year? How many do you have to -- you're starting before the end of your fiscal year here? And how many do you anticipate next year? Can you give us specific numbers on those?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [17]

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Overall, [George], I can't. When you look at 2019, we spoke to the 17 and we say major launches. There's a large number of smaller launches that may be standard technology that we're not calling something disruptive or something new. So in these 17 majors, the -- a lot of these were new technologies or first-time technologies to the market. And so that's -- and that drove a lot of the -- I'll say, the premium expense in comparison to others. Of those 17, we would say we're about 70% through that -- those programs, leaving quarter 4 with 30% of that remaining. So we still have basically 5 or so major going on and happening right now.

When you look at 2020, the previous question on where do we see new business wins, we do have a larger -- a large number of programs next year. Next year, there's more, I'll say, similar technologies versus disruptive new technologies. Because now we've gone through some of the first-time launches on technologies. So one, we have a more robust process -- planning process in place and so we implemented that as kind of lessons learned from, let's say, 2019 to make sure we drive that. So 2020, let's say, it's half the number at this point of major launches, still what we'll classify as major launches, new disruptive technology, does -- but we have, like this year, a large number of smaller sub -- what we call, sub-tier programs. So '20 should be less disruptive than '19.

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George Gaspar, - Private Investor [18]

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Okay. All right. And then in terms of the expenditure, the front-end expenditure on the launches, is it possible to give us a figure of what that amounts to this year versus what you might expect next year?

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Lillian Etzkorn, Shiloh Industries, Inc. - Senior VP & CFO [19]

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I guess to that perspective, [George], as Ramzi was saying, next year's launches, we expect them to be less disruptive types of technologies. So launches that we have kind of continuing with our existing technologies. So from year-over-year cost, obviously, we're still working on our 2020 plan, and we'll have more to talk about in our next call in terms of 2020.

But when I think of incremental type of launch cost, so above and beyond, I would expect those to be much less of that type of extraordinary launch expenditures. Again, because of the nature of the launches and the programs and also importantly, the processes and the discipline that the company's implemented from a launch readiness perspective, also minimizes the launch impact for the company.

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George Gaspar, - Private Investor [20]

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Okay. All right. And then one other on this particular subject. In terms of the launches that you're doing going forward and have introduced already this year, some of this obviously is replacing existing parts. Can you relate a little bit about how you're capable of improving your margins? And what you're going -- you're doing going forward versus the parts that are coming out of the picture that potentially had less margin?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [21]

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That's really where the operational efficiencies and getting through the -- I'll say, getting through the launch and getting to the targets, profit margins that we were expecting on that; how we continue to drive down scrap rates, how to drive down operational efficiencies and throughput on your equipment? So when you look at those replacement technologies -- that is to the earlier question from Mr. Weber about getting to that margin, those margin targets -- it is about that mix change overall for the business. So how do we drive that mix? But we also have to launch that -- we have to launch that product and get it to its profit potential.

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George Gaspar, - Private Investor [22]

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Okay. All right. I would like to switch us to China. In terms of looking forward here and then your launch period the remainder of this year, how many parts do you expect to be producing over there, let's say, by the end of calendar 2019 that would be into your new fiscal year, of course? And how do you potentially envision that by the end of the next fiscal year in terms of actual part numbers?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [23]

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We'll probably be, I'll call it, a dozen-plus different products, probably maybe even greater than that. But when you look at the business volume, you'll start seeing that China will be a much more significant part of -- in relationship to where we are today. So that business is -- in essence, will -- if it's 1% of revenue, becomes 3%, 4% of revenue going forward for the total corporation. So this is just launching on programs that are won. So these are not about winning something new. These are the expansion of the vehicles that we're on.

We're on a very good mix of products. We're on CUVs, SUVs, popular sedans that are out there. So our mix has been -- or our targeted platforms has been purposeful. It is about launching differentiated technology. So our ShilohCore dash panel is something that we continue to see on -- every year, they're adding it on new vehicles. Again, it is a wonderful technology. It improves NVH, which is why both on an electric vehicle side, they really like it. It improves NVH, frees up -- creates space in the vehicle as well as an overall cost reduction to the OEM.

So we see activities there on our structural magnesium products, our IP structures, cross-car beams that's moving forward. On our powertrain products, and this is the case of 9-speed, 10-speed transmissions, we see good growth on that product. But where it's a positive because of the fuel efficiencies of those higher-speed transmissions, the particular customer's starting to put more of those transmissions and replace some of their standard. So that's actually a growth opportunity even beyond the market because they're basically increasing instances that are going into a vehicle.

So this is why we feel good about what we've got in place in China. And before we add technologies there, we're going to be very cautious on what technologies and how do we prudently, I'll say, make investments because we do want to make sure that are the right technologies, and we're not chasing commodity products.

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George Gaspar, - Private Investor [24]

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Okay. I could -- appreciate if you could update us on the following: in the last call, I asked a question about if you could give us some -- a revenue generation number for China on a year -- on an annual basis going forward. And I think that the numbers that were given to us were $25 million the first year and doubling that the second year. Can you comment on that? How do you feel about it now? And can you actually push it beyond those forecast?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [25]

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I would say, when you look at a full launch year, I mean, we'll be -- you're going to see that in essence to a certain degree next year. As I mentioned, being -- representing over, call it, 3% to 4% with basically -- on $1 billion. Basically, it says $30 million to $40 million next year with growth the year after. So we still -- even with the market down and -- that's assume -- that's even building in place what the market forecasts are right now. Again, we like what we see in China. We like what we have for China. We have a great team in China. So we see things moving forward.

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George Gaspar, - Private Investor [26]

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I see, I see. Okay. All right. And then one final on the financial side. Could you just comment on how you see the perception for your debt situation going forward? As you see everything that you have to accomplish, say, going forward into the next year about -- I think there was a comment maybe earlier about what you're going to be looking at in terms of your debt structure. And how might that change? Can you give us some specifics on that?

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Lillian Etzkorn, Shiloh Industries, Inc. - Senior VP & CFO [27]

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Sure, [George]. So from a debt perspective, and really let me answer it a little bit from the cash generation perspective and the capital allocation perspective. So very focused in terms of an organization on ensuring we're generating profitable growth, profitable and cash-generating product. So that is very much the focus of the organization with the long-term eye on decreasing the net debt position more into the 2 range versus the 3.5 range that we're presently in.

So when we think about how we're approaching the capital allocation is -- and I think Ramzi touched on this earlier -- it really very laser focused on ensuring that we're delivering the products and the technologies to support our customers to support that profitable growth, focused on servicing that debt, and really focused on reducing that debt longer term for the organization.

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Operator [28]

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There are no further questions at this time. I would like to turn the call back over to Mr. Hermiz for any closing remarks.

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [29]

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Thank you, and thank you for the questions. As we mentioned: Shiloh, there is a lot of opportunities on our technology. We see the market continuing to need the technology, seek the technology. It is disruptive in what we're doing. And we continue to see both our structural products, our aluminum, magnesium, the steels, the high-strength steels -- that portfolio mix, that multi-material solution is becoming and -- becoming more in demand.

When you look at our NVH products to manage sound: again, a technology that is proprietary to Shiloh from our ShilohCore perspective, again, we see more interest in that and more need in that. So we're very confident that we have the right technology, the right -- we've built a very good footprint over the past few years. So we're in the -- we're in Europe, we're in China, we're in the U.S., Mexico. So we have the right footprint going forward. We got to continue to execute flawless launches. So that's clearly a focus for us going forward.

We need to focus on operational efficiencies as well to continue to drive and to drive margin improvements. So we're confident in the plan that we have. We're confident in the team that's in place. We're going to continue to work forward. While there is market uncertainty, we understand that. We are trying to build a business that we'll be operating on more of a variable cost type of structure. So we can respond to market demand or regional demand as it may be. And we feel good that we have the right plan in place for that as well.

With that, I want to appreciate everybody's continued support, and we look forward to talking to you next quarter. Thank you.

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Operator [30]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.