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Superior Industries International (NYSE:SUP)

Q4 2013 Earnings Call

March 07, 2014 1:00 pm ET

Executives

Kerry A. Shiba - Chief Financial Officer and Executive Vice President

Stephen J. Borick - Chairman, Chief Executive Officer and President

Michael J. O'Rourke - Executive Vice President of Sales Marketing and Operations

Analysts

Jimmy Baker - B. Riley Caris, Research Division

Mark Healy Close - Oppenheimer & Close, Inc.

Brian Sponheimer - G. Research, Inc.

Jeff Linroth

Operator

Good day, and welcome to the Superior Industries Fourth Quarter and Full Year Earnings 2013 Teleconference. For opening remarks, I would like to turn the call over to Kerry Shiba, Executive Vice President and Chief Financial Officer. Please go ahead.

Kerry A. Shiba

Thank you, Chris. I appreciate it. I'm fighting a little bit of a head cold today, so hopefully, I won't subject you to my sneezing and coughing, if I do, I apologize. Welcome, everyone, to our fourth quarter and full year earnings call for 2013. Joining me on the call today are Stephen Borick, our Chairman, CEO and President; and Michael O'Rourke, our Executive Vice President of Sales, Marketing and Operations.

During our discussion today, I will be referring to a PowerPoint presentation, which is available on our website at www.supind.com

As usual, I'll start with Slide 2 with a presentation where I would like to remind everyone that any forward-looking statements made in this webcast or contained in this presentation 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.

Conditions, issues and uncertainties that may be discussed from time to time, include, but are not limited to: global competition; product pricing and mix; domestic and foreign market demand; commodity prices, including metal, energy and foreign currency; manufacturing capacity, including progress in constructing at our new manufacturing facility; productivity; capital investment; operating and manufacturing challenges; and our strategic and operating plans.

Please refer to the company's SEC filings, including our Annual Report on Form 10-K for a complete discussion on forward-looking statements and risk factors that may cause actual events to differ from these forward-looking statements.

By now, I expect that you'll have the opportunity to see our press release from this morning before I begin a review of 2013 performance and our financial results, I'd like to turn the call over to Stephen Borick for some comments. Stephen?

Stephen J. Borick

Good morning, everybody, or afternoon. So as all of you can see we had good results for the year and we're moving forward in 2014 with some very exciting information and news that I'm particularly happy to report on which is our new plan is continuing under great construction and execution and we're on time and on schedule. So that piece of news is very important for Superior as we move into the future and our strategy for further growth in '14 and beyond.

Obviously, as most of you know, I'm about to retire. In fact, March 31st is just around the corner, and so this will be my last call as the CEO, Chairman and President of Superior Industries. It's a 57-year run for the Borick family and the legacy, and it's been an exciting time for me over the past 15 years as an officer and certainly, the past 33 as a board member. At this point, I continue to stay on as a board member for the immediate future.

Now as I say all of this, it's important to understand that the future of the company is very well positioned strategically and financially, and then I wouldn't have made the decision to have this retirement if I didn't feel that was the case. I know the question will be asked about a successor and we're still working diligently on that particular project, a lot of activities and some interviews are going on, and I feel confident that in the very short term, we will be naming a successor to my position in the company.

The most important thing that I can say over all of the years as an officer and certainly as a director, has been -- it's been very, very rewarding for me not only to see the success of Superior but also to participate in that. And it's all about the people that have been at Superior and what they've brought not only to this company but to myself, personally, the honor and the integrity that I have been able to bestow and that I have also received over the years. I can't even express how I feel about it. There are too many people to thank. There are too many people that have been all part of that success and will continue to be part of the success in the future. I really want to personally thank all of the employees of Superior along with the Board of Directors, all of our vendors, all of the OEMs and how they've helped Superior in all of these years. And I know that going forward, everybody will work as hard under the new leadership as they have with me. I will continue to be available once I leave my post to be able to help in this transition and in to the future any way that I can. As I said, there are too many people I couldn't even start thanking, but a couple of names I just want to quickly mention, one being, Mike O'Rourke, who's been steadfast and loyal on not only during my father's years and mine, and I want to personally thank him. And I think there again are so many people, Deborah Madden, who has been my assistant for many years and has put up with me and has been a rock and helping me through the good and the bad times, and many, many more.

So Kerry, with that, again, being that this is my last call, I'll be open for questions at the end but I'd like you to move forward at this point. And I certainly say, "so long" to all those that I won't be talking to again, and wish everybody good health and good blessings ahead. Thank you.

Kerry A. Shiba

Thanks very much for the comments, Steve. And as Steve just mentioned, we'll address questions at the end of the formal presentation.

So let's begin the detailed discussion, which will follow the same format as you are accustomed to seeing on our calls. We provided data for both the fourth quarter and the full year. My comments today will place a bit more emphasis on the total year results, and also, for the sake of time and brevity, many of my quarterly comments will focus primarily on sequential rather than year-over-year comparisons.

First, let's begin with a very quick overview. If you would like to refer to the data on Slide #16 and 17, this is where we showed the condensed income statements for the fourth quarter and full year, respectively. Our fourth quarter revenues for 2013 were down 8% from the prior year on a 7% decline in U.S. sales volumes. Despite lower sales, gross profit improved about $6.1 million or 370 basis points when measured as a percentage of sales. Net income and EPS for both, markedly improved when compared to Q4 of last year.

For the full year, 2013 revenues were down 4% when compared to 2012, while unit volume declined 5%. While gross profit had reported improved about $3.5 million for the total year, I would like to point out that 2012 gross profit included a $3.5 million noncash benefit due to the release of a consumption tax accrual resulting from an audit settlement. The full year net income and EPS comparisons were significantly affected by the year-over-year change in income taxes as the 2013 tax expense was $10.4 million higher than in the prior year.

So with this brief overview in mind, to set perspective. Please now turn back to Slide #3, which is titled North American Vehicle Production versus Superior Shipments. As usual, this is where we frame the market environment in which we operate it. First, just a quick review on the slide format, the graph at the top showed both North American light vehicle production in red and the company's unit sales volume in blue. As you know, our business is focused on North America, so light vehicle production is an overall indicator of the demand driver for our products. As we progressed through the next 3 slides, I will provide some perspective on customer product mix which is helpful to really understand our performance against the total market. The data table at the bottom summarizes quarterly information into on an annual basis for both 2013 and 2012.

Let's first take a look at North American Vehicle Production. The market reached about 4.0 million units in the fourth quarter of 2013, with the strong finish contributing to a 16.1 million unit totaled the year, or 4.5% over 2012. 2013 was the first year in which over 16 million vehicles were assembled since the year 2002. In contrast to the overall market, Superior's fourth quarter unit sales volume was down 6.7% year-over-year, while the full year comparison was at minus 4.6%. Against the growing market, our sales volume decline translated into an estimated loss of 3.1 points of market share when comparing the full year 2013 to 2012. I will discuss in a few minutes how dynamics of the customer and program level affected Superior specifically.

If you would now please move to Slide #4, the chart on the left shows our top 5 customers individually but the remainder of the OEMs grouped together in the last set of bars. For each customer, we provide year-over-year production volume comparisons for the full 12 months, including a product category breakdown between light trucks, which is in blue, and passenger cars, which is in red. For context, you will recall from the prior slide that total industry production was a plus 4.5%. I'll share a few key observations regarding our major customers in just a moment.

But first, I would like to point to the chart on the right which shows the year-over-year change in overall vehicle mix. You can quickly see that the 2013 growth rate for the light truck category was over 3x the growth rate for passenger cars. When looking at the actual number of vehicles assembled, the unit increase in the light truck category for 2013 was almost 4x higher than for passenger cars. Keep in mind that included in the light truck category are SUVs, crossover vehicles and vans in addition to pickup trucks. While it doesn't show in the chart, the fourth quarter comparison is almost a caricature of the total year. When looking year-over-year, light truck production was up over 10% while the passenger category was about flat. The mix between domestic and international brands shifted 1 point towards the domestics.

Now here are a few key observations regarding our major customers. Ford and GM remain our #1 and #2 customers, respectively. Ford's production volume grew close to a 10% rate over twice that of the North American market overall. By contrast, GM's production volume grew at only 1.3%, well below the 4.5% overall rate of market increase. Ford vehicle mix continues to tilt almost 2/3 into the light-truck category, although their 2013 growth rate in passenger cars was a bit higher than for light trucks. Commentary on the slide provides some details about the major programs driving the change. We sell into all of the programs noted, except the C-Max.

For GM, their annual growth occurred in light trucks at plus 3%, which slightly offset the decline in passenger cars. However, despite the total year decline, the momentum in passenger cars improved to plus 13% going from Q3 to Q4 of 2013. Most of you are aware of our strong overall position in the GM light truck programs including GMT900 and K2XX. Of the passenger car programs noted, we participate on the Cadillac ATS and the Chevy Volt programs.

Chrysler's annual 6% rate of production increased occurred entirely in the light truck category where over 90% of our participation at Chrysler is focused, mostly on the Dodge and the Chrysler brands.

Production for the international brands was mixed overall. For the major customers affecting Superior, Toyota grew at the overall market rate while Nissan's growth rate was in double digits.

Turning now to Slide #5, which is titled Superior Shipments Year-over-year Comparison. Let's take a look at what drove Superior's year-over-year volume changes for 2013. We're using the same chart format as just shown, except now the focus is on Superior's unit shipments to our customers. I mentioned previously that our total unit market share decline d about 3.1 percentage points as our total unit sales volume declined 4.6% against the growing market. As we noted in previous conference calls, our ongoing capacity limitations happening since 2010 have affected our stance in the market. Although our overall volume was down, we still ran our factories in 2013 at about a 99% utilization rate. Also, in large part due to the lower sales volume, we have been able to operate our factories more efficiently, which contributed to a 6% improvement in gross margin despite lower sales.

Our volume was up slightly in the light truck category, with growth at Ford and Toyota absorbing declines with other customers, most notably Chrysler. It was in the passenger car category where volume reductions occurred, the largest of which were for Nissan and GM. Overall, our mix of sales to domestic versus international brands moved 2 percentage points toward domestic. This is mostly reflective of both growth at Ford, coupled with contraction at Nissan.

Our annual growth at Ford reflects modest gains on our passenger car program but a double-digit rate of increase for light trucks. Several programs drove the light truck increase including the F series, Explorer, Fox and Edge. The overall decline at GM, primarily occurred in the passenger car category and reflects the loss of the Malibu program which we have spoken about before. We did experience nice growth with the Cadillac ATS. We were up slightly with the GMT900 K2XX platform. The decline at Chrysler primarily reflects losses on the Jeep brand, most notably for the Jeep Grand Cherokee, which is a program we no longer participate on.

For the international brands, we experienced a great deal with Toyota, in particular in passenger cars with the redesigned Avalon. With this growth, Toyota surpassed Chrysler to become our #3 customer in terms of unit sales volume. On the other hand, we saw large decrease in volume with Nissan, the largest of which was for the Sentra, which is a program we no longer participate on. Our next largest decline in Nissan was for the Maxima and it largely reflects the decrease in vehicle assembly volume. While the declines is noted on the slide for BMW and Volkswagen were fairly large on a percentage basis, these are smaller volume programs in our portfolio from a unit perspective.

If you would now turn to Slide #6, we can look briefly on -- at the sequential sales volume comparison, the changes going from Q3 to Q4 of this year do tell a bit of a different story for both the market and Superior.

Let's start with the context of what happened in the market. Fourth quarter assembly rates were relatively robust as evidenced in the sequential increase of just over 4%. While the growth rate in light trucks was a bit higher than for passenger cars, the differential was much narrower than for the total year comparison. The same is for the total year, the market mix between domestic and international brands shifted 1 point towards the domestics. What stands out the most from comments on the slide is that Chrysler, by far, registered the larger sequential increase of plus 15% overall. Both Toyota and GM grew at a faster rate than the overall market, with the increase focused in passenger cars. Ford was up marginally with unit growth in light truck assemblies offsetting a decline in passenger cars. The rate of increase at Nissan was slightly below the overall market with our growth almost entirely in light trucks.

Now looking at Superior, in contrast to the total year decline, our fourth quarter shipments were about flat going from Q3 to Q4. While market share was down an estimated 1 percentage point, the decline was at less than 1/2 the annual rate, growth at all domestic brands was offset by lower shipments to Toyota and Nissan. I won't read all the individual comments on the slide, however, I would like to note that Toyota -- at Toyota, the disparity between the overall sequential growth and our decline at this customer is reflective of the Corolla. Toyota significantly increased production of this vehicle which is a program that we do not participate on.

Before leaving this slide, I would like to comment briefly on the first quarter of this year. Thus far, for 2 months, our shipment volumes have been downward compared to a year ago. The shortfall is relatively broad-based and may be reflecting a variety of factors, including the negative impact of poor winter weather on retail sales, overall OE management of new vehicle inventory levels and unfavorable vehicle mix with respect to specific product trend lines that we are the supplier for. This reduction to our order patterns, along with the somewhat short reaction time that we're given, is very similar overall than what occurred in Q2 of last year, where you may recall that our unit volume was down 11% year-over-year. As a component supplier, we don't control overall market demand and sometimes we're dealt unexpected and volatile changes and vehicle production schedules that do impact our shipments week to week.

I next would like to turn to Slide #7 which focuses on net sales dollars and a year-over-year comparison for the fourth quarter and the full year. This slide is on the similar format that we have been using. I will focus primarily on the full year, which is on the right-hand side of the slide. At the top, you can see the 5% unit volume decrease, which is shown on the first line of the data table, and it's similar to the 4% decline in sales dollars as shown on the second line. The remainder of the table shows the individual components of the sales dollar comparison. Starting with the third line of the table, you can see what clearly has the most significant impact on net sales, namely, the unit volume decrease. This decrease translates into about $35 million of lower net sales. I won't comment on each of the additional line items, however, 5 lines further down the schedule, I would like to point out that the decline in price of the metal component of our product reduced net sales by almost $13 million. In case we have anyone new on the call, I would remind everyone that our commercial agreements basically provide for the periodic passthrough of aluminum price fluctuations and our selling price. The majority of these changes are measured based on movement in published prices for commodity aluminum.

The final item I would like to comment on is to look at the line item that's labeled price mix at the bottom of the schedule. We continue to see a positive impact for changes of our product mix, which almost reached $13 million positive for the full year. If you are now -- please turn to Slide #8, let's review what happened with gross margin. This slide compares the full year 2013 to 2012, give me just a second to take a sip of water.

Okay, the first item in the comparison is for volume, and showed the estimated gross margin impact resulting from the 5% decrease in unit volume. As just noted in the sales analysis, the next item, which is labeled mixed rate, was positive for the year at plus $11.5 million. As a reminder, this amount will not match the price mix item on the sales analysis as gross margin also was affected by the cost impact of mix changes.

I'm going to skip over to cost performance, which is positive $3.3 million, improved performance at our U.S. manufacturing facilities was the primary source of this year-to-year gain. 2012 was hampered by a variety of challenges related to new product launches, equipment reliability and very high-capacity utilization. Lower volumes in 2013 actually aided our ability to improve factory performance, providing more time for preventive maintenance, and allowing us to take older and less reliable equipment off-line. Ongoing capital investment further enhanced our manufacturing facilities, both process and factory flow, while many operating practices also have been improved.

In the meantime, our factories in Mexico continue to operate smoothly overall. With lower production volume requirements overall, we focused on keeping our capacity fully loaded in Mexico in order to best leverage our favorable cost position there.

Depreciation is pretty obvious, so let's go next to the item labeled consumption tax adjustment, which I mentioned, at the outset of the presentation. In 2012, we recorded a $3.5 million noncash benefit in gross profit due to the audit settlement I referred to. Excluding this benefit, the comparison of 2013 to growth to 2012 gross profit was an improvement of $7 million over the total year. Finally, although lower than in the previous 3 years, our capacity utilization remains high at 99%.

Turning next to Slide #9, we have added a sequential gross profit analysis which hopefully you will find helpful to better understand performance trends. I'm not going to describe the individual items either because they are somewhat self-explanatory toward the overall theme is similar to the total year. However, I will point out that much of the overall improvement in cost performance was accomplished in our U.S. operations during the fourth quarter. A few minutes ago, I discussed that the near-term trend in sales volume points towards a challenging first quarter of the current year. As usual, we are prioritizing customer demand to be allocated first to our facilities in Mexico, at least within the constraints of program approvals that exist. This allocation process will reduce production requirements in our U.S. facilities, where the resulting burden to flex costs will be the greatest. Because our cost structure is not entirely variable and cost-reaction to volume fluctuations typically cannot be immediate, operating leverage can be negatively impacted during sporadic or unexpected volume downturns.

If you'll now please turn to Slide #10, I have a few further comments regarding income performance when comparing 2013 to the prior year. The focus will be on the total year comparison. I previously described the consumption tax adjustment in 2012, higher SG&A expense in 2013 primarily reflects executive separation costs, other changes in SG&A components basically offset each other. The 2013 full year income tax expense was about $14 million, which represents an effective tax rate of 38%. This compares to only $3.6 million or 10.4% for 2012. I'll probably give you more information than you wanted to know but allow me to spend a few minutes in this area. Some of the most significant items affecting the tax provision in both years are noted on the slide.

I'm going to start with 2012 because the effective income tax rate for the full year obviously was quite low. The most significant item to note was just over $10 million of net benefit due to the settlement of a foreign tax audit for 1 year and expiration of the audit statute for a different year. There also was a benefit of roughly $1 million for tax credits related to 2011 that were not recognized until 2012 due to a change in law during the year. These benefits were partially offset by a $3.4 million increase in valuation allowances against our state deferred tax assets that no longer were expected to be utilized. The 38% effective tax rate for 2013 was affected negatively by $1.1 million, which is about 2.7 percentage points of tax rate due to an increase in deferred tax liability caused by changes in Mexico tax laws that were enacted, increases in the liability for uncertain tax positions were basically offset by tax credits.

Please, next turn to Slide #11, which addresses the balance sheet and cash flow. First, let's take a look at the balance sheet which can be found on Slide #18. Cash and short-term investments ended 2013 at $204 million or about $4 million below the prior year end. I will discuss key cash flow items in just a minute. The year-end decline in accounts receivable primarily reflects a shorter end of year selling period which is the result of taking a longer maintenance shutdown at the end of 2013 than for the prior year. Net inventory declined roughly $5 million with finished goods increase offset by decline in working process and raw materials. A large increase and other current liabilities reflects about $28 million of noncash accruals related to how we are capitalizing value for the new Mexico manufacturing facility. Working capital and the current ratio both remains very strong, but they are down rather markedly for last quarter and the prior year end. Keep in mind the noncash accruals I just mentioned had a large negative impact on working capital.

Let's now take a look at cash flow. Capital spending was up significantly year-over-year. This is to be expected with our new manufacturing facility in Mexico under construction. We didn't start flowing cash on this project until the third quarter, so you can see the spending thus far have been relatively linear with elapsed time. I will speak more in a few minutes about how we currently see the pace of spending, rolling in 2014. You also can see that as we have been pointing to in our last few conference calls, the pace of reinvestment in our existing facilities was around $9 million higher in 2013 than in the prior year. As I noted previously, improved equipment reliability and process improvements resulting from these investments are supporting our gross margin expansion. We increased our quarterly dividend by 12.5% during Q4 of 2013. You likely will recall that we accelerated our 2013 cash dividend payments into December of 2012 in reaction to uncertainty at that time with respect to future dividend tax rates. As a result, the only cash dividend paid out in 2013 was the increment for the increase in quarterly rate for Q4. In the first quarter of 2014, we paid out a full quarterly dividend at the rate of $0.18 per share. So while cash only declined $4 million during 2013, the absence of a full dividend payment contributed to absorb part of the increase in capital spending for the year.

Let's now take a look at Slide #12 which focuses on some key cash flow considerations that will or may affect liquidity during 2014. We are providing this information in an effort to help you gauge the sensitivity of our liquidity to major factories as we progress through the year. Of course, the largest change from 2013 will be spending for the new manufacturing facility. As we just saw, 2013 spending was just under $36 million. For 2014, and based on current schedules, we expect another $80 million to $90 million to flow in the first 3 quarters of this year. Of this amount, about 80% should fall into the first half. There also will be an estimated $8 million of start-up expenses that will be funded prior to commercial shipments beginning. Some of this costs will be capitalized and some will be expensed. Working capital will build to support the business, although that will not occur until 2015. While this cash need is a while off into the future, I just wanted to be sure you start to consider this in your longer-term outlook. For the base business, I point out the balance sheet comments that accounts -- or on the balance sheet comments that accounts receivable was lower at year end of 2013 when compared to the prior year and. However, receivable balances at the end of the year typically are low because of maintenance shutdown periods when no shipments are occurring. As a result, it is not unusual for accounts receivable to increase upwards of $30 million over year-end balances during the times when sales volumes was higher. We also can have intra month liquidity fluctuations that go as high as $3 million which is reflective of collection of payment patterns that occur in relatively large pieces due to both customer and vendor concentration.

For our existing facilities, we continue to see a relatively high pace of reinvestment, which we estimate to approximate $40 million for 2014. The focused directionally is moving away from equipment replacement and towards process and efficiency improvement. As a result, there is a larger discretionary component that will allow us more flexibility with respect to project timing and amount.

Despite passing through the majority of changes in metal price to our market, we still must carry the value of metal in the inventory. This can be in the form of raw material through finished goods, as well as having to carry this metal cost in the form of accounts receivable. Starting relatively early in 2014, the component of metal price, referred to as the Midwest premium, increased rather dramatically from about $0.12 per pound to $0.195 per pound as we sit here today. As a rough estimate, $0.01 of metal price movement is worth about $1 million of working capital that we carry on our balance sheet. And finally, as a reminder, 2013 carried very little cash call for common stock dividends. Our current dividend rate currently translates to roughly $20 million on an annual basis.

Turning next to Slide #13, we have a brief update regarding the progress of constructing our new manufacturing facility in Chihuahua, Mexico. We also included just a few pictures on Page 14 to give you a look at how things are progressing. The building structure is entirely enclosed, and pouring of the floors and construction of interior walls is proceeding on schedule. Much of the mechanical infrastructure, equipment is either in the process of or already has been installed and utilities such as electricity also are progressing on plan. Certain components of process machinery have been delivered, and there's a great amount of work in process at various equipment manufacturers. About 83% of the projected budget has been committed to vendors at this time. We are still estimating commercial startup in the first half of 2015 with a great deal of effort in late 2014 being focused on equipment startup, along with process and product qualification with our customers. Our cost estimates remain in the range of $125 million to $135 million although we are reporting more at the lower end of the range these days. We are providing floor space and infrastructure to support a future expansion of up to 500,000 wheels per year. Of course, additional processing equipment would be required for such expansion.

Finally, moving on to Slide #15 and the conclusion, I'm not going to read all the individual bullet points as I think they're fairly self-explanatory, but hopefully this summary helps you keep major points in mind as you think back to this presentation. I expect our annual report on Form 10-K for 2013 to be filed with the SEC later today, and once filed, the 10-K also will be available on our website at www.supind.com.

So with that, we would like to thank everybody for your time and attention, and for attending the call today, and we'd like to open up the line for your questions. So I'll turn it back to you, Chris.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Jimmy Baker, B. Riley & Co.

Jimmy Baker - B. Riley Caris, Research Division

First, let me offer my farewell and best wishes to Steve, best of luck to you in your next chapter. So really, really nice gross margin here in the quarter. I have to go back a few years to catch a quarter this strong. And I just would like to think that the cost performance improvement, that component of gross margin should be viewed as sustainable. But maybe you can just walk me through the puts and takes of the gross margin line there particularly given some of your comments on volume challenges here in Q1 and potential impact on operating leverage. And I guess as a follow-up to those questions on gross margin, just given the mix was a meaningful contributor as well, maybe you can outline how we should be thinking about mix as we move through 2014?

Kerry A. Shiba

Okay, and I'm sure Mike O'Rourke may have some comments also, but let me try to address those one by one, Jimmy. First off on the mix question, your last question. When you keep looking at year-over-year comparisons, eventually, this will start to I, think, even out of a bit more. You got to almost think back to 2010 when we were first seen -- really back in 2009 when we had loaded the portfolio with some business that everybody was out in the market very aggressively bidding for due to the recession. As that stuff has wound its way out of our portfolio. You have been seeing this steady mix of improvement. I think it was starting at the very end of, really in early 2012 and then continuing through 2013. So again, year-over-year, you'll start to see the comparison start to level out. But nonetheless, our mix is clearly enhanced then when we came out of the recession. On the culture [indiscernible] of instrument side, we're very pleased with what we've been seeing happening in the U.S. overall, but the near-term challenge clearly is going to be with the volume fluctuations. It makes common sense so we continue to keep Mexico loaded as much as we can within the boundaries at least of our program qualifications, our product qualifications. Our cost structure in Mexico tends to be more fixed also, so that's really a second reason to keep our volume allocated to the plant in Chihuahua as best as we can. But when you get as rapid a decline in -- and it's really the decline side that's the heart of the deal, when you get the rapid decline in volumes that we've been seeing in the early part of this year, I think our factories are adjusting well, but we just can't be expected to keep up with it with an immediate reaction. So you got to keep that in mind for the shorter term. I think the longer-term trend is a favorable one. Mike, do you have anything?

Michael J. O'Rourke

The one thing I would add is on the improvement of mix, and carrying that forward. We have strengthened the capability especially in the plants in Mexico. We're focused on increasing that capability on things like premium paints with the launch at plant 15. So that's the kind of business we continue to focus on in the short-term and a long-term as we look at opportunities in the marketplace.

Kerry A. Shiba

Yes, I think we have mentioned, I think we may have mentioned before also our new plant in Chihuahua, we have sort of couple vintages of paint systems in our operations and as you would expect, our new plant in Mexico will have the most recent vintage most capable paint system in our company so that will continue to improve our capability [indiscernible] with some of these high content programs.

Jimmy Baker - B. Riley Caris, Research Division

Okay, got it. And then I just wanted to touch specifically on K2XX given the size of that program for you and maybe you could just talk about how that program is comparing to what you are seeing in general volume declines here so far in Q1,,of course, there's a weather component to this but sales has been relatively uninspiring there year-to-date. So maybe if you could just talk about your shipping expectations for that program here and as we're moving to the front half of 2014, if you're seeing any changes in releases or any continued impact from the changeover or if maybe we should actually expect some sequential improvement as we get into later into Q1 or Q2 relative to Q4 just given the seasonality of shutdowns that maybe depress volume there in Q4.

Michael J. O'Rourke

Well, Jimmy, if you look at K2XX affects last year, latter half of the year, we were focused on the pickup launch. We have certain content programs that where we really at an over tooling capacity that has definitely leveled off. So you have more of repeatable and are able to plan in terms of volume. But right in the beginning of the SUV, the fourth launch, the K2XX, so that kind of balancing that a little bit on certain part numbers. In our portfolio, part numbers, there's not a complete crossover, like there used to be, with the full-size pickup truck and SUVs [indiscernible] will differ for us but there is a -- so I would say that the focus on the SUV is kind of making up for all that pick up from the pickup trucks.

Kerry A. Shiba

Which sort of translates -- which somewhat translates to a kind of an even line for us from a volume perspective.

Michael J. O'Rourke

Certain part numbers actually over and under, outside maybe a little bit, as I compare it to the second half of '13, probably a little bit less.

Jimmy Baker - B. Riley Caris, Research Division

Okay. So did I understand that correctly that year-over-year, that's essentially a flat line item, but maybe a little bit down on a sequential basis from the back half of '13?

Michael J. O'Rourke

Yes, I would say so. And can you keep mind that the -- on year-over-year, looking at first quarter of '13 to '14, we're just getting into the pickup truck launch and building up the remaining GMT900s.

Jimmy Baker - B. Riley Caris, Research Division

Sure, okay. So then, thanks also for all the disclosures on the new plant progress. Can you just give us an update on how your backlog is shaping up relative to the new plant coming online. Let's say, assuming some of our projections hold, do you have the orders to reach optimal or near optimal systemwide utilization in the back half of '15 or let's say on a run rate exiting '15?

Michael J. O'Rourke

Well we're looking at -- typically, we have a 15- to 18-month foothold in terms of product development. So the focus right now is on the back half of '15. And the last couple of months, there's been a lot of activity due or cues replacement programs and incremental opportunities that we're focused on or specifically for plant 15.

Jimmy Baker - B. Riley Caris, Research Division

Okay, last for me, just a couple of housekeeping items. First, just wanted to understand what your depreciation expense expectation is for 2014? And are you actually expensing any of the depreciation associated with the new plant in '14? And then also, what do you see as a tax rate going forward?

Kerry A. Shiba

Depreciation expense, I'm going to say, for 2014, it's going to be, it's going to be up. But I think the 2012 to 2013 increase can be projected in 2014 as being a reasonable estimate. The new plant will not start to depreciate until we start running commercial production across the machines. So that will be a hit in 2015, primarily. The tax rate, I can put all the quarters of the last 3 years into a cup and kind of shake them up and roll them out there. But I think that overall, in the mid-30s, 35% maybe a little notch higher would be a fair expectation right now.

Operator

We'll take our next question from Mark Close from Oppenheimer & Close.

Mark Healy Close - Oppenheimer & Close, Inc.

I'd also like to pass along my thanks, and congratulations to Steve. The utilization was roughly 99%, I think, you said for the year, can you give us a sense of where it was in Q4 and how it's shaping up here in Q1?

Kerry A. Shiba

To tell you the truth, I think we're in also in the high 90s, roughly about the same as the annual rate in Q4 as we were for the overall year. In Q1, I don't have an exact percentage point number for you, Mark, but directionally, it will be a little bit later obviously than what we saw on the fourth quarter.

Mark Healy Close - Oppenheimer & Close, Inc.

Okay. One of the impacts, obviously, the weather, as we've seen, now gas prices move up. In the past the company's been hedged a bit there, and the future's market and so on. And with the gas price being well below outside of the United States, I was wondering where -- are you positioning yourself there or have you thought about that?

Kerry A. Shiba

I don't recall at the top of my head of where -- how much we're hedged in the U.S. That will probably be in our 10-K, also 20%, 25% maybe. We've had a fundamental problem in Mexico that in its -- today, because of the nationalized monopoly with PEMEX, the only way to hedge gas prices in Mexico was literally to prepay the entire physical consumption that you want to hedge. And that is an awful lot of cash to put on the table. So we have exposure to gas fluctuations going forward, whether they'd be plus or minus. We've been incurring some of what of an incremental gas pricing in Mexico also because of PEMEX has been passing through a surcharge fundamentally that I think, ultimately is related to the fact they have to import some liquefied natural gas because they've been a bit quantity-short to serve the growing industrial base especially down in the central part of the country. So they're passing that cost increment through to the marketplace even if you're not consuming that higher cost increment. There's some national -- there's a lot of talk at the national level and it's a big part of the new President's campaign platform to deregulate the natural gas industry. There's a lot of talk out there right now and various suppliers that are positioning themselves to try to move into the market as it opens up. I think that this is a change that will be positive but will probably take some time, that's not going to happen overnight, and probably not going to happen in 2014. So the near-term expectation maybe for Jimmy Baker that's gets back to something, that your question about sustainability of margins. The gas pressure we're seeing, we're happy to absorb at this stage. Really bad winter, Mark. And what the trend's going to be in the markets once the supply cycle start to catch up with the winter draw downs, and I'm not smart enough to completely predict right now.

Operator

We'll go next to Brian Sponheimer of Gabelli & Company.

Brian Sponheimer - G. Research, Inc.

Steve, I offer my best wishes. And Kerry, I hope you feel better. I just -- a couple of real quick ones, Kerry, help me reconcile the share buyback versus the share creep in the diluted shares outstanding? If you repurchased $10 million of stock, that's 500,000 shares, but share count was up 300,000 year-over-year.

Kerry A. Shiba

Yes, it's all kind of mechanics of the arithmetic. The share buybacks didn't start until towards the very end of November, Brian. What you're seeing in the EPS computation is the weighted average number of shares. So even for the quarter, we were in the market buying shares for only about 1/3 of the elapsed time and obviously much less than that for the entire year. So it's just the waiting effect.

Brian Sponheimer - G. Research, Inc.

Okay, what was the share count at, at year end them?

Kerry A. Shiba

27.1 something and some change, I think.

Brian Sponheimer - G. Research, Inc.

Okay. Yes, and you are talking about your effective tax rate? What were cash taxes for 2012 versus 2013, actual dollar amount?

Kerry A. Shiba

I don't have that off the top of my head, Brian. I would have to get back to you on that one.

Brian Sponheimer - G. Research, Inc.

All right. And I guess bigger picture, Steve, your retiring in 24 days, I guess, talk about the search for a new CEO. And is -- I guess, along those lines, to what extent, if any, is that the job as a CEO only job -- an issue for any prospective candidates?

Stephen J. Borick

Is it -- I'm sorry, did you say that, the only job? I didn't quite get that.

Brian Sponheimer - G. Research, Inc.

That, that is not a Chairman and a CEO job?

Stephen J. Borick

No, we're actually just looking for, at this point, the search is for a CEO position. We haven't made a final decision about what we're going to do on the Chair position, that's in the works. And there's a committee that is working inside the board on the CEO with Korn Ferry. There has been quite a bit of work done and some interviews. I'm actually getting ready to do another set of interviews starting next week. And it looks promising. I mean, that's what I would say at this point in time, I am confident that based on some of the candidates that we're going to continue to move to pretty rapidly. As far as once I leave, we're still working on a decision as to how we want to deal with -- I'm not walking away from Los Angeles from turning the offers than -- we're not overly concerned about that, if needing we'll have an office of the CEO and we'll work that process however we need to, short-term. If it gets long-term, we'll have to look at it differently, but I don't have to anticipate that.

Brian Sponheimer - G. Research, Inc.

Would you stay out longer as CEO if you don't have anyone hired by the 31st?

Stephen J. Borick

No, I'm leaving the 31st of March.

Operator

Then we'll take our next question from Jeff Linroth of Leaving It Better LLC.

Jeff Linroth

My question is about the December 5 press release, Gabelli proposes Superior Industries authorize Dutch Auction. I just wonder if you've had any conversations since then, how would you characterize them?

Stephen J. Borick

Well, we -- there's been some conversation, and I would characterize them as overall, positive, that the company has not responded directly to that proposal at this point in time and we're working together internally and externally to decide how to continue to move forward on that particular subject. And also, as you all know, there was also not a proposal but Gabelli and GEMCO decided to put a slate of 3 directors up against our slate of 4 and we're working through that at this point in time.

Jeff Linroth

Okay, I really appreciate that, and I do appreciate the efforts with the capacity constraints to improve margin such as you can. And so, thanks for that. And Steve, I wish you a splendid retirement.

Operator

We have no further questions in the phone queue at this time.

Kerry A. Shiba

Okay, with that, again, thank you, everyone, for your kind attention and good questions and we'll talk to you in a relatively short amount of time when we get to Q1. Thank you.

Operator

And this does conclude today's presentation. Thank you, all, for joining, and have a great day.

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