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Edited Transcript of SUP earnings conference call or presentation 9-May-19 12:00pm GMT

Q1 2019 Superior Industries International Inc Earnings Call

SOUTHFIELD Jul 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Superior Industries International Inc earnings conference call or presentation Thursday, May 9, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matti M. Masanovich

Superior Industries International, Inc. - CFO & Executive VP

* Timothy C. McQuay

Superior Industries International, Inc. - Chairman of the Board

* Troy Ford

Superior Industries International, Inc. - VP of Treasury & Corporate Development

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Conference Call Participants

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* Douglas Louis Dethy

D.C. Capital Advisors, Limited - President and MD

* Elizaveta Andreeva

Deutsche Bank AG, Research Division - Research Associate

* Gary Frank Prestopino

Barrington Research Associates, Inc., Research Division - MD

* John Sykes

Nomura Securities Co. Ltd., Research Division - Analyst

* Vahid Khorsand

BWS Financial Inc. - Research Analyst

* Steven Borick

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Presentation

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Operator [1]

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Good day, and welcome to the Superior Industries First Quarter 2019 Earnings Teleconference. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Troy Ford. Please go ahead, sir.

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Troy Ford, Superior Industries International, Inc. - VP of Treasury & Corporate Development [2]

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Thank you. Good morning, everyone, and welcome to our first quarter 2019 earnings call. During our discussion today, we will be referring to our earnings presentation, which is available on the Investors section of Superior's Website.

Joining me on the call today are Tim McQuay, our Executive Chairman; and Matti Masanovich, our Executive Vice President and Chief Financial Officer.

Starting on Slide 2. I would like to remind everyone that any forward-looking statements contained in this presentation or commented on today are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially because of issues and uncertainties that need to be considered in evaluating our financial outlook. We assume no obligation to publicly update any forward-looking statements. Specific conditions, issues and unknown factors that may represent forward-looking statements are noted in detail on the slide.

I would like to point you to the company's SEC filings, including the company's Annual Report on Form 10-K for the year ended December 31, 2018, for a more complete discussion on forward-looking statements and risk factors.

We will also be discussing or providing certain non-GAAP measures today, including value-added sales and adjusted EBITDA. These non-GAAP measures exclude the impact of certain items and therefore have not been calculated in accordance with GAAP. Reconciliations of these measures to the most directly comparable GAAP measures can be found in our first quarter 2019 earnings press release and in the appendix of this presentation.

I will now turn the call over to Tim McQuay. Tim?

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Timothy C. McQuay, Superior Industries International, Inc. - Chairman of the Board [3]

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Thanks, Troy. Good morning, everyone, and thank you for joining us today. Let me start with the important news of the appointment of Majdi Abulaban as our incoming President and Chief Executive Officer. Majdi will start next week. He is a veteran of the automotive industry who brings with him significant operational experience in global leadership and a track record of value creation within the industry. We are all excited to have Majdi join the Superior team and lead our organization as we continue to grow as a best-in-class organization.

Now moving to Slide 3. Net sales for the first quarter 2019 were $358 million compared to net sales of $386 million for the first quarter of 2018. The reduction in sales was primarily driven by lower volumes in North America, a weak euro and lower aluminum prices, partially offset by improved product mix comprised of larger diameter wheels and premium finishes in both regions.

Value-added sales were $193 million, with value-added sales per wheel increasing $0.80 to $38.26. Excluding the negative effects of foreign exchange, value-added sales were up $2.50 year-over-year, which underscores our progress on leveraging the secular shift to larger wheels and more premium finishes.

Finally, adjusted EBITDA for the quarter was $43 million, reflecting the lower volume and higher energy cost compared to the prior year.

Turning to Slide 4. Let me discuss our unit shipments as compared to overall production in the markets we serve. As you can see, our North America shipments in the first quarter declined ahead of the overall market, impacted by reduced take rates on several platforms that we supply as well as softer industry production levels at our key customers.

Industry production growth in the region was largely driven by OEMs with whom Superior has little or no share, whereas production at our key customers was down year-over-year. In terms of take rates, our volumes were down more than the overall market on several platforms in our portfolio due to the trim level packages that were ultimately sold to our end customers.

We expect these impacts as well as reduced share on specific platforms to continue impacting our North America volumes and anticipate our shipments in the region to be down roughly 10% year-over-year, which is in line with our outlook for 2019.

Moving to Europe. Our European shipments declined year-over-year mainly due to market softening. And similar to North America, our primary European customers saw larger declines on the overall market. These headwinds were partially offset by strong performance of our platforms and strong share of the winter wheel business for premium OEMs.

Globally, despite the volume headwinds, we continue to see the shift towards larger premium wheels as reflected in the continued growth in our value-added sales per wheel. As a percentage of our total wheels sold, we saw the volume of 19-inch-and-greater wheels increase substantially by approximately 8% year-over-year in both regions. We also saw an increase in the absolute number of 19-inch-and-greater wheels despite the overall soft volumes. We expect this trend to continue through 2019 in both regions when compared to 2018.

As we look ahead, we are confident in our ability to capitalize on these secular trends and increase our customer opportunities, given our strategic position in the market.

With that, let me turn the call over to Matti for a closer look at the financials. Matti?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [4]

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Thanks, Tim. I'll now provide a more detailed overview of the financial performance for the first quarter of 2019.

Turning to Slide 5. We have provided a breakdown of unit shipments, net sales and value-added sales by region for the first quarter of 2019 compared to the prior year period.

We reported net income of $2 million, or a loss of $0.24 per diluted share. This compares to net income of $10.3 million, or $0.07 of earnings per diluted share, for the first quarter of 2018. Please see the table in the appendix for the reconciliation of net income to earnings per share.

The provision for income taxes for the first quarter of 2019 was $4.9 million, resulting in an effective tax rate of 71.7%. This compares to an effective tax rate of 24.6% in the prior year period. The higher tax rate was a result of US taxation on foreign earnings under the global intangible low-taxed income or GILTI provisions of tax reform, as well as the recognition of a valuation allowance on nondeductible interest expense. It's likely the effective tax rate for the year will remain elevated due to the same factors as mentioned regarding Q1. Despite the high effective tax rate, cash taxes were a net source of cash of approximately $2 million during the quarter. We expect cash taxes for the full year to be approximately $10 million.

Slide 6 gives us a closer look at sales for the first quarter. Net sales for the quarter were $358 million, down approximately $28 million from the prior year period, while value-added sales decreased $14 million year-over-year to $193 million. The reduction in value-added sales was driven by reduced volumes and a weaker euro, partially offset by improved product mix comprised of large-diameter wheels and premium finishes in both regions.

Quickly, I'd like to touch on SG&A, which was roughly 4% of net sales in the first quarter. In terms of integration of corporate functions, these are largely complete. And we saw a decrease year-over-year in integration expense.

In addition, as part of our integration, we aligned the reporting of SG&A expenses between our North American and European operations during the first quarter, which resulted in a higher cost of goods sold and lower SG&A expenses than the prior year period by approximately $4 million. We also took actions during the quarter to ensure we're optimizing our cost structure in light of the lower volume environment.

Turning to Slide 7. Adjusted EBITDA for the first quarter of 2019 was $43.2 million compared to adjusted EBITDA of $52.2 million in the prior year. The decrease was largely driven by lower sales in both regions and negative performance from plant inefficiencies due to lower production volumes and absorption of fixed expenses as well as higher energy costs. These were partially offset by improved product mix of larger wheels and more complex finishes and lower SG&A expenses.

In terms of performance in North America compared to the prior year period, as discussed, volume and energy rates were a drag to profitability for the region. In anticipation of volume declines, we right-sized production days and schedules at the facilities to manage finished good inventory levels down and corresponding with the business needs, which negatively impacted the absorption of fixed costs.

Despite these headwinds, we have made progress on improving our manufacturing performance in the region. For example, year-over-year, we have seen an improvement in North America on various operational metrics, including production yield, safety, delivery and quality. These are steps in the right direction. However, we still see higher-than-desired internal scrap rates and are experiencing elevated volumes on specific premium finishes that require the increased usage of higher-cost outside service providers.

Moving on to Slide 8. We generated $28.7 million of cash from operating activities in the first quarter of 2019 compared to $14.4 million in the prior year period. The increase was mainly due to improved working capital, including inventory management and the usage of the company's accounts receivable program as well as timing of cash payments, partially offset by lower earnings.

Cash used for capital expenditures during the quarter to support expansion and enhancement of the company's portfolio of products and technologies as well as ongoing maintenance totaled $13.4 million. The net of operating and investing activities inclusive of CapEx left $16.8 million available for debt reduction, the acquisition of minority shares in Superior Industries Europe AG, dividend payments and other financing activities.

During the first quarter, we paid dividends of $6.1 million and acquired an additional 1.4 million in shares -- $1.4 million in shares of minority shareholders of Superior Industries Europe AG. The amount still outstanding related to the minority interest is $12.2 million.

In terms of liquidity management, we continue to have significant borrowing capacity under our US and European revolvers. Our total available liquidity, inclusive of cash on hand and the unused portion of our committed credit facilities in the United States and Europe, was $243.4 million at the end of the quarter.

Now let me provide a review of our 2019 outlook on Slide 9, which we are reaffirming. For full year 2019, we continue to expect unit shipments to be in the range of 19.85 million units to 20.3 million units, with net sales in the range of $1.42 billion to $1.47 billion. Value-added sales is expected to be in the range of $765 million to $805 million. And adjusted EBITDA is anticipated to be in the range of $170 million to $185 million. Capital expenditures are expected to be approximately $85 million. And cash flow from operations is projected to be in the range of $125 million to $145 million.

And with that, I'd like to now turn the call back over to the operator to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question would be from Gary Prestopino of Barrington.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [2]

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Could you just tell us what percentage of your production was 19-inch wheels or better this quarter versus last quarter? I think you said it was up like 8%. But how does that break down as a percentage of (inaudible)

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [3]

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Overall, it's 26% of our sales. So we are at about 19% prior year -- 18% prior year. So we continue to penetrate in the greater than 19-inch wheels. We see that going to about a third at the end of this year as the year continues.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [4]

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And then in terms of the, what you talked about with SG&A, Matti, is that 4% of sales something that is going to hold throughout the rest of the year, or does it go up from here?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [5]

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I think it kind of -- it trends up slightly. So I think we'll end the year at around 4.5% of net sales. And I think that's a good target, 4.5% to 4.7% of net sales. Obviously, with the volume environment, we continue at opportunities at the cost structure to continue to reduce overhead costs and to get to even more thrifty to the extent we can possibly do that. So I think that's a good target for us is the 4.5% to 4.7% of net sales.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [6]

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Okay. And then you said your take rates were down in North America. And are you seeing on the platforms that you're on right now is that more people are electing for -- more buyers are electing for trim levels that don't include your specialty wheels? Is that really what's going on here -- part of some of the problems?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [7]

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That's a good question, and it's a convoluted answer. But the answer to that direct question is no. It's just a mix. And some products, you'll see that where they're electing for a cheaper version, if you will, so instead of the highest-end version or the premium segment on a trim level that we're on. But it's equally offset. It just happens to be, from a take rate perspective, we don't get every wheel for every platform program that the companies -- the OEMs have. And so we place a bet 2 and 3 years in advance on the proliferation of those programs. And that bet we make, sometimes it turns out in our favor. In this quarter, it turned out against us. Just to give you a stat, we saw negative take rates on 12 of 15 of our top platforms in the quarter. So I just -- it is what it is, unfortunately. And sometimes, we're on the losing end of it. And this quarter, we're on the losing end of it. What I'd say as kind of the offset to that is we are still continuing to see penetration in the greater than 19-inch wheels, which really was our strategic design to go after. And so as we mentioned, we're up 8% in both regions to get to a 26% overall sales rate for greater than 19-inch wheels, which I think is a good sign.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [8]

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And then in terms of what's going on in Mexico, where are you in terms of, let's call it, innings in terms of where you eventually want to be? Are we still in the second or third inning on that, or --

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [9]

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Yes, I think we're in early -- in the early innings, if you want to use that terminology or that analogy. I think we started to see some traction in the first quarter, as I mentioned. And so we saw our production yields and our scrap rates drop. They're not where we want them to be, where our desired levels. And so we had a proliferation of our -- from our European operations coming to help the North America team and assist the North America team in driving yields up and scrap rates down. I'll tell you it's early. And I think one quarter doesn't make us. But clear, we had a good quarter and a strong quarter. And we hope that momentum continues.

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Operator [10]

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(Operator Instructions) Our next question comes from Vahid Khorsand with BWS Financial.

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Vahid Khorsand, BWS Financial Inc. - Research Analyst [11]

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First off, thanks for putting in the slide breaking down the unit shipments per region. Appreciate that. Question on CapEx. It looks like you've cut it down year-over-year, which would put you behind on a pace of hitting that $85 million mark that you're setting for the year. Is that something you are purposely planning to do larger amounts later in the year?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [12]

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It's just really -- I'd say it's not purposeful. It's just the timing of the CapEx and the way the CapEx spend was -- is phased in. We'll start to see a larger CapEx burden as we go forward for Q2, 3 and 4 as we invest. And then we have specific investments we're making in growth, so for growth purposes. And so those kind of come in at a little different timing cadence. But you'll see us ramp back up to -- and we feel good around the $85 million marker for total CapEx for the year.

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Vahid Khorsand, BWS Financial Inc. - Research Analyst [13]

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Okay. And I know in prior calls and presentations, we've hit upon this. And I'm glad to hear your 19-inch wheels, the goal is to get 33% of sales by the end of the year. But I think we've talked about where, if you go larger, it just means lower volume because it just takes more energy and more manpower to create the larger wheels and uses more of the equipment. So is that something where you're going to basically say your maximum output is less than -- I'm trying to figure out like what is going to be your total capacity if you're guiding more towards larger wheels that take up more use.

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [14]

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Well, it's in our planning capacity and our planning today. So from a guidance perspective, we feel confident we can get to the guidance, and we can drive to that one-third marker for greater than 19-inch wheels for the year as we end and we exit 2019. So it is in there. You are correct. The more larger wheels we generate, it does kind of impact the overall capacity. But what I would tell you is, if we can bring down the scrap rates and continue our scrap rate reduction, that frees up capacity. And so I think, net-net on balance, I think we're okay from an overall perspective driving to our plan, if that answers your question directly.

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Vahid Khorsand, BWS Financial Inc. - Research Analyst [15]

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Yes, it does. And then my final question, program launches. Are they taking off in the second quarter and third quarter? Or it'd be mostly in the first quarter?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [16]

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No, program launches in '19 really start to take effect Q2 and Q3 and into -- and through Q4. There's a bit of a difference in timing generation in '19 between North America and Europe. Europe, we got off to a strong start in Q1 with about a third of the launches in Q1 getting started, slower ramp up in North America. So the launch window for North America really starts to ramp up in Q2 through Q4 at a pretty even pace as we go through the year.

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Operator [17]

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Our final question comes from Steven Borick with Louis L. Borick Foundation.

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Steven Borick, [18]

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Good morning, everybody. I'm going to talk for just a minute about where we are as a shareholder for a minute and ask a couple of questions. And it's for everybody that might be on the line, which doesn't seem like a lot, but could be. So we're probably one of the largest single shareholders other than the largest institutions left at Superior dating back from the original IPO '69. We recognize that we've had the opportunity to dispose of and have done so over the years many shares. In fact, we've disposed of in total probably 6 million shares. Our decision to maintain a large position after the founder passed and I stepped down as the CEO in 2014 was in the hopes that this Board would continue -- and management -- the good works of the company. After 5 years and a stock price decline of 75% from $20 to $5 and a 50% reduction in dividends, it's apparent it was poor judgment on our part and, even more concerning, judgment on the management and in particular the Board of directors. Our main concern is the poorly timed and expensive acquisition of the new European affiliate. As we used to say, the auto cycle is long in the tooth, as it has been for a few years now. And it is now even longer. And you can see that by some of the numbers. With that said, it makes me wonder what as shareholders we're not being fully disclosed about. So I have a few questions that I keep pondering as to why the earnings don't seem to get to a more positive nature based on all of the activities that this company is taking place, recognizing the reduction in wheel volumes, both in North America and Europe. So first question, you have a major, major program underway in Mexico called PVD or vacuum deposition, which is a change in how you put a material chromelike on a wheel. Can you explain to all of us what the cost of the facility has been and how much money the facility is making or losing at this point in time? Based on what I get as information that a lot of the OEMs have not yet approved that production facility.

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [19]

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Steven, it's Matti Masanovich. Yes, I can take the question on. We have invested in PVD technology. PVD technology is a relatively new finishing technology that provides a chromelike finish in a more environmentally friendly manner. We currently outsource our PVD to a tier 2 supplier. So we do -- there's another supplier in the United States that does PVD application and finishes for us. We did develop and we are continuing to develop the technology in house. We've incurred about $35 million in total CapEx -- that's capital investment to bring the PVD facility up -- to get it up and running. It is in the process of being validated at multiple OEMs. We have active commercial dialogue with our customers regarding this technology. And so the current estimate on PVD we'll be launching is subject to the final testing and durability testing at the OEMs, as I'm sure you're aware of, to get the product to commercial viability and then ultimately sell on and take on volumes. So we believe -- just to be fully transparent, we believe the PVD technology that we have is superior to any other PVD technology on the globe today. And we do believe it will meet the extended durability testing of the OEMs. And so I think it's a fundamental investment that we've made into capability and a finishing technology that's desired specifically for the North American market.

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Steven Borick, [20]

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So that's a good answer, but from my inside information, which as you can imagine, being the ex-CEO, I have plenty of, it is years behind where it should be. It is not getting the approvals that it needs to get. There is a huge expenditure that continues to be had, and it obviously is draining your earnings to some degree. So I appreciate your answer, and I don't think it's quite where we as shareholders would like it to be. But again, you've made your statement. I'm making mine. $35 million plus, I've seen it before. I saw it with our chrome plating operations in Fayetteville, Arkansas, 20 years ago. And at some point, the drain is significant. And I recognize that you don't break it out. But at some point, you may need to because of the amount of spend and what it might be doing to drain. But I'm leaving that to you. All I'm doing is telling this team of people on the phone that I have a very, very different set of answers about where they really are and the problems that you're having. And I'll leave it at that. That's what these calls are about. Second question, is Fayetteville, Arkansas, a profitable or nonprofitable facility as a standalone today?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [21]

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So Fayetteville as a facility does not generate a profit for the company. We use Fayetteville as an outlet to -- from a capacity standpoint when we get into either capacity constraints on certain wheels. We also use Fayetteville to -- for some of its clear coat applications from a paint line perspective as well. So again, Fayetteville is clearly not at capacity. It hasn't been at capacity in probably 5 years or 6 years. But we continue to run it as part of the portfolio, given that it gives us a US footprint, also give sustainable the capacity to flex demand and our capacity needs.

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Steven Borick, [22]

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So that was the same story that I used to say on the telephone when I was doing what you're doing today as a team. And at some point, from a shareholder standpoint, what that does in draining earnings is something that obviously I hope you all are going to continue to look at, particularly as volumes have declined fairly significantly. And where they're heading, nobody knows. And then one further question is -- I have 2 further questions. Have you made any great progress last time you talked about the cost of electricity being a headwind in Mexico and where that stands today?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [23]

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Yes, so we've got -- we've put our applications in to qualify to buy in the secondary market. And those applications are in. We have to do some investment in the infrastructure of about $1 million to invest in our infrastructure to be able to buy in tat secondary market. We've made those investments and approved those investments. And those investments are in midstream. They should come online. And the benefits of buying in the secondary market will offset some of the cost increase, but not all of it, starting in the second half of 2019.

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Steven Borick, [24]

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Okay. And then can you tell me, what is the largest component of your noncurrent liabilities today? I think I know what it is, but I'd like to hear it from you. It's around $80 million -- I think around $80 million is the number.

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [25]

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Largest component of noncurrent liabilities. Just have to give me a moment, Steven.

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Steven Borick, [26]

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Yes, noncurrent liabilities as of 12/31 was $80 million.

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [27]

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Steven, I'll have to come back to you on the -- on that specific question.

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Steven Borick, [28]

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Yes, someone's got my email. That would be great. Two final comments, when you talk about liquidity and debt structure, I understand that you have not really from last period reduced your debt very much. And based on your numbers, your anticipation, even though that's the mantra of the company to get our debt reduced down, at what point do you believe you need to go out to the market to look at restructuring of your debt based on your numbers as of today?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [29]

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Well, I don't think we have any near-term maturities that would involve us going to the market. So our maturity schedule on the slide -- it was on Slide number 8.

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Steven Borick, [30]

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2023 or '24 or I believe.

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [31]

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Yes, so the 2 big -- the term loan B and the unsecured notes come due in '24 and '25. From a necessity standpoint, you have to be in the market about approximately a year earlier than those maturities, so kind of beginning in '23, if you will. And then obviously, our revolvers are due, the main revolver, the US revolver due in '22. So that would imply a '21 financing of the revolver. So we don't have any near --

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Steven Borick, [32]

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Yes, no near term. Then finally, when you look at your debt structure, you -- I realize that the $144 million that is in the preferred is in a different structure. And so it doesn't -- when you look at debt-debt, I look at the total 800 plus, but the reality is it's the 6 and change, and that's what I'm going to certainly go by because that is, in the way we do accounting, what it is. From that standpoint, we're still holding onto our position, really nowhere to go. We've talked about whether, at these levels, you just dispose of the asset or not. But we're not prepared to do that yet because we still have belief in the company, and we want to see and we wish the new CEO well coming into the company. And from that point of view, I appreciate your time.

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Operator [33]

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We did have additional questions enter the queue. Our next question comes from Douglas Dethy with D.C. Capital Partners.

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Douglas Louis Dethy, D.C. Capital Advisors, Limited - President and MD [34]

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Great. Could you just comment just on the current environment in terms of new contracts? And how far out are we looking? Are there any sort of at-once contracts there? And then relative to that, your current capacity utilization with I guess current mix and scrap rates, both in the US and Europe, if you could give some broad comments on that, it'd be appreciated.

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [35]

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Sure. So from a customer quote perspective and contract perspective, we still see a robust pipeline of contracts coming in. Right now, sourcing cycles kind of bring us into '21 and '22. The time period for '21, '22 is what they're sourcing today. There is some nearer-term opportunities on one-off wheels in 2020, but kind of starting late 2020, so the normal -- what I'll say normal sourcing cycle and normal wheel sourcings going on. From a capacity perspective, I think we're at full capacity in Europe as we look forward into the LRP. And then if we look at North America, we're obviously undercapacity in North America, given the volume -- what's going on here today with volume in North America and where we are from a take rate perspective. But I do think we have the opportunity to fill up that capacity in North America as we go forward, specifically the Chihuahua capacity.

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Douglas Louis Dethy, D.C. Capital Advisors, Limited - President and MD [36]

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The Chihuahua. Could you comment a little bit on the pricing environment on the bidding? Or is there any change really in the last 6 or 12 months with respect to gross margin opportunity?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [37]

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I think we're in a very competitive environment. And we've never answered that any different. And our strategy to drive what I'll say price differentiation was to move upscale into larger wheels with more complex finishes. And I think we've been successful at driving that. I think the lower smaller wheels is very competitive. They're -- although these are highly engineered parts with very complex appearances and finishes that have to be perfect on larger and larger wheels, that's viewed as a commodity in the industry. And so I think, at the end of the day, pricing remains very competitive for us as well as all of our competitors around the globe. The tariff situation, right now, there's a 10% tariff on aluminum coming into the US. So that is somewhat helpful. But what we've seen is the China competition's been able to absorb that. And now with the more recent announcements of potential tariffs coming in at 25%, as we had mentioned at the end of last year, there was some interest from some of the OEMs from a quote perspective. We do see some renewed calls on that front. But how long those go in for and the duration and how those are going to be handled and managed is somewhat unknown today.

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Douglas Louis Dethy, D.C. Capital Advisors, Limited - President and MD [38]

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Good. Just one last one is just the wage labor situation in Chihuahua these days. I know, earlier in the year, we heard from some other companies maybe closer to the border that there were some pretty sharp either mandated labor increases or otherwise. But if you could comment on your situation in Chihuahua, I appreciate it.

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [39]

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We have not been impacted from a wage perspective with the -- what I'll say the Texas border starting in Matamoros earlier, 4 or 5 months ago, with some demonstrations going on. It's really a minimum wage phenomenon in Mexico. We pay above minimum wages. And specifically, on certain of our operations, key operations, machining, casting deck, etc., melt, we pay above -- well above minimum wages for those positions. So I would tell you that we have not been impacted. We're 3 hours south of Juarez. But the Texas border, to your point, there has been some labor unrest and some demonstrations. We do follow those very closely. But we have not been impacted as of today.

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Operator [40]

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Next, we'll go to Elizaveta Andreeva of Deutsche Bank.

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Elizaveta Andreeva, Deutsche Bank AG, Research Division - Research Associate [41]

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I had a couple of follow-ups, please. Firstly, on your inventory and receivables financing programs, could you please update us with what were the latest amounts outstanding and how much you factored during the quarter?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [42]

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So we have a total of about $65 million on the AR factoring arrangement with where we sell the receivables off. And that's -- we're up about $12 million Q1 versus the prior quarter, so Q -- against...

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Elizaveta Andreeva, Deutsche Bank AG, Research Division - Research Associate [43]

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So $65 million is the balance as of Q1?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [44]

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Correct.

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Elizaveta Andreeva, Deutsche Bank AG, Research Division - Research Associate [45]

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And secondly, in terms of the impact from the higher electricity cost in Mexico that you're seeing, on your year-over-year EBITDA bridge, how much of the performance impact was related to higher energy cost in Mexico?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [46]

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About $2 million.

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Elizaveta Andreeva, Deutsche Bank AG, Research Division - Research Associate [47]

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Thank you. And just a final one from me. I apologize if I missed it, but did I hear you correctly that you do expect the volume declines in North American market to continue at around 10% for the rest of the year?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [48]

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Yes, that's volume as well as our take rate. But yes, you heard correctly.

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Elizaveta Andreeva, Deutsche Bank AG, Research Division - Research Associate [49]

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And in terms of timing, is that, I guess, roughly evenly split between quarters, or do you expect the situation to improve maybe towards the end of the year?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [50]

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I think it will be ratably through the year. So it's -- we're down about 10% Q1 against market. I think that'll continue for the period. And that's what our planning and our guidance is based off of.

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Operator [51]

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Next, we'll go to John Sykes with Nomura.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [52]

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Yes. I just wanted to go -- with respect to the China wheels, okay, how -- is that like your biggest competition, or is there a bunch of different factors, and that's one component?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [53]

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I think China competition's not new to the company. So it started 8, 9 years ago. So we've been dealing with China competition for quite some time. About 40% to 45% of the wheels, North America wheels come in from China on an annual basis. And so the balance are built in North America. And so I don't think it's anything new. We also face competition from suppliers on the Mexican border. And so -- and there's also some suppliers in the US. So I don't think there's any change per se in the competitive landscape or the competitive environment.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [54]

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Okay. The second one was on the guidance reconfirmation. Just wanted to get - - you may have answered it before, but I think I missed it. Wanted to just get a little bit more color on your confidence, sort of where you -- why you feel that you should be able to make that this year.

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [55]

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Look, we see our forward order book. So we've got very good access to definitely 16 weeks of production, but also then 42 weeks on a longer-range scale basis. We see what the market's doing. So the overall market, if you believe IHS, for the full year, North America 1.6, and Europe will be down 2.4. We believe we'll take share in Europe, given our positions in Europe. So Europe will come in above market. But North America will continue to be about 10 points below market. So I think that's our planning. And that's what we've built into our plan. And so we feel -- based on what we know today and what we see today, we feel very confident with the guidance in the ranges we provided. And...

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [56]

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Yes. No, that's -- yes...

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [57]

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So there's -- and we've got a lot of activities in place to reduce costs. And we've also got a lot of levers at our disposal. So we adjust as we did in Q1. We posted $43 million in Q1 of adjusted EBITDA. And we took a lot of actions to right-size the business to the environment, so to the lower production environment in North America. So the North America team was very proactive in taking out costs. That's headcount. That's indirect cost. That's overhead cost and MRO across the board. And then obviously, SG&A, we looked at SG&A. And we're very proactive with SG&A as well, taking down the cost. And then obviously, as important, as mentioned earlier, was -- is cash and cash management and balance sheet management. And we're taking out required inventory and getting our DIOs down even further from the volume reduction. So I think we've done a really nice job through Q1. And we think we've got the people and the awareness in place to continue to drive forward.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [58]

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Yes, and you just look at April. I know 1 month doesn't make the year, but obviously, it was pretty weak. And I guess what you're saying is you expect some sequential improvement in the industry as we move forward here, but also in Europe. Is that fair to say, or...

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [59]

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I just -- overall, so Europe -- I'll just give -- Q1 Europe market's down 5%. They're saying full year will be down 2.4%. I think we're going to -- we'll be able to hold our own and kind of come in above market in Europe. So I do think -- that's just given our launches and our launch cadence and how we behave with our customers. I think WLTP impact in the second half of '18 is going to be almost totally alleviated as we enter the second half of '19 for Europe. So you're going to see -- that's where you see the uptrend for the European market. It's on the back of being held back last year on the implementation of WLTP in the second half. So I think Europe makes a lot of sense. North America being down 2.5% in the first quarter and then bumping back up to 1.6% in the market, our customers, we don't see it on our major customers. Our customers are down 4% and 5%. Our major customers are down 4% and 5%. And we're seeing that for the full year. And then we're looking at our take rates. And we're not adjusting our take rates up. We're not planning on seeing that take rate improve. So like I said, we're planning on being down 10% or approximately 10% for the year against market. So I don't think we're planning a recovery, if you will, in the second half for North America. And we're managing the business to that lower volume level.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [60]

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Do you -- the last one I have, just in terms of leverage, where do you guys kind of want to get to? Where do you feel most comfortable?

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Matti M. Masanovich, Superior Industries International, Inc. - CFO & Executive VP [61]

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I think we've publicly stated it before. So I'd like to get down to 2x levered or 2.5x levered. We obviously went out with a plan historically, which we're not reconfirming today, to get down to 2x by 2020 that we've obviously adjusted the timing on that. We don't think that's doable, but holding our leverage for '19. We ended the year '18 at 3.4x. If you kind of look at our cash flow and you kind of can see what's happening through Q1 and using our full guidance, our full range for the year, we should be able to hold our own from -- for all a leverage standpoint. I do think, though, as we go forward, we can take down leverage as we go forward through 2022. So that's our plan. And obviously, mission number 1 for us is to take the leverage down. It inures for the benefit of every party.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Analyst [62]

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Yes, okay. That -- I was looking -- I wanted to hear more about that. But yes, that -- obviously, given the nature of the business, that's what makes sense, right? All right. That's great.

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Operator [63]

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Thank you. With no further questions, I would like to turn the conference back to Mr. Troy Ford.

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Troy Ford, Superior Industries International, Inc. - VP of Treasury & Corporate Development [64]

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Thank you, everyone. That's it from us.

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Operator [65]

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Thank you. And thank you all for your attention. This concludes today's conference. All participants may now disconnect.