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Edited Transcript of SHLO earnings conference call or presentation 20-Dec-18 1:00pm GMT

Q4 2018 Shiloh Industries Inc Earnings Call

VALLEY CITY Jan 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Shiloh Industries Inc earnings conference call or presentation Thursday, December 20, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary DeThomas

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

* Lillian Etzkorn

Shiloh Industries, Inc. - Senior VP & CFO

* Ramzi Y. Hermiz

Shiloh Industries, Inc. - President, CEO & Director

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Conference Call Participants

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* Aileen Elizabeth Smith

BofA Merrill Lynch, Research Division - Analyst

* Alan W. Weber

Robotti & Company Advisors, LLC - Research Associate

* Richard Clayton Carlson

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to Shiloh Industries Fourth Quarter and Full Year 2018 Earnings Conference Call. Today's call is being recorded. (Operator Instructions) I'd now like to turn the call over to Mr. Gary DeThomas, Vice President, Corporate Controller of the company. Please go ahead, sir.

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Gary DeThomas, Shiloh Industries, Inc. - VP, Corporate Controller & Principal Accounting Officer [2]

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Good day. Thank you, operator, and thank you all for participating in Shiloh Industries Fourth Quarter and Full Year 2018 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 statements.

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 statements made today and in our management discussion and analysis of financial condition as well as the results of operation in our Form 10-K for the year ended October 31, 2018, and other filings with the SEC. Our earnings press release was issued today and has been posted to our website at shiloh.com on our Investor Relations page. The earnings press 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-K will be filed later today with the SEC. A replay of today's call will be available. Instructions for the replay are included in today's press release. I will now turn the call over to Ramzi Hermiz, our President and Chief Executive Officer. Ramzi?

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

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Thank you, Gary, and thank you to all for participating on the call. I will begin with some comments on the performance of our business during fiscal 2018, and provide some color on the market conditions we are currently seeing, and our larger and broader thoughts on the outlook of the industry. Lillian will walk you through our financials in more details and provide our guidance for 2019.

We generated solid results for fiscal year 2018 that demonstrate the progress we've made on our strategy to position Shiloh as a technology leader with the ability to provide the market with lightweighting, value-added solutions.

We grew our 2018 revenue by more than 9% over the prior year or nearly $100 million to $1.14 billion, and we generated adjusted EBITDA of $74 million. Importantly, we delivered adjusted EBITDA within the range of our original financial guidance, while overcoming challenging end market conditions that impacted many in the industry as well as launch related expenses.

During the fourth quarter, we also achieved an important milestone with the largest quarterly revenue in Shiloh's history. This was driven by organic and acquisitive growth. Additionally, we outperformed all 3 of our key end markets. I will now provide some color on those markets.

I'm pleased to report that Shiloh generated solid fourth quarter revenue growth in North America of 6%. Our automotive revenue grew by 4.4% compared to the industry production growth of 3.6%. The North American market grew but was impacted by softening productions trends and uncertainty surrounding trade and tariffs. We have had a very active quarter with 6 new product launches, and we are also busy helping our customers explore solutions to offset higher tariff related costs. Excluding acquisitions and on the currency-neutral basis, our automotive revenue in Europe grew by 6.4%, which significantly outperformed the market that was down 4.1%.

The industry was impacted by WLTP, which is a regulatory change in the measurement of CO2 emissions that went into effect on September 1. WLTP pulled forward demand during our fiscal third quarter, which further highlights the strength of our fourth quarter results.

Our business in China continues to ramp up, while the rate of growth in the overall Chinese market has slowed down, Shiloh performed very well with our lightweighting value-added products.

During the fourth quarter, launch activity began to ramp up as we made further progress converting our book business into production. We had heavy launch activity in our North American facilities. The launch process is complex and creates short-term challenges, particularly within our CastLight business. We incurred upfront cost that impacted our margins during the quarter, but are expected to generate higher margins in the second half of 2019. Some of the startup costs are related employee recruitment and training and the expected inefficiencies as we bring new technologies to market. We expect launch activity to remain elevated during 2019 with 17 new program launches as we continue our new product rollouts.

We also continue to expand our global manufacturing capabilities with the launch of our new facility in Nantong, China. We are supporting preproduction builds as we move closer towards the official start of production in the summer. We began absorbing initial expenses related to these investments in the fourth quarter and expect these 2 to continue into 2019.

Overall, we had a very active year, preparing our facilities for production launches of many new products and bringing new capacity online to support our global growth.

I am very proud of the collective effort of our employees across Shiloh. I believe their efforts and their -- and the investments that we are making are critical to position Shiloh for continued success.

For the year, we generated new business wins, representing $775 million over the life of the programs. This represents strong growth of 17% or $114 million over 2017. These wins include Shiloh's innovative products that were sourced on some of the industry's largest global platforms, including a number of notable trucks, SUVs and CUVs. They also include key wins with our Asian partners, who have remained dedicated to both passenger cars and SUVs.

New products include our laser-welded door-inners, structural components for body, chassis and interior, made in aluminum, magnesium and steel, in addition to a number of components for electrification as we continue to expand our customer partnerships. Collectively, these represent exciting new wins and growth opportunities across all regions and are reflective of the acceptance of our leading technologies, such as, in clean combustion engines, hybrids and electric vehicle solutions.

Looking specifically at the fourth quarter, we had new wins with Ford, Honda and Volvo and a number of our Tier 1 partners. We also continued to win strategic business with our commercial vehicle partners. Importantly, we remain focused on our strategy to reuse or redeploy assets to minimize future capital requirements.

I'm also pleased to report that Shiloh has content on 7 of the 9 2019 North American Car, Utility and Trucks of the year finalists.

On the operational improvement front, our restructuring activities progress during the fourth quarter as we continued to drive fixed cost out of the business. You may recall, we embarked on this restructuring effort last year to help reduce the impact from potential changes in the cycle.

We completed the closure of 2 facilities in North America and Georgia and Michigan, incurring restructuring costs as well as related expenses to transfer customer volume to other facilities.

These are important actions as they eliminate fixed cost and drive improved utilization by shifting production to better performing facilities. We will continue to focus on ways to eliminate fixed costs and streamline our global business as we remain diligent should market conditions warrant additional actions.

During the year, we also completed the strategic Brabant acquisitions, boosting our global presence, customer base and product offering. This transaction is long term in nature, and we believe can generate robust returns given a very attractive purchase price. I would note that the transaction resulted in no goodwill being created for these high-quality assets. From a people perspective, the acquisition was talent accretive, bringing to the Shiloh team experienced leaders and technical expertise. We remain very optimistic about Brabant's longer-term profit potential, but anticipate little contribution to 2019, given the challenging volume outlook in Europe.

We made good progress integrating the business into Shiloh and expect to make further gains as we move into 2019. We see this integration as a broader opportunity to optimally align our combined European capabilities and strategically shift production to the most efficient locations and facilities. As part of our footprint alignment efforts, we closed a minor facility in the Netherlands.

Next I would like to provide an update on the tariff and trade situations. Tariffs. We've managed to incur minimal disruption from tariffs that many in the industry are facing. We continue to feel confident that our strategy of in market, for market has reduced our potential risk. We have aligned our supply chain such that raw material supply is sourced within the same region as we manufacture the product. With customer delivery also completed in the same region, allowing Shiloh to avoid cross-border tariffs. In addition, we have material resell programs and material pass-through agreements with our customers to minimize increased market pricing.

We also continue to believe that we are well positioned to help our customers offset some of the negative impact from tariffs. Our lightweighting solutions can reduce material consumption requirements, which can offset the material price increases related to tariffs. For example, our laser-welded products can offset up to 60% of the tariff impact attributed to those products through reduced material usage and material optimization.

Shiloh technology places the best material with the optimal design and ideal specifications to improve performance and increase strength in a cost-effective way.

Regarding trade, we are also encouraged by the anticipated successor agreement to NAFTA. While the USMCA agreement will impact OEMs through new reporting requirements, we expect little impact to Shiloh. Progress seems to be made with China, which is another positive for the industry. In North America, we can continue to see some industry softening and continued mix from cars to SUVs, while OEMs continue to navigate the impact of tariffs.

We expect minimal direct impact from GM's recent news about plant closures and elimination of certain vehicle lines. We will continue to closely monitor the situation.

Europe is being impacted by a number of factors. We are seeing some softness related to WLTP that we mentioned earlier, but we expect that impact to be transitory. There is been an increased focus given the uncertainty surrounding Brexit, and we are continuing to monitor those developments as well. Lastly, mix shift away from diesel vehicles has been impacting the overall market, but we feel good about our opportunities as a lightweighting solutions, our power agnostic and help improve efficiency across all platforms.

According to industry studies, every 10 pound reduction in the weight of a vehicle reduces carbon emissions by 10 pounds. While the EPA reports that every 100 pound reduction improves vehicle efficiency by 1%.

Europe remains an important growth opportunity for Shiloh, and we believe we are well positioned to win in a market that we expect to represent more than 30% of our revenue.

China is an emerging opportunity for our company and that market will begin to contribute to our financial performance in a more meaningful way during the second half of 2019. We are preparing for upcoming production launches for General Motors and SGM. We are also well positioned to benefit from Tesla's recently announced plans to expand in the region, given our leading technology solutions for the EV market and our existing relationships.

Content for vehicle remains an important long-term growth opportunity for Shiloh, as our products remain in demand and our technology differentiation continues to gain acceptance across the industry. Our recent acquisitions have created additional opportunities with new customers and new vehicles. As part of our integration, we are now going to market with a well-positioned global team that can offer customers our full suite of solutions.

To wrap up, I'm pleased with our performance during a challenging year for the industry. We delivered on our financial guidance and are well positioned to make further progress.

Underlying demand for our lightweighting solutions remains strong and our long-term content per vehicle opportunity remains intact. We continue to closely monitor industry conditions while taking the appropriate action to position the company for success. With that, I'll 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 fourth quarter increased by 13.6% to a record $300.1 million compared to $264.2 million in the fourth quarter 2017. This is comprised of approximately 4.5% organic growth, which outperforms similar market growth of 1% and approximately 9% contribution from our acquisitions.

If you recall in 2013, 100% of our revenue was from North America. In our most recent quarter, 75% of our revenue was from North America and 25% was from the rest of the world. We are making progress on our goal to drive global, profitable growth.

We are pleased with the record revenue growth as it is the leading indicator of the success of our lightweighting strategy. We also absorbed incremental costs and capital investments associated with launch activity. The launch activity required putting the appropriate incremental resources in place to ensure a seamless customer experience, which results in elevated expenses in the short term.

Gross profit was $23.8 million in the fourth quarter compared to $28.6 million in the prior year period, representing a gross margin of 7.9%. Margins were negatively impacted in the quarter, primarily as a result of launch expenses mentioned earlier.

For the fourth quarter, net loss of $8.5 million compared to a net loss of approximately $900,000 in the fourth quarter of 2017. While we reported a pretax loss of $3.8 million, we recognized a deferred tax expense of $4.6 million as a result of the third quarter change in estimates for credits and the change in pretax income from prior quarters. Fourth quarter adjusted loss per basic share was $0.23 compared to net income of $0.13 per basic share in the prior year period.

Adjusted EBITDA was $15 million for the fourth quarter compared to $18.3 million in the prior-year period. Fourth quarter adjusted EBITDA margin was 5%, reflecting the impact of higher launch costs.

We remain focused on our product strategy, while pursuing opportunities for operational improvements. Our restructuring activities remain on plan, incurring approximately $1.5 million of cost during the fourth quarter. As outlined in the previous quarters, the total charge over the 24-month period is expected to be approximately $17 million, of which we have incurred approximately $11 million to date. We expect to incur remaining $6 million during 2019. As a reminder, the benefits from this initiative are expected to generate annualized savings of $7 million to $10 million by 2020.

Looking at our full year results, revenues were in line with expectations at $1.14 billion, a 9.4% increase from the prior year. We generated $116.1 million of gross profit, a slight increase compared to the prior year. Gross margins fell 90 basis points to 10.2% for the full year compared the prior year, driven by launch costs primarily from the fourth quarter and the impact from recent acquisitions.

Net income per diluted share for the year was $0.49 compared to a net loss per basic share of $0.04 in 2017. Adjusted earnings per diluted share was $0.62 compared to $0.53 in 2017. Finally, adjusted EBITDA was $74.1 million, which as Ramzi mentioned, was within our guidance range. We are proud of our ability to deliver on our guidance during a very challenging period for many in the industry.

As of October 31, 2018, cash and cash equivalents were $16.8 million. We generated operating cash flow of $53.2 million, and we invested $50.1 million in capital equipment, realizing $3.1 million of free cash flow.

Net borrowings under our revolving line of credit were $245.4 million and our leverage ratio was 3.1x on a net debt to trailing 12-month adjusted EBITDA basis. This compares to 2.3x in 2017, which was prior to the Brabant acquisitions. We continue to target leverage in the mid-2s, while managing investments to grow the business.

As we look to fiscal 2019, our end market outlook remains consistent with current IHS forecasts. While industry volume forecasts are slightly down year-over-year, we have a significant number of new business launches occurring in 2019. To put this in perspective, we had 15 launches for all of 2018. In 2019, we expect 17 launches, with 14 of those 17 launches occurring in the first half of the year.

This heavy activity should allow us to outperform the market. For 2019, we anticipate revenue of approximately $1 billion to $1.15 billion. While we are pleased with the new business going into production, there is a short-term financial impact given the concentrated number and the complexity of launches. Taking this into account, we expect to generate adjusted EBITDA in the range of $62 million to $70 million for 2019.

To provide a little more color on sequencing, increased launch expenses are expected to result in adjusted EBITDA margins during the first half of 2019 that are similar to our exit rate margin in the fourth quarter of 2018, with the lowest margin occurring during the first quarter. We expect margins to accelerate to a more normalized run rate in the second half of the year as our higher value-added products begin to contribute more meaningfully.

Overall, as we look forward, we remained encouraged about our ability to outperform the market and the benefits we expect to see as our mix continues to improve and we grow our business. Operator, we are now ready to go on 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.

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Aileen Elizabeth Smith, BofA Merrill Lynch, Research Division - Analyst [2]

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This is the Aileen Smith on for John. Can you give a little bit of -- a little bit more color on the elevated launch costs and product and program investment costs that you incurred in the quarter? So many of these newer programs, you've probably had at least some lead time to prepare your plants and production lines accordingly. So should we be think about these launch costs as being substantially above your own expectations or somewhat in line? And is it possibly a function of broader industry volumes starting to decelerate, which can pressure cost leverage all else being equal?

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

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Aileen, this is Ramzi. Couple parts to your question. When you look at the cost with a -- with in line of our expectations, yes, they were in line with our expectations. As we go forward, the complexity of the launches, the types of products, the new technology that we were moving forward was in line, great technology. There was time compression in the number of these launches, a lot of things have moved -- compounded on each other as some customers were delaying and some customers pulling forward. So we actually see that in 2019. When you look at the number of launches in the first half of the year, a lot of it is some people move things out and other customers are pulling things in. From broader market perspective, I would say the programs that we're on, we're actually seeing stronger demand for those poles, not less. So that is part of, let's say, a more rapid launch-up period -- launch period of volume increased than the contrary of something going down. When you look at cost the -- so the cost was in line with the expectations. When we talk about 2019 in guidance, there is a significant cost to launch in this short period of time. Again, when we look at longer term -- or I'd say, near-term profitability and near-term value creation, we see that in the second half of '19 as well.

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Aileen Elizabeth Smith, BofA Merrill Lynch, Research Division - Analyst [4]

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Okay, great. And then, obviously, over the next year and the next few years, as you highlighted, you're going to be launching a significant level of new product, which will, as you noted, mean some more launch costs. If I remember correctly a few years ago, you had targeted a longer-term EBITDA margin range potentially in the double digits by early next decade. Is that a target and a timeframe that still hold or do some of your product investment and launches or broader cycle of macro conditions push that target out in any material way?

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

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Absolutely, it still holds. I mean, when we look at -- I think we're really -- we were really excited about what is happening. When you look at quarter 4 record revenue and quarter 4 record revenue for 2018, when you look at our -- the technology, our lightweighting strategy technology is actually being pulled through the marketplace so our strategy is working there. When you look at our growth in Europe and even our growth offsetting the WLTP impact is demonstrating further that our technology solution is agnostic to the power train or to the propulsion system serving diesel engines or be it internal combustion engine or EV or hybrids, the strategy's working there. When you look at what we're seeing in China and the demand and pull in China and the growth in China, our global growth strategy is continuing to work. Our product -- our process to product strategy, when you look at the types of technologies we're launching -- we launched in quarter 4, disruptive lightweighting technologies. When you look at what's happening right now, and to the first half of the year and quarter of 2019, the strategy is clearly working. Part of the success of that strategy is then carrying into that profitability model. And so looking at these programs, looking at the product technology, keeps us in line with that exit rate -- 2020 exit rate of double-digit EBITDA. We still feel comfortable with that as a strategy and an objective.

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Operator [6]

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Our next question comes from the line of Richard Carlson with BMO Capital Markets.

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Richard Clayton Carlson, BMO Capital Markets Equity Research - Analyst [7]

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So I just wanted to dig in a little bit I guess to the guide. Because it seems as if 4Q may not have turned out exactly as you were expecting. I mean, just the implied 4Q guide, I think would've been softer revenues than what we saw for sure but stronger margins. So how did things kind of progressed throughout the quarter that we ended up with so much stronger revenue? And I assume that was at much a mix issue as it was, the cost associated with launches for the lower guide -- I mean, the lower margin.

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [8]

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We clearly saw a strong pull. When you look at the customer mix that we have and the product mix that we have with those customers, definitely strong pull on the product. In SUV, CUVs, we see the trucks, we see some of the premium vehicles. So that was extremely positive and pull things forward. With our launches, there was -- even with those launches, the ramp-up schedule in some of the cases were accelerated, so that drove some of the cost, increased cost in Quarter 4. The launch cost were in quarter 4. While we would say, you mentioned the implied quarter 4, again, I have to reiterate, we hit guidance. We met our guidance number in the range. We said 74%. We are right there, look, I'll say, the midpoint of the range. So we feel that we've delivered on what we had articulated would happen. So we're comfortable of what was delivered, we were comfortable with what was expected. And as we going into quarter -- going into 2019, a lot of activity, which is what we want to see. We want to see those launches. Those launches represent the success of the strategy. Those launches and the technology that's coming out represent that we are delivering on a product technology that will be needed in a marketplace and it's going to deliver going forward.

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Richard Clayton Carlson, BMO Capital Markets Equity Research - Analyst [9]

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Got it. And then just on the comments you made, Lillian, about the cadence, I think that was for the EBITDA margin. Can you talk about the cadence though for revenue as well? Just to try and get a sense because it does sound as if you'll start the year maybe -- you're expecting to start the year maybe a little more headwinds and then as these products come out, you'll end the year I guess with stronger mix. Is that fair?

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Lillian Etzkorn, Shiloh Industries, Inc. - Senior VP & CFO [10]

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Yes, Richard. No, that is fair. We didn't talk specifically to the cadence of revenue, really focusing along the margin and trying to help illustrate the impact in terms of the elevated launch expenditures in the first half of the year. So clearly, as we stepped through the year, we're going to be seeing more product coming on board, and we launched those products, starting to get more of a full impact. One of the other things to consider, as you think about our fiscal year and our fiscal calendar, that's different, right? We're on a little bit of a different cycle. So your first quarter is heavily hit by Thanksgiving holiday, the holidays in December, et cetera. So that tends to be a little bit lighter of a quarter generally speaking for the company. And I would expect that to be consistent this fiscal year as in the past.

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Richard Clayton Carlson, BMO Capital Markets Equity Research - Analyst [11]

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Got it. And then just last one for me. I just wanted to touch on the content per vehicle. Is there a big difference between light trucks, SUVs and cars? Because as we see that mix shift, we see almost a natural kind of upward pressure to your CPV.

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

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From content per vehicle, our -- it remains intact. Our target or our addressable market on a vehicle is roughly $1,500, and that doesn't change significantly if it's on a car or a truck or a SUV. And we see that opportunity's still there. We actually see it increasing in opportunity when you look at the acquisition of Brabant, it brings us from a European perspective, additional technology, additional capability, additional capacity to enable that growth. So that $1,500 is independent of our clean combustion engine and hybrid electric and/or pure electric vehicle is still there, and we like what we see in front of us.

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Operator [13]

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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 [14]

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So can you -- I'm just a little unclear. So in the quarter, your revenues were up, call it, $36 million. The gross profit was down, call it, $5 million. Can you talk about the new launches? How much should they really contribute to the revenues? And how much really were the expenses from the new launches?

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Lillian Etzkorn, Shiloh Industries, Inc. - Senior VP & CFO [15]

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Alan, in terms of the launch expense that we incurred in the quarter. As Ramzi mentioned, it was a heavier launch quarter for us. I mean, we've had a lot of activity going on in our facilities. And really, when we look at the compression on the margin, as a result of those launches, it was about $7 million of launch expense that we incurred in the quarter. So that hit margin probably about 230 basis points roughly. We did have some goodness that came through in the quarter in terms of productivities, savings from some of the restructuring. But the launch definitely had an impact on the business as we were in the quarter. We also experienced higher pull from the customers in terms of pulling the products through the plant. So that's part of how you see the higher revenue in the quarter, but really what was driving the overall margin change is the higher launch expenditure. And as we're looking into first quarter fiscal '19, we're expecting to continue to see that level of launch continue into the first quarter and then gradually taper off as we progress through 2019, and we begin rolling off the launches and start getting into more of the full production mode for those products.

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Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [16]

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So when you look into 2020 because you talked about exiting with the run rate of 10% EBITDA margins. What are the general assumptions? I don't mean the macro, but I mean in terms of new launches in '20, is that going to be a little bit slower or flatter? How should we look at that? Because I guess the question is, if you look at -- right, if you take a step back and look at EBITDA, so the EBITDA you're projecting next year is lower than '18, which was I think flat or lower than '17, and now in '20 you're projecting quite an increase on an exit. Trying to understand -- I guess, why that will occur or is it just a reduced amount of launches in '20 that, that's the case?

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

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Alan, this is Ramzi. When you look at the -- our customer base and the product launches that they have going on, you will see that '19, overall, is a very heavy active year for many of the customers in the industry, and then you do see a slowdown of launches as you go forward. So we would expect in 2020, based off of our portfolio that we've seen in the technology that we're booking, it would be a more moderate launch period, so that allows us to be in more of a steady state as we exit '19 and go into '20. As we mentioned, we have 17 major launches in 2019, 14 of them occur in the first half of the year, therefore, 3 only in the second half of the year. So that helps with that stability on the exit rate of 2019. 2020 is a more moderate rate and so that expense and the concentration is more spread out, that will also support the exit rate of a 2020 type of move.

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Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [18]

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Okay, great. And just my last part is -- oh, I'm sorry, were you saying something?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [19]

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Just say progress for that -- so you see that progress towards the 2020 exit double digit.

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Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [20]

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Okay. And then just again when you talk about the launches in '19, I think you 17 launches in '19, 14 in the first half. Just roughly what should one think about in terms of that contribution towards the revenues of the company?

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

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When you look at the annualized run rate of that volume is probably roughly $140 million of annualized revenue. So you're looking at approximately a 14%, I'll say, turnover to the revenue of the business. And that is what implies part of the margin growth that we're expecting because these are newer technologies of the products that we won in the prior year. So you've heard us articulate over $3.5 billion of book -- new business being booked since 2015, 2016. So now they have product just starting to come into play, into launch. So again, another validation point of the strategy is working in that technology portfolio. So roughly about $140 million of annualized revenue of launches in the first half of the year.

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Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [22]

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And that would be annualized, again, looking out towards 2020, not 2019?

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

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Yes, yes. Correct.

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Operator [24]

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(Operator Instructions) Our next question comes from the line of George Casper , private investor.

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Unidentified Participant, [25]

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First question is related to China investment, current activity expectations for 2019. Can you relate the investment to date? How far along are you there? What can we expect in 2019 in terms of operational dates? And how many automotive manufacturers do you expect to be involved in China as you're moving forward in 2019?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [26]

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Okay, George. When you start looking at the China investment, I'm going to take a step back if you allow. When we look at China, the progress in China is going very well. When you think about 3 years ago, we launched our ShilohCore dash panel, and that was our first entrée into China. Business has continued to grow, that business is nice profitable business. It has -- we're fully -- of the equipment that we put in is near full capacity, so we're looking at making additional investment for our ShilohCore technology. We then launched our magnesium technology for IP structures. And again, that business is moving forward, good profit on that, we're seeing a number of global RFQs, request for quotes, because of our portfolio and our ability to support Europe, the U.S. and China. So that regional footprint we now have, that global footprint we now have is creating additional opportunities in China. What we have is, you mentioned, recent investment would be our high-speed transmission components that we'll be launching in our Nantong facility. We are in preproduction right now and making those investments for preproduction with moving more to SOP, start of production, in the late spring, early summer. So we see that launch going into bit more high production the second half of the year. What's also happening in China is our investment in engineering talent in our tech center. So what you see us doing and we have been doing for the last 12 months or so is, building our global -- our engineering capability locally in China to work with the local customers to sell them the product, to sell them a technology and engineered product.

You had a second part of your question, the number of customers. We work with roughly 5 different customers currently in the portfolio that we have with that wanting to grow over getting more quotes or more relationships, and in many cases, driven by the electrical vehicle market. When you look at our ShilohCore technology, it's an NVH -- lightweighting NVH solution. And that solution in electric vehicles because of noise has seen a lot of pull. And even parts of the vehicle that we may have not originally targeted for use but because trying to manage the high-frequency pitches and the high-frequency noise of the electric vehicles from a motor standpoint, our technology is a unique solution, a unique lightweighting solution that's actually seen a lot of interest because of the electrical vehicle investments that you see occurring in China. So we're really confident on what we have for China. We have -- we've been very particular on what investments that we put in China, we're not trying to sell everything to everyone. It is a targeted specific technology, specific solution type of approach to make sure that the investments are prudent, but also the IRRs on those investments is at a higher level because of what we want to put on the ground there.

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Unidentified Participant, [27]

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And if you could utilize additional question on this China thing. If you relate to -- by the end of 2019, how do you view your capacity? What would you view your revenue generating capacity out of that plant compared to other plants in your whole worldwide system?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [28]

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We typically don't speak to a particular plant or an individual plants revenue capacity. What I will say to help -- put guide to that question would be that from a technology standpoint, where we will look at the potential for the business over -- with the technology that we have on the ground today. Could we see China between $150 million to $200 million business in our horizon? Yes. So when you look at our portfolio, that is something that we feel that there is that market potential. When I look at our ability to deliver on the strategy and our ability to execute, I'll refer to some of the comments Lillian made in her prepared statement of, in 2013, Shiloh had 0 revenue outside North America. We've set a global growth target, and we saw opportunity in Europe, we saw opportunity with our technology in Europe. And now that you see we're more on a run rate of 30% of our revenue. So in a few short years, we've been able to develop a strategy and execute a strategy for growth and that growth will continue in Europe. When we look at the same type of strategy that we're taking in China with a specific unique portfolio that is pretty much targeted towards an electric vehicle solution, which is a direction China is moving. I feel that we can -- we will -- they have the ability to deliver that same team similar to what we had to do in the U.S. and in Europe about building the talent or the engineering talent first to have the people on the ground, the talent on the ground. Our leadership team in China is very strong and they've been able to deliver the expectations, and we see continued growth in that region.

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Unidentified Participant, [29]

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And then I've got a question on product launches, generally speaking. Can you highlight the -- your initial work now on introduction of the aluminum axle system? And does this track as maybe being one of the largest, if not the largest individual opportunity that you've generated maybe since the dash panel?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [30]

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I would say there are other technologies that are even being launched are even more significant when you look at some of the work that we're doing with some of the European OEMs for launches in North America. So it is -- the actual housing an extremely important launch, very critical launch for both us and the customer. But when you look at '19, where we have launches in 5 countries and 9 plants, a number of different technologies. So what you're seeing is a strong portfolio pull and back to the strategy of a multi-material, a multi-technology approach. So you see in some of launches are unique laser-welded technology in steel. You see a number of launches that are in aluminum type of solutions and you also see a number of launches in magnesium. So our product and material strategy, our multi product strategy, our global strategy are all working and they are all delivering the expected results. So it is -- each technology brings a unique solution, the actual housing clearly disruptive in the sense of taking 24 pounds out of a vehicle, which is significant when you look at every 100 pounds is roughly 1% to 2% fuel efficiency or -- on the vehicle. So 25% of that, that's significant. That impact is as great as somebody can do it, you'll say, in propulsion technology or energy management or vehicle management system. So what we have is unique, and what we have is disruptive, and you're seeing that pull and its representative in what we're seeing in the first half of this year.

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Unidentified Participant, [31]

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Okay. All right. And just one thought on the various expansion that you've done in Tennessee plant. I assume that's probably getting the most effort in North America. Correct me if I'm wrong, but when you measure now your total output, steel, aluminum, magnesium. Can you give us some percentages of how those rate to 100%?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [32]

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George, if you can say that second part, I want to make sure I understand the question correctly. If you can repeat that one more time?

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Unidentified Participant, [33]

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Okay. If we take all your revenue stream and try to divided it between steel, aluminum and magnesium and maybe you can divide it further, what are the percentages of total volume in these 3 entity -- this -- these 3 offerings in total for your total capacity of getting up into that $1 billion, $200 million range for revenue stream?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [34]

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I would say they're roughly split evenly. If you look at what's happening from kind of the broader categories. If you look at casting, you look at the blanking laser welding -- laser-welding technologies, and then our stamping technologies, it really falls into nearly 1/3, 1/3, 1/3 type of market. From a -- and really that is in part what we have said. The multi-material solution is really what is unique about Shiloh. Many of our competitive base is singularly focused. They are a magnesium type of base material provider or they're aluminum and/or they are steel. What Shiloh -- and what we have purposely developed and we have -- what we built the strategy on is that multi-material solution. And so what you are seeing, even in this 14 launches, you see a relative balance between the technologies of those launches. And again because not every vehicle needs the lightest solution. It may be a more cost competitive solution. And so we're able to balance that based off of technology, and that ability to manage and work with the customer and focus on an application versus a process because that's really where -- this is the difference of a process strategy versus a product strategy. We're really been able to target those products that provide the solution that is either helping the customer manage more a profitable solution or maybe a more lightweighting disruptive solution because they're under pressure from a fuel economy standpoint.

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Unidentified Participant, [35]

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I see, okay. And In terms of -- if I could just ask a question on the growth of -- or the financing situation within the company at this point in time. Do you envision that you have the capacity to accomplish what you're looking at going forward now or are you going to need some additional financing, equity or otherwise?

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Lillian Etzkorn, Shiloh Industries, Inc. - Senior VP & CFO [36]

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George, it's Lillian. We feel very comfortable with where we are in terms of the financial position for the company. We've been both investing in the business to ensure that we are growing it, that we're putting the necessary product and supporting our customers in our facility while we're also growing the business. So feel very comfortable with where we're at and that we'll be generating the appropriate earnings to continue to support our -- both being able to pay down debt in the future and continue to invest in our growth for the future as well.

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Operator [37]

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Mr. Hermiz, there are no further questions at this time. I'll turn the on the floor back to you for any final comments.

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [38]

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Thank you very much, Marcella, and thank you for -- everyone for your interest in Shiloh. We look forward to continuing to keep you updated on the progress that the business is making. We're excited, clearly, I think you can hear it in our tone. We are excited about record revenue in the quarter, we're excited about record revenue for the year. So that is something that we're really proud of and really proud of the hard work that Shiloh team has done to pull this together. When you look at what is in front of us in 2019, we're excited about the products that are going to be coming to market, again, further highlighting Shiloh's unique position, disruptive position and really the success of what we've been working on for the prior few years. So really the strategy's working, the strategy's coming to play, and we're definitely excited about that. So the only thing I'd like to do is close with a -- wishing everybody a Merry Christmas and happy holidays and wishing everybody a wonderful, wonderful 2019, and we'll be talking to you all soon. Thank you.

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Operator [39]

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