Superior Industries International Inc (SUP) 2015 Q4 法說會逐字稿

Good day, and welcome to the Superior Industries fourth-quarter and full-year 2015 earnings call. For opening remarks, I'd like to turn the conference over to Kerry Shiba, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, and good morning, everyone, and thanks for joining our call. During our discussion today, I will be referring to our earnings presentation, which is available on the investor section of our website at www.SupInd.com. We got this posted a little bit late this morning, so hopefully you're able to go check, if you don't have it in your hands. Joining me on the call today is Don Stebbins, our President and Chief Executive Officer.

As usual, I'm going to start with the second slide of the presentation, where I would like to remind everyone that any forward-looking statements contained in the 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 update publicly any forward-looking statements.

Specific conditions, issues and uncertainties that may represent forward-looking statements are noted in the detail on the slide. I would like to point you to the Company's SEC filings, including our annual reports on Form 10-K for a more complete discussion on forward-looking statements and risk factors that may cause actual events to differ from these forward-looking statements.

We'll also be discussing or providing certain non-GAAP financial measures today including value-added sales, EBITDA, and adjusted EBITDA. Reconciliations of these measures to the most directly-comparable data presented in accordance with GAAP may be found in the financial tables included with our fourth-quarter and full-year 2015 earnings press release. I now would like to turn the call over to Don Stebbins, our President and CEO.

Thanks, Kerry. Good morning, everyone, and thank you for joining us.

In 2015, we made significant progress in the continued evolution of Superior. I'd like to highlight a few of the major projects we completed during the year. My comments will be reflected on pages 2 and 3 of the slide deck.

First, we opened our new manufacturing plant in Mexico, our most advanced in the platform, which we have successfully ramped up to its full production capacity in the fourth quarter, and now manufactures our full range of products. Second, we invested in our finishing capabilities, and in driving innovation, with an aim toward bringing more advanced finishes and styles to our customers. Third, we moved closer to our customers, completing the relocation of our headquarters from Van Nuys, California to Southfield, Michigan.

Fourth, we expect to drive higher levels of operating efficiencies throughout the business, with the opening of a new shared services center in Mexico, centrally locating key support functions and facilitating the sharing of best practices. And finally, we put the right tools in place to drive higher levels of accountability and productivity, with the completed rollout of our new performance management and program management processes in the fourth quarter. We expect to benefit from these investments over the long term but their impact can already be seen in our improved financial performance in 2015, which continued to build in magnitude throughout the year.

Net income for 2015 was $23.9 million, or $0.90 per diluted share, nearly 3 times higher than the $8.8 million or $0.33 per diluted share in 2014. Adjusted EBITDA for the full year increased 36.4% to $76.1 million, well in excess of the growth in unit shipment volume of 1%. Adjusted EBITDA margin as a percent of value-added sales was 21.1%, a 600 basis point improvement year over year, exceeding high end of last quarter's outlook by 80 basis points.

As a percent of net sales, EBITDA margin was 10.4% in 2015, reaching our goal of double-digit EBITDA margin two years ahead of schedule. Our growth in profitability led to improved cash generation, as cash from operations totaled approximately $60 million in 2015, around 5 times the $12 million generated last year. The profitability and cash flow also increased our global competitiveness.

Recent market share gains and the benefits of our continued progress towards operational excellence are evident in our fourth quarter results, which I now would like to highlight. Unit shipments in the fourth quarter increased 19% year-over-year to 3.2 million wheels, outpacing production growth of 2% in the North American light vehicle market. This represented a 16% increase sequentially, compared to the 3% growth in unit shipments achieved last quarter.

Fourth-quarter value-added sales increased 16% to $103 million, reflecting higher unit shipment volume, and favorable product mix, partially offset by the negative impact of foreign exchange. As a result of the pass through of lower aluminum value year over year net sales increased at a slower pace of 4% to $195 million. Fourth-quarter adjusted EBITDA increased 61% year over year, driven primarily by higher shipment volume, favorable mix, and improved cost performance.

As a percent of value-added sales, adjusted EBITDA margin was 24.5% expanding by 680 basis points year-over-year. This drove fourth-quarter net income of $8.1 million or $0.31 per diluted share, a greater than 6-fold increase compared to the $1.4 million or $0.05 per diluted share in the prior year. Operating cash flow improved to $20 million in the fourth quarter of 2015, almost 3.5 times the $5.9 million for the same period last year.

We maintained our balanced approach of returning cash to our shareholders. During the fourth quarter, we paid a quarterly cash dividend of $0.18 per share, and repurchased 287,000 shares for $5.3 million. Over the course of the full year, we repurchased 1.1 million shares for close to $20 million, and in January of 2016, we completed the $30 million share buyback program we improved back in October of 2014. Also, in January of this year, we approved a new larger $50 million stock repurchase program, and since then, we have repurchased $1.5 million of our stock.

Despite our operational and financial progress in 2015, we believe we are still in the early stages of our Company's evolution. Some of the projects we expect to complete in 2016 include, by the end of the first quarter, we expect to have increased the capacity in our newest facility by an additional 25% or 500,000 units, to a total capacity of 2.5 million wheels per year, to help us efficiently meet customer demand.

We also expect to make further progress toward a 24/7 manufacturing schedule, driving higher efficiency and incremental low cost capacity. Along with our partner, we also expect to complete the ramp-up of our Mexican polishing facility by the end of the second quarter. We are also initiating a project to increase the capabilities of our wheel finishing capacity in Mexico.

By year end, we expect to complete the rollout of our new ERP system, which will provide us improved analytical tools to better manage the business. And finally we expect to benefit from our new tax strategy, that will reduce our effective tax rate in 2016 to the low 20% range from 32% in 2015 and 49% in 2014.

In summary, we will remain focused on further strengthening our manufacturing platform, driving increased operating efficiencies through best-in-class processes, and further diversifying into more value-added segments while growing value-added sales. We believe these initiatives will continue to drive profitability in 2016 and beyond.

With that, I'll turn the call back to Kerry.

Thank you, Don, and apologies up front for any coughing or hacking you hear from me. I'd like to now provide you a more detailed review of our financial results for the fourth quarter and the full year 2015.

Let's start with slide number 4, please. On the right side of the table, you can see that Superior shipments increased 19% to 3.2 million units in the fourth quarter of 2015, compared to 2.7 million units in the same period last year. Significantly ahead of the 2.2% growth in North American vehicle production, which is shown on the left side of the table. We are very pleased with the level of unit shipments in the forth quarter, which was the highest per single quarter since 2007.

Similar to the trends we observed last quarter, our highest increase in shipments occurred for our largest program, the Ford F Series, which grew by 202,000 units or 58% year over year. The largest increase for F Series largely reflects timing of the new platform ramp-up for Ford. We also experienced nice growth on the Focus and the Fusion for the quarter.

We have significantly higher volume at GM, with an overall 25% increase year over year. The largest increases at GM were for the Chevy Malibu, which is a program that we are new on, and for the K2XX platform, with the Chevy Traverse also up significantly. Additionally, we were at plus 19% at Toyota, with strength in both the light truck and passenger car categories. And finally, we also experienced nice increases for the Yaris Scion iA program and the Mazda 2.

Similar to what we saw in the third quarter, the overall shipment growth year over year was partially offset by declines in our volumes on the Ford Edge and the Nissan Maxima, which are programs on which we are winding down. I would also like to comment briefly on the sequential pace of shipments.

Total shipments were up 16% in the fourth quarter compared to the third quarter while North American vehicle production was down 1% sequentially. The strong sequential growth was driven by a 16% increase in shipments for the K2XX, which was bolstered by a win of an in-process 20-inch polished wheel program. This was further supported by strong increases on the Toyota Avalon, Nissan Altima, the Dodge RAM Truck, and the Ford Fusion.

Our increased volume on the redesigned Chrysler Town & Country, now known as the Chrysler Pacifica, somewhat reflects ramp-up timing for the new vehicle. Although we do expect our shipments for this program will begin to decline in the near future.

Moving to slide number 5, let's take a closer look at the change in value-added net sales. We introduced a new format this quarter to also address value-added sales, which we haven't done specifically in the past. Both analyses are now on a waterfall format, which I also hope you find more straightforward than the formats we've used previously.

Let's start by looking at the fourth-quarter comparison for value-added sales, which is shown at the top half, or on the top half of page 5. The first and last bars of the chart basically reconcile value-added sales to reported net sales, where you can see the value of the metal and upcharges we exclude for value-added sales, because they fundamentally are passed through to our market. For the fourth quarter of 2015, value-added sales were $103 million, a $14.3 million or 16% increase compared to the fourth quarter of 2014.

As previously discussed, the increase was mainly driven by higher unit volume, which had a positive impact of $16.3 million on value-added sales. Favorable product mix contributed $1.4 million to the improvement. The benefits of higher unit volume and favorable product mix were partially offset by a $900,000 negative impact for changes in the relationship of the US dollar to the Mexican peso, and the higher sales adjustments credited to our customers and lower project development revenues.

Net sales were $194.6 million for the fourth quarter of 2015, a $7.9 million or 4% improvement when compared to the fourth quarter of 2014. The volume growth benefit of $33 million was offset significantly by the pass through of $26.4 million in lower aluminum value, and the combined impact of smaller differences that I just mentioned in the value-added sales comparison.

In case you have a question, the $26 million impact of lower aluminum value is measured as the change in unit price for metal, times the number of units sold in the current period. So this number isn't going to match the difference on the top chart when just comparing aluminum value at the beginning and end of the periods of contrast, because of the volume adjustment.

Turning to slide number 6, which addresses the full year 2015, value-added sales were $360.8 million, an $8.5 million or 2% decrease, compared to value-added sales of $369.4 million in 2014. The decrease was mainly driven by $4.1 million, due to the strengthening of the US dollar versus the Mexican peso, higher sales adjustments, and lower project development revenues, which more than offset the $3.2 million benefits from higher unit volume.

Net sales declined $17.5 million or 2% to $727.9 million, while unit shipments increased 1% year-over-year. The volume growth benefit of $6.4 million was more than offset by the $11.9 million pass through of lower aluminum prices, as well as the other items just discussed again, which impact value-added sales.

Turning to slide number 7, our fourth-quarter adjusted EBITDA increased 61% year over year to $25.3 million, and reached 24.5% of value-added sales, an increase of 680 basis points when compared to the same period last year. This excludes $3.1 million of plant closure related cost, most of which was for asset impairments recorded during the quarter, as noted on the bottom of the table so you have it as reference.

As you can see from the chart, the increases in fourth-quarter EBITDA were largely driven by higher unit shipments, and a stronger product mix, which we have already discussed. Similar to previous quarters, cost improvement was another key contributor to our increase in profitability.

Something I believe I've commented on previously, cost comparisons were less favorable in the fourth quarter than in the first three quarters of the year, as expected, as high production rates to build inventory prior to the shutdown of the Rogers facility in the fourth quarter of 2014 contributed to temporarily improved deficiency at that plant during the shutdown period. That being said, improved cost performance resulted from a combination of factors in the fourth quarter. These include the benefit of changes in our strategic manufacturing footprint, namely the previous plant closure and the completed ramp up of our newest facility in Mexico, as well as lower energy prices, particularly in Mexico, and strong cost control across all of our manufacturing facilities.

Going forward, while we expect the benefits still from continued cost performance improvement, the year-over-year benefit of the strategic footprint change will begin to decline, as inefficiencies during the 2015 ramp-up of the new plant in Mexico move further out of the rear view mirror. Slightly offsetting the volume and cost improvement in the fourth quarter was $3.7 million in higher SG&A expenses, including $1.7 million of transition costs for the relocation of the Company's headquarters from California to Michigan, the $1.6 million higher compensation cost, reflecting improved Company performance, and about $600,000 for consulting and legal expenses, primarily related to the corporate income tax project which Don referred to earlier.

Moving on to slide number 8, our full-year adjusted EBITDA increased 36% year over year to $76.1 million, or 21% of value-added sales. This represents 600 basis points of margin expansion year-over-year.

When looking at the waterfalls analysis, improved cost performance was by far the largest factor in driving the year-over-year EBITDA increase in 2015, with roughly one-half of the improvement resulting from the strategic manufacturing footprint change. This was partly offset by the timing of the pass-through of aluminum, as the impact of significant declines in aluminum prices during the year flowed through the P&L more quickly in our sales line than in our cost line.

Similar to the quarterly comparison, higher SG&A of $5.6 million in 2015 reflected transition costs related to the relocation of our headquarters, about $4 million The majority of these expenses were incurred in the third and fourth quarters, and we of course do not expect to see significant additional costs related to the relocation in 2016.

The increase in SG&A for the full year also reflected $1.6 million in higher compensation costs, again reflecting improved Company performance. Adjustments to EBITDA were $6.3 million for the full year, all of which relate to the closure of the Rogers manufacturing facility.

I would also like to comment briefly on the sequential quarterly changes in EBITDA, which is illustrated in greater detail in the appendix of the earnings presentation, that should be slide number 15. Fourth-quarter adjusted EBITDA increased by about $8 million or 48%, when compared to the third quarter. A little over two-thirds of the sequential improvement in adjusted EBITDA was driven by higher unit volume, and favorable product mix.

The remaining sequential improvement was driven by cost control in all of our plants, as well as favorable timing of aluminum pass through. This was partially offset by increased costs related to the relocation of the corporate office, and higher compensation costs, as I talked about earlier.

Turning to slide number 9, I have a few final remarks on cash flow and capital allocation. We saw significant increase in cash generation for both the fourth quarter and the full year. Our operating cash flow during the fourth quarter was about $20 million, which compares to $5.9 million for the same period last year.

Operating cash flow for the full year of 2015 was just under $60 million, as compared to a little under $12 million for the prior year. The change primarily reflects improved net earnings and lower working capital, which was aided by reduced cost for aluminum. Capital expenditures were approximately just under $7 million in the fourth quarter of this year, about two-thirds lower than when compared to the $20.6 million spent last year. Almost three-quarter of last year's total capital spending was for the new manufacturing facility in Mexico.

Lastly, as Don mentioned at the beginning of the call, we remain focused on a balanced approach to capital allocation. During the full year in 2015, we repurchased 1.1 million shares for a total of $19.6 million, again part of the $30 million share buyback program approved in October of 2014. We also paid $19 million in dividends during the year. As Don also mentioned, we completed our $30 million repurchase program in January, and we announced a new $50 million share repurchase program at about the same time.

With that, I would now like to turn the call back over to Don to walk you through our 2016 expectations.

Thanks, Kerry. Turning to slide 10, let me take a moment to walk you through our 2016 guidance, that we first provided in mid-January. We expect value-added sales to be in the range of $370 million to $390 million, driven by unit shipment growth of approximately 1% to 4%, along with favorable product mix in 2016. We expect value-added sales growth to be higher in the first half of 2016, compared to the second half, reflecting the broader overall North American production schedules, along with new program launches.

Adjusted EBITDA margins measured as a percentage of the value-added sales are expected to increase 125 to 200 basis points. Net sales are expected to be in the range of $720 million to $740 million, and adjusted EBITDA margins as a percentage of net sales are expected to increase 100 to 175 basis points. We expect capital expenditures to approximate $40 million, and working capital to be a slight net source of funds.

We also anticipate an effective tax rate in the low 20% range for FY16, as a result of our more favorable corporate tax strategy. Lastly, we expect to return approximately $20 million in cash to shareholders in the form of dividends.

In conclusion, we are very encouraged by the early progress we have made in the evolution of our business, and we remain confident that we have the right strategy in place for continued success in 2016. With that, I'll turn the call over to the Operator to open it up for questions.

(Operator Instructions)

We'll go first to Jimmy Baker at B. Riley & Company.

Great quarter. Just first looking at the Q4 value-added sales rate, I guess, even adjusting for seasonality. It seems like that rate is above, on a run-rate basis, what you're guiding to for 2016. You mentioned that the first-half growth rate would be greater, just given North American production schedules, but are you actually expecting second half or at least Q4 of 2016 value-added sales to be down year over year, or could you just do a little bit more breaking out of the delta between the Q4 run rate and what you're expecting for 2016?

Yes, I'll go first, Jimmy. I think that it breaks down is somewhere in terms of production 52% to 53% of what we think we will make in terms of the number of wheels will be in the first half versus 47%, 48% in the second half. So that would explain most of that I would guess.

Yes, and specific to your question on Q4. Again Q4 of this year was one of our strongest on record, and we do not expect that to be replicated in the fourth quarter of 2016. So that will be down.

Okay, understood. And then just beyond the volume, anything to note on the quarterly cadence, as it relates to breaking down the margin improvement or pace of margin improvement throughout the year?

I would expect that you will see a slight improvement in the first half of the year, that rate of improvement I would expect to tail off slightly in the second half. It goes back a lot, Jimmy, to the point that as we progress through 2016, the inefficiencies and the comparison when looking at the 2015 ramp-up of the new facility in Mexico, will start to disappear from the year-over-year comparison. By the time we hit the fourth quarter of 2015, the new plant in Mexico was basically running at its full-rated capacity. So a lot of the start-up friction was behind it by then.

Okay, so just to be clear, let's say your capacity exiting 2016, essentially the same as what you exited 2015 with? And then just one more footnote. What are your underlying assumptions for the F-Series and K2XX production in the 2016 guidance?

No, let's talk capacity. So I would expect in terms of capacity, that the end of 2016 will be higher than 2015. Now again, 2015 was an extraordinary, the fourth quarter was an extraordinary quarter, in that we were able to make 3.2 million units without the additional 500,000 units on the new plant in Mexico. But I would tell you that it was not a sustainable rate to be able to run at that level for a year, or a year and a half. So we're going to continue to improve from an efficiency standpoint in each one of the plants. We're adding the additional 500,000 units that will be ready at mid second quarter, late second quarter, so those types of things will certainly allow us to operate at a higher level as we go into 2017.

Okay, and then your underlying assumptions for F-Series and K2XX? Just rate of change?

Yes, I think we'll have to get back to you on the actual numbers that we're using, in terms of those two platforms.

Okay, fair enough. I'll get back in the queue, thank you.

We'll go next to Anthony Deem at KeyBanc.

First, can you share your actual aluminum content forecast embedded within your net revenue guidance range and if you believe there's any potential risk to the downside, given the weak fourth-quarter pricing and maybe what you're seeing year to date in aluminum pricing?

Hold on just a second on that one, Anthony. So we are forecasting about a $1 a pound, $1 a pound of aluminum content. The number of pounds that we have in the sales forecast is, I'm going to say roughly about $330-ish million. We will take a re-look at that and come back to you in more detail when we talk later, but that's I think rough order of magnitude at this stage.

Okay.

And that $1 a pound also has two basic components to it. It's a Midwest price for commodity aluminum, and then we also pay an alloy premium. I really can't -- here is the problem for you, I understand, but really don't want to disclose those two different components, because the alloy premium is a competitively negotiated price.

Understood. Secondly for me at the mid point, it seems you expect EBITDA dollars to grow about $7 million to $13 million year over year in 2016. Can you dimension the most significant factors behind that EBITDA improvement, and provide any commentary on 2017 and beyond? That would also be helpful.

Yes, so I think if you were to break that down certainly, the addition of the 500,000 units on our new facility, that expansion certainly will help us in 2016 and continue in 2017. Certainly, the transition cost, that friction will go down as well. I think that throughout, as we've mentioned essentially for the last year, and probably a year and a few months, we've mentioned that the operating efficiency in each one of our facilities is improving. We've added temporary labor.

We've taken that from 3% to 17% in our facilities which is helpful as well, and then as you go through 2016 and beyond, a large portion of this, and you'll see this in the value-added per wheel, is going to be the mix of product. We are moving towards larger, more complex wheels, which will yield more margin for us, and you saw a little bit of that in the fourth quarter of 2015 you'll see more of that in 2016 and you'll really start to see the impact of that in 2017 and 2018. Remember, we're bidding for a program two to three years out, so as we started to drive that strategy in late 2014 and 2015, we're going to see that in late 2016 and 2017.

And then that's a good segue to my next question. In the press release, you also in the guidance section, it states Superior will be expanding its product portfolio. Was that just a comment geared toward the larger more complex wheels, or can you elaborate on that comment, to maybe clarify if it's more of an M&A comment potentially, where Superior might be interested expanding beyond its singular product, the aluminum wheel? Any color there would be helpful.

It was intended to speak to moving in terms of different aluminum type wheels, with different finishes, different sizes, more innovative product in terms of reducing weight per wheel, working with other companies in terms of the materials that go into wheels, that type of thing.

All very important but don't over-read too much into that.

Got you. Just wanted to clarify, thank you. And then, last question for me. So when does the share repurchase authorization expire, and maybe what dilution should we model against it? Looks like a 2% decline in the share count annually in the fourth quarter. Is that a safe assumption for us to model? Thank you very much.

There is no funds-stated sunset on the program itself, Anthony, so it's open. We look at market conditions and price valuations, and how that's comparing to where we've been historically, so it's circumstantial at this point in time, as to what our intentions are, as far as volume that we will repurchase. Certainly, the shares get issued out of compensation plans. We want to ensure at minimum that there's no dilution that occurs for our investors as a result of that, so that will set a floor for us, on what we want to do. But timing, I think will be circumstantial to how we see what's happening in the market.

Very good, thank you.

We'll go next to Tristan Thomas at Sidoti & Company.

Two quick questions for me, first I'll use a baseball analogy. In your mind, where do you see the North American light-vehicle market, and then where is Superior with its internal changes? Second inning, third inning, what have you?

Yes, I think for North America, it's probably in the late innings of the cycle. I think the question is, is do we reach, or are we at a plateau level and stay at 17.5, or some level slightly above that, or slightly below that? That's certainly our feeling here.

For Superior, I think we're in probably the third inning. We've got a long way to go in terms of both our strategy to move towards higher value-added product, improving our relationships with our customers, and improving the efficiency of the operations of our facilities. So I think we have a long way to go before we run out of things to do.

Got it. And I just want to tag on to what the previous individual asked. In terms of M&A, is that something you're continuing to look at, or should we maybe be -- maybe provide more color into that?

No, it is something that we continue to look at and evaluate both inside the wheel space here in North America and globally, and we've also had dialogue with some guys that do aluminum products for our customers outside the wheel space, so we'll continue to evaluate that as we go forward, but job one for us is to, again, to make sure that we're as competitive as we can be and successful as we can be in the aluminum wheel space here in North America.

Sounds good, thank you.

We'll go next to Glenn Chin at Buckingham Research.

My questions have been answered, thank you, but congratulations on a strong quarter.

Great thanks, Glenn.

We'll move next to Brian Sponheimer at Gabelli & Company.

Couple questions. First, I just want to get my numbers right on the buyback. So if you repurchased $1.[1] million this year but your diluted share count only went down by roughly 300,000, is that to imply that there were option grants and other share grants that went to new employees for Southfield, and that shouldn't repeat, or is this more a run rate thing for the rest of the business?

I think that it was basically vesting. There were not a bunch of new stock grants that were given to people as we moved the headquarters. That was not a factor. You're basically looking at vesting schedules on programs that have been in place, a little bit circumstantial to Don's contract, and some loading on that. But I think that ultimately, my hope would be clearly that the performance of the Company continues to be very, very positive, and that we'll continue to see equity grants in the future that are tied to that improving performance.

And the criteria for the equity grants, is that a margin hurdle or a stock-price hurdle? What's the -- give me some color on the criteria, if you can?

The performance base of our --

So two-thirds of the performance of the stock plan, the long-term incentive plan is performance based. One is EBITDA margin. Two is return on invested capital, and the third is total shareholder return versus the peer group, and the weights of those are 20% TSR, 40% for the other two.

We are going into a new three-year plan for that right now in 2016 to 2018. We did switch one component based on feedback from our investors Brian, and we took out the EBITDA margin because we're still driving the short term on EBITDA performance. Some of our investors felt that, that was a little bit of a duplication of factors, so we replaced that component with cumulative EPS over a three-year period, so that will be in there for the new plan going forward.

Okay, just on the business, Don, how staffed are you now in Southfield, relative to where you want to be for the business?

We're fully staffed. We have about 65 people here in Southfield and --

All right. Obviously we're seeing production move away from cars and into light trucks and crossovers. Could you, just one, give a sense as to your ability to be flexible regarding costs as these programs change? And two, just if you can remind me what the car versus light truck mix is right now for Superior?

Yes, I think in terms of the percentage car/trucks, it's probably 70/30, and I think if you look at the next three years, 2018 that will be declining, the light truck will be declining to probably another three or four percentage point change, so we'll move closer to the market split of light truck to pass car.

Just to clarify, you're 70/30, truck to car?

Correct.

Okay. And last one for me. Your cost basis out of Chihuahua, how much of your total costs down there are de nominated in US dollars versus peso? Is labor peso, while the rest of the costs are generally speaking dollar denominated?

Somewhere between 75% and 80% of that cost is peso denominated. That's not taking into account aluminum.

So labor obviously is, we're paying our employees in Mexico in pesos, our electricity cost is denominated in pesos, most of our supplies, outside contracting costs, all that type of stuff is primarily pesos. Natural gas is denominated in US dollars, that's the major non-metal cost that's in USD, and of course metal.

Thank you very much.

We'll go next to Hamed Khorsand at BWS Financial.

Regarding your earlier comment about the expanding into different wheel base size, and so forth, what's preventing you from being more into the automobile space, and what is it, I'm assuming that now, that gives you the ability to go into that space and benefit your profit margins?

I think historically the Company had been set up for, let's say, larger production runs, and so as you move towards the higher more complex wheel, larger, more complex wheel, this is a different skill set, the facilities weren't initially set up for that. Certainly from our standpoint, we view this as a significant change for the Company, and along with that, is going to be able -- we'll be able to grow our margin and conquest new business.

I think somewhat it's also reflective of just the competitive dynamics, 40%-ish of the North America market is served by imports, most of those are coming out of Asia, and most of those were coming out of China. So there is significant logistics costs to move those wheels over here. On smaller diameter wheels, which tend to be for passenger cars, the logistics cost is more competitive, and you can put more smaller diameter wheels in a shipping container than a large diameter wheel. So a natural ebb and flow of where is the market more competitive versus where is it better from a value perspective, that's also led us to gravitate towards the light truck category. It really has not been any issue of process constraints or factory constraints at all.

If you look at our forecast, in terms of 19-inch wheels and above in 2015, that represented about 14% of our production, and as we look at 2018, that should be somewhere in the neighborhood of 25% to 28%. So clearly, a focus, clearly it's working, clearly, we can be competitive and drive that margin through those programs.

Okay, great, thank you.

We'll go next to Brian Rath at Walthausen & Co.

Just first one, on your comments about moving towards the 24/7 production in Mexico, just curious if you could elaborate in terms of what you're seeing from the workforce there, and anything, any pushback in either culturally, or just moving to that type of production model? But more so, what does that do in terms of adding capacity if you were to get to 24/7, and what do you see that as savings from a cost perspective, as you're maybe more efficient and not having to idle things on the weekend?

Yes, so the move to 24/7 is part of the program to take us from essentially 11.5 million units or so million units that we were at 22, 24 months ago, up to 14 million units. And so 24/7 is a part of that, certainly internal scrap reduction is a part of that, certainly improving the OEE of our facilities is a part of that. The additional 500,000 units in Plant 15, our new facility, is a part of that.

So I think we'll be there in probably another year and a half in terms of that ramp-up to 14 million units, which is perfect in terms of how we plan this out with the sales function. So even if we had 14 million units of capacity today, we don't have the orders to fill that. So this has been time to move very methodically into this, to dovetail with the sales function.

As far as implementation and I guess you asked a question, Brian, cultural reaction to it all, it was a little bit of work at the beginning to try to get this running smoothly, so I wouldn't say that the day we flipped the switch in first departments to go to around-the-clock staffing that it went perfectly smooth, but we've learned from that. And at this stage I would say things are running smoothly, where we do have 24/7 today. So I think we particularly figured out the right way to go about it.

Okay, great, and then just switching on, my only other question was on the tax strategy. Can you elaborate more on what you're doing to drive that rate down from the 32% that you said to the low 20%s?

Fundamentally, it relates to some changes in legal structure, Brian, and I don't want to go into too much detail about that, to tell you the truth. But we're moving some of the values of our legal entities around a bit, and then that's allowing us to adjust some of the overall tax rate, based on the jurisdictions that we're in.

All right, thanks.

That does conclude the question-and-answer session. At this time, I'll turn it back over to management for any closing remarks.

Great thank you very much. Great questions today and appreciate your support. Thank you.

Thanks, everybody.

That does conclude today's conference. Again, thank you for your participation.