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Tower International (NYSE:TOWR)

Q3 2013 Earnings Call

October 30, 2013 1:00 pm ET

Executives

Derek Fiebig - Executive Director of Investor and External Relations

Mark Malcolm - Chief Executive Officer, President and Director

James C. Gouin - Chief Financial Officer and Executive Vice President

Analysts

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Itay Michaeli - Citigroup Inc, Research Division

Kyle Chung

Matthew Dodson

David Melka

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Tower International Third Quarter 2013 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Mr. Derek Fiebig. Please go ahead, sir.

Derek Fiebig

Thanks, Crystal, and good afternoon, everyone. I'd like to welcome you to the Tower International third quarter 2013 earnings call. Materials for today's presentation were posted to our website earlier this morning.

Throughout today's presentation, we will reference the non-GAAP financial measures of adjusted earnings per share, adjusted EBITDA and free cash flow. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP are included in the appendix of this presentation.

As a reminder, today's presentation contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements relating to revenue, adjusted earnings per share, adjusted EBITDA, free cash flow, trends in our operations and expected future contracts.

Forward-looking statements are made as of today's presentation and are based upon management's current expectations and beliefs concerning future developments and their potential effects on us. Such forward-looking statements are not guarantees of future performance, and we do not assume any obligations to update or revise the forward-looking statements. Additional information and risk factors are available in today's materials and on our regular filings with the SEC.

Presenting on today's call are Mark Malcolm, our President and Chief Executive Officer; and Jim Gouin, Executive Vice President and Chief Financial Officer. Also joining us in the room is Jeff Kersten, Senior Vice President and Corporate Controller. Following our formal remarks, we will open up the phone lines for questions and answers.

Now I'll turn the call over to Mark.

Mark Malcolm

Thanks, Derek, and good afternoon. As summarized on Slide 3, third quarter was another overall solid one for Tower. In last quarter's earnings call, we described a business environment that was strong in North America, muddling along in Europe, weaker in the Brazil market and with customers in China that were experiencing launch and sales issues. That's pretty much how the third quarter unfolded for us, with sales in Brazil and China a bit weaker than anticipated and with net cost performance and operating execution a bit stronger than anticipated. Net result being the 13th quarter out of 13 since the IPO that Tower has met or beat the earnings consensus.

I'd like to acknowledge and thank our global team for their consistently good execution and their proven resilience and dedication to delivering results and meeting commitments.

While I believe the overall business environment will carry on for a while similar to what we've been experiencing, I'm pleased to report that we are increasing our outlook for adjusted earnings per share to $2.25 for full year 2013. This latest $0.35 increase reflects the additional interest rate reduction of 100 basis points on our U.S. term loan accomplished during the third quarter, plus a lower effective tax rate from having a higher proportion of our earnings occurring in the U.S.

After Jim reviews the third quarter financials and updated 2013 guidance, I'll provide some early views on 2014. Jim?

James C. Gouin

Thanks, Mark, and good afternoon, everyone. Slide 4 shows summary of financial information for the third quarter. Revenue of $495 million was up 1% from the third quarter of 2012, and adjusted EBITDA of $48.4 million was up 8% from a year ago.

Our adjusted EBITDA margin for the quarter was 9.8%, and that was up 70 basis points. Adjusted earnings per share increased significantly to $0.48, reflecting the higher EBITDA plus interest savings from our refinancing and a lower effective tax rate because of higher proportion of our earnings were in the U.S., which does not incur tax expense because of the valuation allowance on our NOLs.

Slide 5 explains the year-over-year change in adjusted EBITDA during the third quarter. Although global revenue was up slightly, the profit effect of net volume and mix was unfavorable versus a year ago. North America volume and mix was positive, but that was more than offset by lower customer sales and a less favorable product mix outside North America.

Foreign exchange translation was favorable in Europe, but essentially offset in Brazil. Net cost performance contributed $9 million versus a year ago, more than offsetting the adverse volume and mix. This reflected continued good overall operating performance plus favorable non-recurring benefits of about $3 million in this year's third quarter.

These period benefits, the most notable one being the reversal of a value-added tax reserve in Brazil, were anticipated in the guidance we had previously provided for Q3.

As shown on Slide 6, free cash flow for the third quarter was positive $21 million. This was $16 million better than projected in our prior guidance, largely reflecting CapEx timing. I think it's worth noting that free cash flow is now positive for the year-to-date.

Net debt, leverage and liquidity are shown on Slide 7. As of September 30, we had cash of $106 million and $531 million of debt, resulting in net debt of $425 million. Leverage was 2.6x on a gross basis and 2.1x on a net basis, each improved by 1/10 of a turn from the end of the second quarter. And we ended the quarter with good liquidity of $237 million, up $21 million from June 30 as a result of the positive free cash flow.

On Slide 8, we provide our updated 2013 guidance. Full year revenue is now expected to be $2.1 billion, a minor decrease of $15 million from the previous outlook. This reflects our third quarter experience in China and Brazil and the latest customer production schedules of Tower-contented vehicles.

Full year guidance remains unchanged for adjusted EBITDA at $210 million and for free cash flow, which is still expected to be positive $25 million to $30 million, assuming net 0 effect for customer tooling.

Adjusted earnings per share guidance is being increased by $0.35 to $2.25 per share, carrying through the third quarter good news and the latest interest savings. In late July, we repriced our $420 million term loan. The annual interest rate, based on a LIBOR floor plus spread, is now 4.75%, which is 100 basis points better than the prior rate.

And with that, I'll turn the call back over to Mark.

Mark Malcolm

Slide 9 discusses the preliminary revenue outlook for 2014. While we're not planning to provide bottom line revenue guidance until the year-end earnings call, we want to be proactive in discussing some of the key factors as they presently appear.

We expect 2 main positive revenue factors versus 2013. As previously communicated, our book backlog of net new business is projected to add approximately $100 million of revenue in 2014. The actual amount will, of course, depend on the level of customer production volumes for these new vehicles. In addition to our new business backlog, IHS is presently projecting that industry production will increase next year in each region in which Tower operates.

The biggest presently anticipated negative revenue factor in 2014 is customer mix. Based on estimates by IHS, the year-over-year change in sales of customer vehicles with Tower content would lag the overall industry change next year, adversely affecting Tower revenue by about $75 million. This potential headwind is, of course, beyond Tower's near-term control, reflecting relative sales projections for customer vehicles like Ford Econoline, VW up!, Porsche Cayenne and our China customers like Chery.

In addition to mix, revenue in 2014 will be negatively affected by normal customer price reductions and the elimination of our defense and aerospace business. We're not presently anticipating significant year-over-year revenue effects from exchange rates or steel pricing.

We also are not yet providing specific 2014 revenue -- 2014 guidance for earnings or cash flow.

The Slide 10 provides a recap and reminder of significant favorable year-over-year tailwinds already in place.

In 2014, we will receive a full year of interest savings related to the refinancing and subsequent repricing that occurred in the second and third quarters of 2013.

Other things being equal, these already accomplished actions will improve adjusted earnings per share by about $0.45 in 2014 compared with 2013. The related year-over-year improvement in free cash flow will be about $15 million. The full year benefit in 2014 free cash flow is even more than implied by the EPS benefit because, as previously communicated, the 2013 cash benefit is being muted by the change from semi-annual interest payments on the retired senior notes to quarterly payments on the new term loan.

Slide 11 provides additional perspective on Tower's potential cumulative free cash flow through year-end 2014. Based on the positive free cash flow just delivered in the third quarter and the positive cash flow guidance for the fourth quarter, we are projecting total free cash flow of $40 million to $45 million in the second half of 2013.

Although we aren't providing specific bottom line guidance yet for 2014, this chart shows the potential free cash flow next year of $40 million to $45 million, based on this year's projected full year free cash flow of $25 million to $30 million plus the incremental benefit reviewed on the prior slide related to the 2013 refinancing. That would result in potential cumulative free cash flow or a reduction in net debt of $80 million to $90 million during the 18 months from this past June 30, which is equivalent to about $4 per share of Tower stock, or almost 20% of Tower's market capitalization.

In my humble opinion, this speaks to both the viability of Tower's ongoing business model and also to a stock price that I believe is significantly undervalued, which leads us to today's presentation conclusion on Slide 12.

We believe, based on consensus estimates, that the earnings multiples for Tower, based on adjusted EBITDA and adjusted earnings per share, are at or near the lowest in the entire auto parts sector.

In my opinion, this deep valuation discount is not appropriate based on factors such as: Tower's projected free cash flow yield being among the highest in the sector; Tower's adjusted EBITDA margin approximating the median for the sector; our much-improved and very workable debt structure combined with strong liquidity relative to our needs; and Tower's track record of delivering results through the great recession of 2008 to 2009 and now for the last 13 quarters as a public company.

We are pleased that Tower shareholders have been rewarded this year with significant capital appreciation. But the fact is that our stock price increase is largely reflective of sector uplift, leaving Tower's relative multiple undeservedly in the ditch.

In a stock market that I believe could be increasingly shifting from picking good sectors to picking good individual stocks, I think there's a fundamental story worth telling about Tower.

As CEO, one of my top job priorities is achieving fair value for our shareholders. And as a major investor myself, I am aligned and motivated.

With that well intentioned rant, I'll conclude our presentation. Let's please turn to Qs and As.

Derek Fiebig

Crystal, if you could please remind the participants how to get in queue for the question-and-answer.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Rich Kwas of Wells Fargo.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Just a couple of questions. When you look at the $100 million of business that's coming online in '14, what's the breakout geographically in terms of contribution?

Mark Malcolm

It's predominantly now, it's overweighted in the Americas. Part of it is because as our customers, notably Fiat on its ramp-up, has struggled. It's taken away some of what we hope would be even more in China. And there just haven't been a lot of programs awarded recently in Europe. So disproportionately, U.S. and Brazil.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Okay. And then on the mix headwind, it sounds like maybe there's some of that -- the $75 million, is that -- some of that is North America? It sounds like there's also some in Europe. How did that break out?

Mark Malcolm

Yes. I don't know that I have it exactly geographically. You're right, it is in both the U.S. and in Europe. I mean, I'll tell you, it's in different places. And again, so everyone is clear, what I'm -- we’re using at this point in time are vehicle-by-vehicle projections made by IHS. Now we'll hone it a little bit closer when we get to the end of the year and we get more customer feedback and see how it's gone. But it also involves rich places like Brazil. I'll give you context, we are -- our top 2 customers, which I think you know, in Brazil are Volkswagen and Fiat. That's about 75% of Tower's revenue in Brazil, and they control over 40% of the market. But their share has gone down in the near term. And that's right now projected by IHS to continue into next year. I think those are the right places to be. At my 3.5 decades, say, these things come and go, but I think it's important to, at least, provide transparency for what's being forecasted right now.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

And then what's the -- the incremental margin on the $100 million, I assume that comes in at a lower incremental than you typically see on your base businesses. What's kind of the range we should be thinking about on that new business?

Mark Malcolm

Yes, it looks -- and you're right, Rich, because we're in an odd situation here now, where it's filling in some places that have lower utilization and some that are pretty high. We've said what should come in. On average, the best place to use it is a -- best projection is about a fully accounted margin. So we're in the low teens.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Okay. Final question, earlier today, one of the other suppliers had their earnings call and talked about kind of maintain a 3% decline in Europe for the year. That implies a decline of -- a mid single-digit type decline for the fourth quarter. Just curious, I know you have the IHS numbers on here for the fourth quarter of roughly flat, but are you seeing anything where there's any potential risk of early shutdowns heading into the holidays in Europe, any signs that you're seeing of concern?

Mark Malcolm

It has been and we've been calling it out for the last couple of quarters kind of flattish. It's a bottoming. We've not seen a pickup. So no, I'm not unduly concerned, nor do I think there's a lot of upside optimism, to be honest with you. And to be clear, and I'm not sure how other companies do it, we do put in the IHS numbers so people can see. For that near quarter, when we're providing guidance, we don't use IHS. We go strictly to customer production schedules as they affect Tower-contented vehicles. So when we're giving a revenue guidance, we throw IHS away, and we are in the nearer term where our customers are. In large part, because those schedules are relatively fixed in the course of a quarter. So that's what you get in our guidance. And the overall market, what we're hearing from the customers is what I would describe as flattish.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Okay. And then just could you share kind of the broader -- what that nearer term in your actual numbers, like, what that implies for the European market for Q4?

Mark Malcolm

Yes, for us, it's also happens to be relatively flattish.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Okay, all right. So no real big departure?

Mark Malcolm

No. No.

Operator

Your next question comes from the line of Patrick Archambault with Goldman Sachs.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

I guess a couple of questions. Just in terms of -- let's just start with the quarter. In terms of the performance piece, right, you, I think, lay it out very well in Slide 8, where, based on what you did in 3Q, you're kind of tweaking down revenue but keeping EBITDA the same, keeping cash flow the same. Just from an operational point of view, a performance point of view, can you tell us like what on the margin has come in better relative to your expectations?

Mark Malcolm

Yes. I'd say it's the continuing productivity in the factories. That's the biggest lever that we have, obviously. It gets harder and harder in a continuous improvement environment, but people have been -- I don't want to say don't keep it up, keep it up, but it has continued to come in probably better than we would anticipate. Now we're also working. We work with the customers on the commercial side and we've kept that well inbound, so it's a combination. I think, certainly, SG&A has stayed in check through all, so that has been less of the surprise. The biggest part, I'd say, is in the factory stature.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay, helpful. And specifically with comments to Brazil, it sounded like that was part of the shortfall in revenue. I mean, I think you laid out your exposures, but was that more of a market expectation come in softer or was that just those 2 big customers that came in?

Mark Malcolm

Yes. And again, for the quarter, we would have -- in the guidance that we gave would have reflected the schedules we were seeing at the time. So we actually had some call-offs by the customers from their initial schedules, in part, related to their view, obviously, of the market. We had called out the market as being soft. What we never know is when they're going to make adjustments that may affect their stocks. And they actually called off some units during the quarter.

Patrick Archambault - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. And then, I guess just on a forward-looking basis, I think on the last call, you said that one of the incremental margin opportunities was backfilling some revenue into Europe where you are underutilized. And so, some of that revenue ought to flow on at relatively high margins, at least, initially. Given what you now know about your fine-tuned volume expectations as well as the net new business that's rolling on, is that still an opportunity for you guys as we think about 2014 margins?

Mark Malcolm

Directionally, it's exactly the right way to think about it. But don't read into it any high optimism I have for a major volume recovery in Europe next year. I think, as what's said here, were just asked, let us finish the year and see the closer color we can get from customers. But when it comes, it will come nicely. So if you have a bullish view on Europe, you're right in what you just said, but you've got to temper that with what is still running as a relatively slow, if any, type of recovery thus far in Europe. But when it comes, it will come good.

Operator

Your next question comes from the line of Ryan Brinkman with JPMorgan.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

I know you're not providing specific guidance today regarding 2014, but at least from a revenue perspective, you do provide many of the pieces of the puzzle here. So it's kind of tempting to sort of try to add them all up. I think, for example, you're saying $100 million positive year-over-year from backlog, $75 million negative from cost per mix, $14 million negative from TDA. And then you have to go into some assumptions, but I'm thinking $40 million negative from pricing, just take 2% of 2013's top line guidance and then global industry production of 4% next year per IHS, that's a positive $80 million. And when I just kind of add it all up, it's a plus $51 million, which would be about 2% growth next year. Is that sort of a fair-ish way of summing it up or don't you want us to leap to those conclusions just yet?

Mark Malcolm

I mean, we'll help you with the information as we can see it right now. We'll be more precise as we get to the end of the year. I understand what you've done, and I'm not going to quarrel or comment with any particular element, if that's okay.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Okay, that's fine. And then just on Slide 11, can you kind of help me in terms of understanding exactly what you're trying to communicate here? So I think what you're saying here is that -- let me say, is it what you're saying here, is it that you expect to generate $40 million to $45 million of free cash flow in 2014 or are you simply just saying that, hey, if you only took 2013 and guided $25 million to $30 million then add the $15 million for refi savings, you're pro forma would be at $40 million to $45 million, and that's just the starting point before taking into account everything else that's changing relative to EBITDA, working capital, CapEx, et cetera?

Mark Malcolm

Yes, it's the latter. It is exactly how I try to describe it as this year plus the incremental refinancing benefits that is done and accomplished and will affect next year. Obviously, year-to-year changes in EBITDA, year-to-year changes in CapEx, working capital pension, all those other details that we have still yet to finalize or yet provide guidance on would either plus it or minus it from this level that's here.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Would you say your bias is to the upside?

Mark Malcolm

No, I wouldn't say one way or the other, Ryan.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Okay, okay. And then just on -- how about 2015 backlog, is it too early to kind of get a read there? How should we think about it directionally, at least relative to the good business you're picking up in '14?

Mark Malcolm

Yes, it's still in progress. There are a lot of programs yet to be settled in the balance of the year. That's something, again, I'd prefer to cover in the year-end call. It's not one of these things because it comes in so lumpy, Ryan, that given kind of partial scores or where you stand in the sixth inning isn't necessarily a great indication.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Okay, okay. And then I know pension is not huge for you guys, but what are you seeing in terms of the status of your pension fund given the various different moving pieces year-to-date, most of which I think have been positive?

James C. Gouin

Yes, Ryan, it's Jim. We're on the balance sheet at $87.4 million now. That's an improvement of roughly $6 million from the second quarter and, of course, that's really driven by the contributions that we've made into the plan. Overall, I think things are moving in the right direction. The discount rate that we used at the end of last year on the plan was 3.65%. It's running somewhere around 4.4%, 4.45% right now. And if it stays at that rate, we get about $8 million per 25 basis points of improvement in that discount rate. So it could end up at the end of the year in a much better position, assuming the rates continue to rise.

Operator

Your next question comes from the line of Itay Michaeli with Citigroup.

Itay Michaeli - Citigroup Inc, Research Division

Yes, so just going back to Slide 9, the $75 million of potential negative mix, I know, Mark, you mentioned that was clearly on IHS's projection. I would think by now you probably have your customer projections firming up, at least for early '14. I mean, would those also be pretty close to the $75 million that IHS is talking about or is a bias maybe better or not?

Mark Malcolm

I don't think it's -- would be helpful really to refine it anymore than we're seeing here right now or saying right now for where IHS, Itay. I think, Itay, will come out negative. The customers aren't as far along as you might think they are. And frankly, when taking the longer view, we apply judgment to what the customers say on that longer view. Once you get beyond one quarter, it's a combination of a bunch of factors and we just need more time to be able to see that. And frankly, IHS may move around between here and there. But it was a big enough number that we can now see and see that, at least in this near term, it's going to be negative, that we wanted to be as transparent as possible.

Itay Michaeli - Citigroup Inc, Research Division

Great. And then on the elimination of the TDA, the $14 million, can you show what the margin impact of that might be?

Mark Malcolm

Yes, 0.

Itay Michaeli - Citigroup Inc, Research Division

Okay. Is that from an EBITDA basis?

Mark Malcolm

Yes.

Itay Michaeli - Citigroup Inc, Research Division

Okay, great. And then maybe just a few more. I guess, I don't think it's early to talk about the tax rate, kind of some of the volatility and then maybe how directionally we should think about it going into next year?

James C. Gouin

Yes, it's Jim, Itay. I mean, the tax -- as we've talked so many times before, the tax rate here is really not a very meaningful number because we have such a large NOL in the U.S. and we're not a cash taxpayer nor do we incur tax expense, so neither on the book side or the cash side. So the best way to really look at it is, if you're trying to model it, is to try and use statutory rates in the different regions that we operate in and assume basically nothing in the U.S. I guess I'd tell you from a cash standpoint that probably 2012 is a relatively reasonable proxy for what our 2013 will be, but it's probably around $10 million or so.

Itay Michaeli - Citigroup Inc, Research Division

Sure. And then maybe just a last question, a big picture question. Leverage is coming down nicely. You'll have strong free cash in the fourth quarter as well as next year. I think you've put up a previous target to get to sort of a 3% free cash flow to sales. As the balance sheet delevers, how do you balance sort of the intent to generate 3% of free cash flow of sales with perhaps new business opportunities and investments that are maybe in the horizon, say, around 2015 and 2016? How do you kind of prioritize those 2? And that's my last question.

Mark Malcolm

Yes, it's a good question. And I don't know if it will be a satisfactory answer, but it's -- the truthful answer, is that everything will be in play. I mean we have shown and we have opportunistically jumped in and out of both investments and divestitures. We'll continue to do the same. We try to make progress on all fronts. I can't call exactly when we may have a particularly attractive investment to go ahead and make. I'll tell you the part I'm not keen on doing is spending a lot of money on small programs that adds up to a lot. But if a customer were to come to us, for example, with a major outsourcing or resourcing, would we talk about that and do it? Yes, because I think it's easier for everyone to understand these $50 million, $100 million type of programs on the size of our business. So we stay opportunistic to take a look at those things, but I won't force it in. We'll be disciplined in terms of what we do. And if the worst thing that happens is we keep generating a terrific cash flow yield, there were worst problems to have. Now the flip side or the other part that's related to that, that I hope everyone connects the dots on is this helps the liquidity. And that becomes a weapon maybe to be used at a point in time either for a major investment or whatever and, at some point in time, being able to deploy some capital back to shareholders at some point in time. But those are the nice type of things we will wrestle with going forward.

Operator

Your next question comes from line of Kyle Chung with PineBridge Investments.

Kyle Chung

Your 2014 free cash flow of $40 million to $45 million, is that before or after pension contributions?

Mark Malcolm

After.

Kyle Chung

After. And I think previously, you mentioned that contributions in '14 are going to be roughly $15 million. Is that still the case?

James C. Gouin

Yes, that's still the case, as they are in 2013.

Kyle Chung

And how much of that $15 million is discretionary?

James C. Gouin

None of it. That's our minimum required level of contribution to the plan.

Mark Malcolm

That's been our policy and that continues to be our plan going forward, to pay the minimum required amount.

Kyle Chung

So the rise in interest rates just hasn't moved that -- moved the needle enough for you to contribute less?

James C. Gouin

Not in the near term because of the smoothing aspect that we chose a couple of years back. So we wanted to make sure that we could plan our cash flow in the years ahead, and so we know what it's going to be. So it's going to take us several years out for -- with a significant reduction in the unfunded liability to change the amount of contributions.

Kyle Chung

And lastly, I think a few quarters back you talked about potentially exploring distressed opportunities, maybe in Europe, once you're generating cash. Now that you are, are those opportunities still available?

Mark Malcolm

They're out there. They're available. It's a matter for us of being patient and disciplined because I'm not inclined to overpay just to get something done. But are there such opportunities that we're seeing in the market right now? Yes, there are.

Kyle Chung

And what are the multiples, whether you see them as multiple of EBITDA or revenue for those kinds of opportunities?

Mark Malcolm

You have to consummate it, actually, end up having an acquisition multiple. I'm not inclined to pay more to buy something that investors will pay for our existing company, let me just say it that way.

Operator

Your next question comes from the line of Matthew Dodson with JWest.

Matthew Dodson

Kind of help us understand, if we do get volume growth next year, what can we expect for your kind of incremental EBITDA margins?

Mark Malcolm

Yes. It will vary depending on where it falls. Our guidance has been the best guess to use right now. And what we would anticipate is something in the low teens. It's closer to a fully accounted margin now because where it comes in it's typically now in a place that we will -- it will come with capacity-related actions that make it more fully accounted.

Matthew Dodson

And then can you help us just break that down between the U.S. and Europe? I assume if we do get volume growth in Europe, those EBITDA margins would be greater than the U.S.?

Mark Malcolm

That's directionally correct, you're right. And again, our -- if it helps, our overall -- our global variable margin, so this is average and it goes different by the type of product, is about 25%. So that's the ceiling, if you will. And again, even within that, it ranges for products for us from the teens, on products where we don't have to invest very much, to in the 30s for variable margins where we do have to invest quite a lot because that's through that variable margin that we get the return on invested capital, which is really the metric that we're looking at when we're making investments.

Operator

Your next question comes from the line of Greg Macosko [ph].

Unknown Analyst

Just going back to the free cash flow that you mentioned. You talked about tooling in the presentation there. Given the $100 million that you're talking about, does that incorporate -- or you clearly know what -- have a sense of that $100 million. Does that include tooling in that $40 million to 45 million?

Mark Malcolm

Yes, Greg, it's Mark. We expect the tooling to be pretty neutral. I mean, we have programs where we're at the point of spending the tooling, where cash is going to be going up. But we also have anticipated reimbursements for programs that we're finishing. Now what happens in any given quarter, like the fourth quarter, where we have both cash going out and cash coming in, is it may not net to 0. For this year, we anticipate being pretty darn close to 0, and that's a good starting point for next year. And these things work themselves out. While the calendar year will determine what the actual final score is, they all end up at 0, which is why we use that kind of simplifying assumption.

Unknown Analyst

So if you have a big program next year, something new or big, you might -- the tooling might be negative at some point but catch up later?

Mark Malcolm

Absolutely correct.

Unknown Analyst

Okay. And then the -- I assume from the way you talked on the $80 million to $90 million kind of over the 18 months, the focus is on debt at this point, right, I mean, to bring that debt down?

Mark Malcolm

Yes, that's certainly there. But again, we remain opportunistic. If we have a great investment opportunity that would be accretive for shareholders, we'll certainly entertain it. But absent -- the default is net debt just keeps coming down and getting us closer to our long-term leverage targets and it accretes just by definition directly to the equity holders.

Unknown Analyst

Okay. And finally, the opportunities, you're talking about acquisition but also sort of outsourcing and the like, it feels as if the outsourcing opportunity might be a more favorable situation overall just, in general, terms?

Mark Malcolm

Yes. And again, this is one that I -- I don't know whether I talk about it too much or not enough. When that happens, it will be notable, but it's not the type of thing that we can force it on the customer. I'll tell you, there are more studies being done now by more OEMs than ever before, but the trigger's got to be pulled for that to happen, and it's got to be won by Tower. So I stand by everything I've always said over a period of time that, that is directionally what will happen, that will benefit the sector beyond the industry, but will come in very lumpy fashion when it does come.

Unknown Analyst

And those opportunities, I sense, are more likely in Europe than in North America at this point in time?

Mark Malcolm

I don't know that I'd generalize it. It is more customer by customer and their own views and what their plans are for expanding their operation. Typically happens, Greg, when they're looking to expand, right, so, now they don't want to invest where they typically have in the stamping and assembly, so they can use more of their own capital for the expansion. That's why I'd say it's more generic and it will fall kind of by customer and by their own policy and philosophy as opposed to by region.

Operator

Your next question comes from the line of David Melka with New York Life.

David Melka

I wanted to see if you might be able to help me better understand the margin pressure on EBITDA in the International segment. You've got in Pages 16 and 17 the kind of outline revenue and EBITDA, and then you've got the bridge on 17. Clearly, the down step is volume and mix but revenue was up year-over-year. Could you just talk about what's happening, I guess, then in the mix? And where is it geographically? What's going on that's creating that pressure?

Mark Malcolm

Yes. And again, this is the mix of our products in this year's third quarter versus last year. So it's kind of a second order effect. But it is in both our International region, encompasses Europe and China. It was experienced negative mix, profit mix, in both sectors. And again, this is just which vehicles happen to be selling better than others. As I've mentioned, our variable margins can range from the teens to in the 30s, now driven mainly by the type of product that we happen to have won and the investment we had to make. And it's just the mix. It has turned out in Europe that our products right now that have been growing have been the ones with a little bit below-average margin. And those that were struggling a little bit more had the above average margin. And the same in China right now. I don't read anything into it longer term. It is what's happened. Europe has dealt with it through the course of this year, more so even than China. I can give some last color, our overall margin for the International region last year was 9%. Because of those type of headwinds, put it down into the 8s or low 8s or whatever for this year. So Europe, that was 8% last year, it's probably going to be in the 7s this year, still not bad relative to what I see for a lot of other companies, but a little bit of erosion, not based on anything other than the particular mix of product that our customers have been selling, those that they've been selling better and those that they've been struggling on.

David Melka

And is it something that relates to where you are in a product life cycle, where something might be newer and it's burdened by heavier costs or does it really just kind of come down to bigger frame, smaller frame and the relative margins that you're able to generate on that?

Mark Malcolm

Yes -- no, it's, again, on any given -- for any given difference we may have on a platform for one customer versus another or a platform for that same customer, that will come down to the type of parts that we're making. And we do have a range of parts. Those that we have to invest more in to make generate above-average margins, variable margins, which is what you see in here right now, and the rest comes out in CapEx, the DNA portion and in net income. So it really is more in terms of for those customers, which can be for where they are in their life cycle, which happened to be on the ascension, which are in the decline. And again, I'll emphasize, it's where they were this year, in this year's third quarter, but relative strength compared with last year. So they get kind of full of those effects. I think the more -- maybe the more telling item is that overall we're probably down less than 100 basis points in the International region this year, but down a bit in terms of that margin versus last year.

David Melka

And do you think, lastly, this level of movement in volatility and mix, is this atypical in the quarter or is this something more normal kind of in the go-forward?

Mark Malcolm

Yes. David, my background of 36 years in the auto business, and I'll tell you, what I've seen is -- and I'm glad you asked that question -- is that people generally expect negative trends to go on forever and positive trends to go on forever, and neither happens. So it's probably what's going to happen in the relatively near term, but it doesn't say anything about the longer term, in my opinion. Though we are a business that will generate kind of the low double-digit type of EBITDA margin at trend volume and nothing has happened anywhere on the globe to change that. The biggest factor will be the overall industry volume and the utilization, if you will, by our customers. That's why in North America, we're running double-digits where capacity is well in line by the OEs and why in the 7% to 8% in Europe and that will be the fundamental thing over a period of time that will drive our margin. This mix will come and it will go and we will always try to guide for what we can see specifically for the product mix that we have.

Operator

At this time, there are no further questions in queue.

Derek Fiebig

All right. Great. Thank you to everyone for joining us on the call. I'll be around the rest of the day for anyone who might have any questions. Well, good afternoon.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Tower International Management Discusses Q3 2013 Results - Earnings Call Transcript
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